SO YOU WANT TO START AN AIRLINE…

Note:  Global response to this blog has been amazing.  Many excellent comments have been offered from readers.  Your comments prompted me to add two items to the “Before You Begin” section as of 23 August 2016:  “The Price of Admission – Safety, Reliability, Security” and “What Makes Your Airline Different?” As of 12 September 2016, a brief section on obtaining an AOC has also been added.

The entrepreneurial spirit lives on in the airline world.  Start-up airline business plans continue to pop-up with regularity.  I’ve seen dozens in my career including several this year.  Something still compels entrepreneurs to start airlines even though only a small percentage make it to their first revenue flight. Getting traction almost anywhere in the world against the behemoths of the ever-consolidating airline industry is daunting.  But, somewhere out there is another Southwest, AirAsia or Jetblue waiting to be born.

How does an entrepreneur with an airline vision increase the chances of actually launching their first revenue flight?  It starts with developing a well-vetted vision and putting together a credible business plan.  Sadly, most airline entrepreneurs don’t know how to do so.  It’s time to give airline entrepreneurs a fighting chance.

I’ve developed, analyzed, and reviewed airline business plans from all over the world for small, medium, and large carriers.  Drawing from that experience base, here’s my primer on how to prepare a credible, defensible airline start-up plan.  This is very high level and intentionally simplified. But, following this outline could increase the chances of moving from concept to vetted plan to possible funding.

Let’s first take a look at some general “facts of life” about starting an airline, then, if you are still feeling entrepreneurial, we will explore the key analytical steps necessary to produce a solid airline plan.

BEFORE YOU BEGIN…

Consider the following before you begin the process of refining your vision and creating a detailed, investor-ready plan:

