Thursday, June 25, 2015

So you want to start-up an airline! (Part 1)

A solid 20 year chunk of my working life has centred around the airline industry.  I've seen my share of crazy proposals and also some brilliant moves.  When investors made a bundle and real economic value was created.  One of the best was South African Express -- management was changed in the late 90s and the airline faced harder time over the past few years, but it remains an example of what a good airline does:  It provides a service and generated economic growth (and profits for the owners). Today the airline is owned by the South African Government, but it was started by a Canadian in 1994, who having travelled to South Africa realised that the national carrier was not providing for the needs of the country's travelling pubic.  

There's an old joke:  "How do you make a small fortune in the airline business, start with a large one".  The business has been cruel, there are no way of securing route rights that can stop competitors from encroaching on the markets you developed -- in fact more town/airport are happy to see more competition.  

Over the past few months I've seen a number of "new airline" proposals.  Some have been good ideas some have been terrible ideas, but I wanted to take this opportunity to give would-be airline magnates a "how to" list that they should consider (before they call)

The basics:  Generally, a good airline manager is one that cares little for the equipment; he's not in love with aircrafts, he has not decided that his airline can only operate one specific aircraft type rather he looks at the optimal aircraft both for today's operations and for expansion.  In the mid 90s, Naresh Goyal returned to India, his homeland, and decided to start a new airline (like many others did at the time) call Jet Airways.  His business model was revolutionary for India:  Aircraft always left the gate on-time, and aircraft landed on-time.  On the other hand most other Indian start-ups worked a different model -- suck-up to government ministers for lucrative contracts and route allocations, and generally ignore the paying public.  Today only Jet Airways and Sahara Air India survived, unsurprisingly both of these two start-ups used the same concept, good aircraft, ignore the politicians as much as possible, provide good on-time service and have excellent maintenance operations.

The grand daddy of the airline start-up is SouthWest Airline that was masterfully run by Herb Kellerher, a lawyer that had little interest in aircraft and the business but was very focused on one concept -- profitability.  We also have Southwest to thank to introduce the concept of frequency as a source of additional traffic (something that was later studied by economists the world over).  As an airline operator his model is the best, always focus on the bottom line -- because independently of how good your service is if you don't make money you don't survive.

What does it take:

(1)  Start small but find quality teams:  My experience of start ups is that the front office is loaded with smart guys but they often will not pay for good maintenance personnel -- because they are "all the same" (not true).  A good maintenance team knows when to ground an aircraft and when to let it fly, they understand maintenance log and they know what it takes to keep commercial aircrafts in the air.

It amazed me while working with small start-ups how many times the advice of the Tech Rep was ignored (industry jargon), that they guys who were sent to be trained were not the guys doing the maintenance.  This was almost painful in India where nearly $100,000 of damage was done to an aircraft because no one bothered to read the maintenance manual on how to remove a fuel pump, and instead of unscrewing it with a special tool decided that brute force was preferable:  the result the aircraft spend two weeks on the ramp.  Bottom line you cannot have incompetent engineers taking care of your flight systems, avionics or other other crucial systems.  

The team that meets the customers on a daily basis need to feel part of the process and need to be able to call someone if there are problems.  The most frustrating thing in dealing with U.S. carriers is that the desk team have no room to manoeuvre and no information.  Leaving customers pissed off when problems arise.  This would never happen on WestJet or SouthWest Airline.  There's always a number to call and often there are solutions, but always there's information.

Bottom line get a quality team and empower them.

(2) Find a good hub:  That's nothing to do with traffic it has to do with maintenance.  Aircraft need lots of TLC -- they are prone to breaking and need to be continually maintained.  As a start up rarely will you have access to new aircraft and therefore these lease aircraft have a more "checkered history". In fact, the maintenance requirements of a 20 year old aircraft are substantially higher than a 10 year old aircraft.  It's not as such a problem, but its something that has to be taken into account -- especially when looking at turn around time (another industry jargon).  Old aircraft appear cheap, but require lots of TLC.  The reality is that small commercial aircraft, such as a Dash8/Q100, have substantial maintenance reserves, and indication of the cost/time required to keep them in top shape. It is also very important to have direct links to the closest manufacturer's parts depot.  If it takes 24 hours to get a critical part, these are 24 hours where an aircraft is grounded

(3) Route selection:  Is challenging because if you are a new operator on new routes you may wrongly estimate demand.  Business travellers want to be able to book within 24 hours, but if you have insufficient spare capacity -- or worse yet leave passengers on the ground, your business model will breakdown.  You need sufficient capacity to meet demand, but need to limit capacity so that your flights are profitable.  You have to be route agnostic; you have to decided not only which route to pick what fare to offer but also what routes you may cover because it allows you to reposition an aircraft for the next day (or maintenance requirements).  This is sufficiently complicated that its almost impossible to use computer to achieve the best results.

On aspect of the start-up business is that there has to be a sense of what business you are trying to attract; is it the occasional traveler, the business person or the tourist?  Each will have different requirements and your airline operations will be dictated by the type of clients you are trying to attract.  In order of importance (revenue wise) are Business travellers, occasional travellers and Tourists.  The latest category is important but fickle and are extremely price sensitive.   Manufacturers are very helpful in creating your business model (in fact their help is essential).

(4) Equipment Selection:  There are many choices available to the start-up carrier.  Obviously, price wise older equipment is attractive -- but there are many pitfalls associated with older aircraft.  The first, and more complex is inconsistency of maintenance (not only doing but also writing-up) there can be many languages than add to the difficulty.

How large an aircraft do you take -- many occasional or tourists have an huge fear of propeller aircraft -- doesn't matter that a turboprop aircraft is essentially a "jet engine" the perception is that these aircraft are less safe.  How small do you go, a Cessna Caravan (14) , Dash 8/100 (37), King Air (12).  What do you do once you get bigger?  Each of these aircraft have their advantages (first they are all still in production), but some are a one class aircraft (Cessna and King) insofar as if you want bigger you have to change your fleet (that means new training for maintenance and pilots and new spare parts depot).  These are all questions that need to be (eventually) resolved or at least discussed.

More next week! 


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