Monday, June 29, 2015

So you want to start an airline (part 3)

Funny enough when I talk to future airline CEOs I always ask them what is their business; rarely is it carrying people from point A to point B. The first thing they say is that they are operating an airline with aircraft and expensive pilots and mechanics.

(7)  Philosophy:  This is the boring bit to many airline executives, it is also tremendously important, because your philosophy as a company has a huge impact on your competitive positioning, and while you are the only game in town when you start up, you can bet serious money that if it works out , you will have some company, and competition.  How you react, and deal with these competitive pressures will have an marked impact on your bottom line.

The first thing you have to realise is that in this business there is always going to be competition, how you deal with it will determine how well you do as a company.  You have to know who you are and what you want to do, and under what terms.  Like google's "Do no harm" statement an airline has to decide what it wants to be, who it wants as its customers -- and gear itself to meet that demand.  It may sound silly, but having a mission, and objectives empowers your employees; they understand what you are trying to do, as do your customers.  When Southwest started they wanted to be a no frills hyper efficient high frequency bus service of the sky.  Believe it or not Southwest remains true to its origins!  I remember, years ago, watching a Singapore airline senior pilot inspect his aircraft -- after inspecting some elements he pick-up debris (actually garbage) from around the aircraft.  On the flight line, near "his" aircraft the rubbish was his problem.  

As a further example, years ago Singapore Airline suffered a tragedy -- the loss of an aircraft!  A grieving relative somehow got into one of the first press conference and started screaming at the SQ press officer.  Instantly, a bunch of security guys converged on that person.  The spokesperson for SQ told the security guys to step way, and allowed this relative "her peace"  in fact, that act alone gave SQ tremendous power -- the were ready to listen, to acknowledge and apologies for the losses in this tragedy.  SQ suffered with their customers -- a tremendous loss, they acknowledged their "failure" (the loss of Silk Air 109 was never resolved), and were able to move as one.  

What I am trying to convey here is that there are ways of behaving that imprint on an organisation, whether its the Indian airline's CEO that insisted that all his employee cease all activities when he walks into a room (I kid you not), to the pilot picking up debris on the ramp or in the aircraft.  These are born from the company's philosophy...enough said!

(8) Landing slots & Other fun bits:  One of the most arcane segment of the airline business relates to purchase (or granting) of landing slots at airports.  Its hard to believe how slots are allocated, and if the domestic scene is complex the international slot allocation business is simply byzantine. Obviously landing and operating rights in underserved airports are a breeze to obtain, but as an operator you will have to negotiate all kinds of agreements especially since you may want to expand. The first slots of a grateful airport are given away, but once there are two or three players...watch out. Bottom line is that slots, although they have an economic value, are not sold/given in a rational basis. 

(9) Consignment, spare parts and manufacturer's depot:  Across the planet, aircraft , engine and avionics manufacturers have spare parts depot, conveniently placed at large airport so that parts can be shipped immediately.  These need to be within 3 hours flight from your main maintenance airport, so that part can quickly and easily be sent over (and sometime the spare part is an engine...).  Your access to these depot changes from manufacturer to manufacturer, in fact they all want to promote their aircraft reliability and this is often an afterthought for the airline. 

Operating an airline is a ballet where each part sings the same tune but with slightly different rhythm. Pilots/ground crew/maintenance are the human factors.  Aircraft/fuelling/spare parts are the physical aspect.  The regulatory/airport/services -- the third wheel of a landing gear, all these have to function together so that you meet your customers' expectations.  It is a complex system.  Thankfully many of these systems are now run via software (off the shelf) that allows management to ensure a seamless product delivery.

No new business is easy to run, they require commitment to perfection, strong leaders that delegate and employees that understand their role within the organisation and can deliver the service to the customer.  Airlines are particular because of the high capital and human cost of the operations. Barriers to entry are low, and can created tremendous strain on even a well run operation.

(10)  How much capital:  is required is a complicated question.  There is a tendency for airlines to operate with a lot of leverage.  Its a historical thing.  Most airlines were sovereign owned and as such had almost unlimited borrowing capacity.  Looking at successful (financially) airlines and you will immediately see relatively low leverage (high by certain standard, but low within the context of the airline industry).  Leverage is great when aircrafts are full, but its a massive burden when times are difficult.

There's no fast and easy rule, and the rules can change from jurisdiction to jurisdiction, but it remains that an airline needs to be able to survive a downturn, it has to have sufficient capital.  


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