  • The Success Rate for Start-Ups is Low – only a few start-up airlines will succeed but you could be one of them. One way to increase your chances of success is to have a well thought-out, methodologically-sound business plan. Patience, passion, and perseverance are also needed.  This is not an easy path to walk.
  • Capital Requirements are Greater than You Think – too many start-up airlines try to get by on a modest budget of a few million US dollars. Successful start-ups raise tens of millions of dollars and a few in excess of $100 million.  So, don’t think you can start an airline on the cheap. Too many external events can happen in this business that will cause a start-up to quickly blow through cash reserves.
  • Plan First – Aircraft Type Later – develop a solid plan first then decide which specific aircraft type allows you to achieve your goals. Don’t let the specific airplane type drive your plan – let the plan drive the aircraft type.  Too many would-be aviation entrepreneurs get hung up on a specific plane and try to craft a plan around it.  They rarely succeed with that approach.  You need a business plan that meets a need, differentiates your product, is financially viable, and that can withstand competition, and economic ups and downs.  There is likely more than one aircraft type that will meet your needs.  If the analysis of your plan shows that there are at least two aircraft types that will work, why wouldn’t you want the ability to negotiate with choices?
  • What Makes Your Airline Different?  Within the various genres of airlines, e.g. traditional air carriers, low cost and ultra-low cost airlines, etc., it is increasingly difficult to distinguish one from another in terms of customer experience.  Thus, differentiation of your product takes on added importance.  Why should anyone fly your airline?  Differentiation certainly includes where and when you fly, and the ticket price, but the challenge is now to go beyond that.  How can you make the customer experience stand-out without “breaking the bank”?  Two hints:  what can you do within your airline’s corporate culture to make your team want to create an exceptional customer experience every day; and what can you creatively do with digital technology?
  • Stress Test Your Plan – once you have developed a solid, interactive forecasting approach, with associated financials, stress test your assumptions. What happens if fuel prices go up 50% in Year 2 of your plan or, your competitors attack with ultra-low pricing during your launch period?  Test all the key drivers in your forecast to see if you have enough cash, and a strategy, to cope with the challenges. Stress testing also gives you a better sense of what cash reserves may be needed.
  • Competitors’ Loyalty Programs Are Formidable – one of the biggest barriers to success, besides start-up capital, is your competitors’ loyalty program. Never under-estimate the power of those plans, or their corporate contracts. You may be offering new non-stop service in a market but customers will often stay with the incumbent carrier, even if it means flying through a connecting hub, because they can earn miles, or because their company has a corporate contract with preferred fares.  Also, if you develop a loyalty program, it’s not enough to allow customers to redeem miles on your limited network. That rarely is appealing.  I worked for a very successful mid-sized airline that offered service to most major cities in the US.  We had a very good loyalty program but what the customers really wanted was a way to redeem their points or miles for trips to Hawaii and Europe, locations not on our network.  You may need to consider linking to someone else’s loyalty to program to give your passengers viable redemption options.
  • Good Business Plans Aren’t Free – Creating a refined vision and a solid, detailed plan takes capital. Too many airline entrepreneurs try do this portion for little or no money, or with a promise to their technical experts of an equity stake in the business.  That approach rarely works. It’s hard to get good help for an equity position that has a very small chance of emerging.  Most start-ups that are around today had to pay something for a quality plan.
  • Where Do I Get Help? – There are many qualified firms of various shapes and sizes that can put together a plan.  At a minimum, make sure that they have a track record with start-ups, have good data, and good tools.
  • Develop a Five Year Forecast – investors want to know what the start-up, ramp-up, and mature periods of your business plan look like. Thus, a five year forecast is needed.  Also, avoid the extremes in forecasting: 1) the “hockey stick” forecast; i.e. poor to modest results in the first three or four years then meteoric success at the end; or 2) instant success.  Reality is somewhere in the middle.
  • It Takes Time – expect to spend, on average, two-and-a-half to three years moving from planning, to fund raising, to certification, and first revenue flight.
  • The Price of Admission –  safety, reliability, and security make up the solid foundation of a good plan.  Don’t even bother to prepare your start-up plan unless these elements can be fulfilled.  Commercial aviation’s safety record, in most parts of the world, has made substantial improvements.  Your airline must contribute to this positive trend.  Greater attention to the latest in crew and staff training; creating a safety culture throughout an organization; the ability to mine, analyze, and act on safety data trends; and access to new and better aircraft and equipment are just a few of the safety elements that must be considered.  Reliability involves operating on-time while adhering to a comprehensive safety culture.  There are more than twenty processes that need to come together in order to get a plane off the ground.  You need a strong team to make it happen every day but it pays for itself many times over in terms of reduced expenses and enhanced revenue.  And, security for passengers, crew and staff is a growing challenge in this age of terrorism.  You have to build security into the plan.  Investors will be asking more questions about it.  Don’t cut corners on any of these three factors in your plan and budget.
  • How Do You Obtain an AOC?  This blog provides guidance on how to put together an airline start-up plan that is credible and investor-ready.  Once you secure an initial tranche of start-up funding, work must begin in earnest on a myriad of issues, including obtaining an Airline Operating Certificate (AOC) from the civil aviation regulatory organization in the country in which the airline will be based.  However, it is important in the early planning stages to identify how you intend to secure the AOC.  Will your airline acquire a new AOC by going through your civil aviation authority’s airline start-up process, or will you buy another airline and use its AOC?  Many countries prohibit directly buying just the AOC from another operator but sometimes you can do so by acquiring another airline in total. Then, it becomes a matter of reworking their business model into your new one.  Regardles, the expense and time of either approach must be included in your start-up plan.

AIRLINE PLAN ELEMENTS

There are eight basic steps to follow. You will also need some “tools” as a lot of assembly is required: at a minimum, a knowledgeable aviation planner; someone familiar with aviation finance; and access to an airline route profitability model and market data.

  • Step 1:  Develop and focus the vision – Structure and a Vetted Strategy Are Crucial.
    1. Begin to define the type of airline based on market conditions and input from stakeholders. Will the airline be a traditional full-service carrier, a Low Cost Carrier or an Ultra Low Cost Carrier, an indirect air carrier (virtual service model), charter operator, membership-based airline, or something else?  Put together a rough concept on one sheet of paper. Identify the compelling need(s) that the airline will fill.
    2. Talk to stakeholders about your ideas to gain focus and perspective on what the market needs are in your area. Talk to airline and aviation professionals, local businesses and major employers, hoteliers, tourism officials, airport officials, and possible funding sources. Gain their preliminary input on your ideas.  Be prepared to adjust your thinking based on feedback.
    3. Conduct detailed research:
      • What is the market need for your preferred airline type?
      • Define your customer experience model.
      • Rough out markets to be served.
      • What is the competitive environment?
      • Identify points of differentiation. Your business model needs to make sense operationally and financially but it also needs to standout from the crowd.
      • Don’t get locked into a specific aircraft type yet. At this early stage, it’s adequate to note that you plan to use jets or turboprops with approximately X seats.
      • Develop functional concepts for each work group within the airline.
      • What are the financial targets? The answer will vary based on where you plan to fly and the type of airline business model selected.
    4. Redraft your concept paper, based on subsections “2” and “3” above. Keep it short: 3-4 pages with a “30-second elevator pitch”. Be able to clearly and succinctly articulate your preliminary plan. Remember, this is a draft subject to change based on the following analytical steps.  Get further feedback on the draft concept paper from stakeholders and make modifications.  Now the analytical fun begins, assuming you found the necessary help and tools.  Note: Steps 2-6 can occur somewhat concurrently.
  • Step 2:  Convert the vision to a detailed operating plan.
    1. The starting point for an airline operating plan is a schedule(s) with specific departure and arrival times by market. The schedule should denote how many days per week each flight operates, what connections are important, and generic aircraft types. Produce what is called a “route-able” schedule; i.e., one that produces logical aircraft flows based on block and turn times. The schedule enables calculation of key metrics for the forecasting and budgeting phases such as block hours flown, available seat miles (kilometers), aircraft, and crew requirements.
    2. Generic Aircraft Types – let the demand forecasting process below guide you to the right aircraft solution. Your earlier research should be a guide as to about what size aircraft are needed.  The distance of the routes to be flown will also serve as a guide to size and general type.  By now, you should have a rough idea if a generic 12, 30, 50, 100, 150 or larger seat count will meet your needs.  And, it’s best to develop a plan based on one aircraft type in order to reduce operating expenses ala Southwest Airlines.  If the forecasts are done properly, you will know what capacity aircraft is truly best.  There’s more to come on this subject.
    3. Develop multiple schedules to test. Your research may suggest testing several schedule options. The options may vary by frequency of service, specific markets, or flight departure times tuned to local market requirements.
  • Step 3:  Define the competitive environment and the likely responses to your endeavor.
    1. There will almost always be a competitive response to a start-up airline in the form of new competitive service, fare wars, and/or loyalty program bonuses, to name but a few threats. Don’t ignore them. In regions of the world with well-developed air service, you need to consider the impact of a competitor’s connecting service, and frequent flyer plan, even if you have spotted a need for an unserved nonstop market.  For example, your business plan may include new nonstop service from Portland, Maine to Columbus, Ohio. However, there are probably dozens of connecting flights on other airlines that operate between these two points.  Plus, your competitors all have powerful loyalty programs and commercial business contracts that will make it hard to attract customers even if you offer a faster, better service.  If using a true airline profitability model, the competitors’ schedule must be included in the analysis.
    2. In certain parts of the world, rail or bus services may be the competitor depending on what service model you adopt. For example, intra-China and intra-European air service is being heavily impacted by the rapid growth of high speed rail.
  • Step 4: Define market demand between all the points on your proposed network.
    1. There are a variety of ways to tackle this task:
      • Buy the data from a known vendor. There are a number of companies that develop and sell historical demand and pricing data between specific origin-destination citypairs.  However, the data is expensive.
      • Some aviation regulatory sources may make the data available at little or no cost. The US DOT is one of the few that do this.
      • Get creative. I’ve used various surrogate approaches to demand estimation including a gravity model, or developing implied market demand based on existing airline schedules between two points and the likely load factors on those flights.
      • If you’re a “Big Data” person, see what you can glean from the internet and social media for both structured and unstructured data relevant to your endeavor.
    2. Make sure the demand data for each citypair on your network is expressed in a consistent numerical format for ease of use in the forecast model. Airlines have typically used Passengers Per Day Each Way (PDEW) as the metric.
    3. Growth and stimulation – data on market demand is typically historical and does not necessarily reflect the future. The data will need to be both grown and stimulated to account for what might happen.  Demand “growth” is what naturally occurs in a market as a reflection of some factor like GDP, population, and/or employment shifts.  “Stimulation” is an increase in demand driven by the presence of new and better service and the a fundamental change in the pricing environment. Note – aggressive pricing usually stimulates demand beyond what a new nonstop route alone would do.  This is the model that LCCs like Southwest, and ULCCs like Spirit or RyanAir, employ. If you are creating an LCC/ULCC, stimulation will require an approach that evaluates demand elasticity for various price points.
  • Step 5:  Develop the Pricing Structure and Other Revenue Sources
    1. What will you charge by market? Pricing is highly dependent on your chosen business model, competition and the number of seats deployed. Think through this aspect of your forecast carefully. Considerations include:
      • Financial objectives. Be sure the pricing structure gets you to those goals.
      • Type of service you plan to offer. There is a vast difference in pricing between a traditional carrier, an LCC, a ULCC, or a membership model. As indicated, the type of service model employed influences how much you stimulate demand.
      • Competitive pricing – what are your competitors charging now? What are they likely to charge if you start service?
      • Ancillary Revenue – like it or not, it’s here to stay, so define your ancillary revenue strategy well. There are many options for ancillary revenues so you can be creative.  However, remember that apart from your own website and call center, its often difficult, or impossible, to sell ancillary products through various GDS’s and OTA’s.  This problem is easing a bit but can still be an issue depending on where in the world you operate and the sales channels used.
      • Will you transport cargo or mail? If so, this revenue line needs to be developed.
  • Step 6:  Create a Budget and Unit Costs
    1. This is where you need that airline finance guru. It’s time to develop a budget for all functional areas of your proposed airline based on the operating plan.
    2. Note that budgets change as you refine the plan so make sure every modification is accurately accounted for in the cost structure.
    3. Convert the budget to unit costs for every driver of expense; e.g. block hours, fuel burn, passengers, employees, aircraft cycles, admin overhead, number of aircraft, available seat mile (or kilometers), etc.  Unit costs will be a key input to your route forecast.
    4. Use a best estimate of aircraft ownership values. This value can be refined as the specific aircraft type required emerges from the forecast.
  • Step 7:  The Forecasting Process – Where It all Comes Together
    1. Forecasting models enable you to calculate potential passenger demand for your flights, revenue, operating costs, profit-loss, along with standard industry metrics using the data from steps 2-6. An industry-standard forecasting tool greatly enhances analytical capability and adds considerable credibility with potential investors.
    2. The models come in many forms ranging from spreadsheet-based versions for a simpler network, to well-developed apps capable of calculating across large, complex networks. They operate on algorithms that calculate passenger traffic, market share, and various financials when your proposed schedule is compared to the competitive environment in which you tend to fly. A proper forecasting model should be able to assess results by flight, route and network.
    3. Inputs – All of the data that you have prepared in the initial steps are incorporated in the model including:
      • Your proposed flight schedule(s). There should be a detailed schedule for each scenario.
      • Competitors’ schedules
      • Market demand data; typically expressed as the number of passengers traveling between specific origins and destinations over some timeframe – daily, weekly, annually.
      • Pricing data for your flights.
      • Unit costs from your draft budget.
    4. Calculations
      • There are a variety of forecasting engines that perform the actual calculations. At the core are algorithms that determine passenger preference for various flight paths between any two points on your network. Passenger demand is assigned to each path based on a scoring system.
      • The algorithms compare your schedule to the competitors by looking at a variety of factors, including, but not limited to:
        1. Type of aircraft flown
        2. Type of service; i.e. non-stop, online connections, interline connections, etc.
        3. Time of Day – customers in markets often prefer to travel at certain times. Well-timed flights will score higher and attract more demand.
        4. Frequency of service – the number of flights per day or week that you will offer versus the competition.
        5. Spill and recapture logic – a probability-based calculation critical to fleet and capacity planning. Spill represents the number of passengers that may not be accommodated on a flight as load factors rise.  Recapture determines whether or not spilled passengers are reaccommodated on other flights in your network or are shifted to a competitor whose flights have available seats. See section “6” below.
        6. Other factors – such as origin point dominance or “S” curve impacts which give your flights a boost in preference if you operate a high percentage of the total flights at a given airport. Also – elapsed time penalties for excessively long journey times, or carrier preference factors.
      • Once market demand is allocated to a flight by the algorithms, pricing data can be applied to calculate revenue, and cost data added to determine profit-loss.
    5.  Outputs
      • The model should provide estimates of passengers, revenue, operating cost and financials by flight, route, and network; along with key metrics like load factor, RASM (RASK), CASM (CASK), yield, etc.
    6. Aircraft type planning using spill and recapture logic
      • If you used generic aircraft with approximate seat capacities this is where an analysis of spill data helps focus on a specific type(s) of aircraft. If spill is high on the majority of flights, then there may not be enough seats on your planes to accommodate demand.  If so, rerun your network analysis with a larger plane to see if spill is lessened and passengers are still retained on your network.  Be careful because if your model optimizes for network profitability it is sometimes better to use smaller units of capacity and spill traffic as this solution may be more profitable than using larger, expensive aircraft.  The optimal revenue and profit solutions do not necessarily need to accommodate 100% of potential passenger demand. If seat sales are managed properly, you will spill the lowest yielding passengers and retain the higher yielding customers resulting in a more profitable outcome.
  • Step 8:  Iterate
    1. Expect to run multiple iterations of this process to determine which plan variant meets your goals. As you iterate, schedules may need to be changed, flights and routes added or dropped, or aircraft types and capacities adjusted before you find the desired answer.

Many financing and implementation steps remain before a first flight but now you have a defensible plan developed around an industry-accepted approach.

The general next steps are shown below.  The timing of these steps will overlap each other somewhat.

  • Prepare the plan in an investor-friendly format. Be sure the plan includes a well-written Executive Summary of no more than two pages and that touches on each key point in your plan. Many investors will read only the summary to determine if they want to know more.  The Executive Summary should also include a clearly articulated request for specific financing and what the net benefit will be to the investor.  Keep the entire document to a reasonable length. Be prepared to show your methodology and detailed forecasts at some point in the process.  Any investor worth having will eventually ask for such details.  Finances should be summarized so that your “ask” ties directly to the plan’s finances.
  • Seek financing. Approaching multiple potential funding sources is the norm.  Be prepared to answer a lot of questions. Patience, passion, and perseverance will become your best friends.  Start with potential investors in the market(s) you plan to serve as they are the ones who will have a greater interest and will understand the market needs more clearly.  Financing will almost always come in tranches with each tranche linked to successful completion of various phases of implementation.
  • Refine the plan and move towards certification and operation. Many more steps lie ahead but if you’ve gotten to this point, you are among a select few who are now able to expand the team and walk through the mobilization and certification processes.  Look for experts with detailed knowledge and experience dealing with the civil aviation regulatory bodies that will oversee your operation.

Clearly, there are many variations on the process and themes outlined above.  This is simply an annotated outline designed to help develop a well-conceived plan.  I wish you all the best and please feel free to contact me with feedback and questions at:  scott@srdanalytics.com.

Check out Scott’s other blogs on leadership and change management.  Click on “BLOG” above.