View Full Version : Airline StartUp Issues
I know its the dream of many pilots and certainly many executives, to start up and own their own airline, however small. With the predicted growth in traffic, reduction of barriers to entry, availability of flexible finance, has anyone here taken the plunge and actually done it ?
Producing a Business Plan and writing the JAR-OPS manual (!) for the AOC is one thing ; getting slots on profitable routes while managing your cashflow is far more difficult !
tornado
Alexander
04-02-2008, 07:42
Yeah I think the temptation is there as a qualified pilot to simply procure and aircraft to do what your love and worry about the business-side and finding paying passengers (or clients) afterwards! The problem is different from that of a scheduled airline or God-forbid, another low-cost airline in a crowded market. Find a client first with managable aviation-needs that you can satisfy, you have a basis on which to build and expand.
Alex
It sounds attractive, but taking the risk is not something I am sure I want to do. Much better to stick to what you know, and let others push the papers and take the commercial risks at least :D
TF
Yeah I think the temptation is there as a qualified pilot to simply procure and aircraft to do what your love and worry about the business-side and finding paying passengers (or clients) afterwards! The problem is different from that of a scheduled airline or God-forbid, another low-cost airline in a crowded market. Find a client first with managable aviation-needs that you can satisfy, you have a basis on which to build and expand.
Alex
The worst airlines are those managed by pilots.
Shagmeister
13-02-2008, 00:09
How do you make a small fortune in aviaton? We all know the answer to THAT one. If I won the lottery tomorrow the last place I'd put my money would be aviation.
Or maybe I'm just too dumb to make it work?
The overheads of even a small airline are huge and how do you get the passengers on your route or booking your aircraft ? That in itself requires significant investment in advertising and promotion to reach the critical load factor or level of booking.
If you were offering ondemand flights, then if you can minimise the overheads of having an aircraft waiting around and control too your variable costs then you stand a much better chance. This is where the modelling comes in and dare I say it, management accounting...
I was always fascinated by route and aircraft optimisation, and I was always surprised that so very few major airlines optimise the utilisation of their fleet in real-time....but thats another topic...
Of course the corporate aircraft may not have the same regular routing or schedule so assumptions for the modelling are even more difficult...
tornado
How do you make a small fortune in aviaton? We all know the answer to THAT one. If I won the lottery tomorrow the last place I'd put my money would be aviation.
Or maybe I'm just too dumb to make it work?
I suspect you may be right... closely following by the "vanity-airlines" that are operated to demonstrate status and wealth without a sound business justification.
tornado
The worst airlines are those managed by pilots.
I was always fascinated by route and aircraft optimisation, and I was always surprised that so very few major airlines optimise the utilisation of their fleet in real-time....but thats another topic...
tornado
I don't want to derail the thread, but it is very difficult to do real time optimisation due to rostering and type-certification issues.
Indeed. I think KLM played with the idea, but as you say crew duty hours limitations cause problems to routing aircraft simply anywhere the model suggests. Simple complexity of the resulting system means it is not optimised beyond allocating aircraft with sufficient capacity on a route with the historical data to justify it.
I do however think there is a lot of potential here if someone can develop a model that remains managable.
tornado
I don't want to derail the thread, but it is very difficult to do real time optimisation due to rostering and type-certification issues.
Well since we started, we might as well continue :)
There are also other problems past rostering (which could sort-of be figured out if the fleet was uniform, or quasi uniform, say 757 / 767 for instance, or A318 - 319 - 320 -321).
There are other variables harder to adjust for - namely load. On most departure control systems there is no real-time link between the dispatching system and the reservation system. So you dispatch on the basis of an estimated load, which may change by quite a margin once the aircraft is actually in position.
Further, you do want to avoid changes in types or configurations as much as possible, since in general flights are "edited" i.e. prepared with the pax load info available at H-24. A change of configuration (say from 2-4-2 abreast to 2-3-2) is a nightmare as all the passenger allocation (assigning groups, families etc) has to be reworked out pretty last minute (on short haul flights that can mean boarding passes have already been printed and issued, and then you're really in a world of pain).
Also, in terms of deadload prepping, changing aircraft can mean that cargo loads that have been palletised for a specific aircraft no longer can be taken on - either due to weight per position issue or the right type of container not being available. That's assuming you don't change from a containerised to a bulk load hold version.
There's also the petty stuff like a plane having to be at a specific place at a specific time for a C/D check.
I know someone who tried to optimise a routing schedule for a trucking operation. he said the work involved was huge, and the benefits infinitesimal in comparison.
Mmmm, I was thinking about aircraft allocation rather than dynamic reconfiguration of the aircraft (though this is obviously possible).
OK , so if we start with a blank sheet of paper. If you start from the outset, with the intention of this kind of optimisation, using a compatible fleet (all crews type-rated for all types), with compatible cargo containers, I wonder if the benefits do justify the complexity.
The benefits for a demand distribution with a small variance demand curve are likely to be minimal.
Anyone know the breakdown of costs for operating an 8-PAX seater small jet. What is the proportion of cost relating to one passenger (70kg?)...
tornado
Mmmm, I was thinking about aircraft allocation rather than dynamic reconfiguration of the aircraft (though this is obviously possible).
Well you don't reconfigure, it's just that within a fleet some aircraft come with different "pantry codes" (i.e. cabin configurations). Some you can change (like changing the number of business / economy seats by moving the seats themselves). Some you don't like the abreast seating configs or hold configuration.
OK , so if we start with a blank sheet of paper. If you start from the outset, with the intention of this kind of optimisation, using a compatible fleet (all crews type-rated for all types), with compatible cargo containers, I wonder if the benefits do justify the complexity.
The benefits for a demand distribution with a small variance demand curve are likely to be minimal.
That's called low cost :D
Still, you cannot dynamically allocate aircraft because you do not get dynamic load information... at least not for majors.
Further depending on the stage of your company you will be running empty anyhow until demand builds up. I remember EasyJet starting in Geneva with ok-ish Luton flights and 3pax per flight to Liverpool.
Finally reallocating efficiently means you have to have decorrelated variances across all your destinations. You can't just afford to have a big plane and a small plane and use just one of the two...
Now they're carrying 25% of the passengers passing through the airport.
Anyone know the breakdown of costs for operating an 8-PAX seater small jet. What is the proportion of cost relating to one passenger (70kg?)...
tornado
That depends on the type plane, the overhead you have, the frequency you have etc. etc. Concepts like casm are difficult to work out in small jets.
Still for the exercise's sake, you want to start out with old clapped out airplanes so your initial capital layout is not huge and you'll only (well sort of) need to cover your variables.
Hi,
I have a business plan for an AOC being AOC provider for the others. The idea is to give start-up projects an opportunity to outsource the AOC structure for the first 2-5 years, so they can built their own structure slowly and with predictable, flat-rate monthly costs. We are looking for an investor to start the business in Poland and then create branches or frenchise to the other countries. If anyone is interested in the idea, I can send general conditions on priv e-mail.
BRGDS,
Tomek
I can't see how this would work. You can't delegate or transfer liability that is inherent in the award of an AOC, and so in your model, you would be liable for all your franchisees' operations... the insurance man cometh :eek:
tornado
Hi,
I have a business plan for an AOC being AOC provider for the others. The idea is to give start-up projects an opportunity to outsource the AOC structure for the first 2-5 years, so they can built their own structure slowly and with predictable, flat-rate monthly costs. We are looking for an investor to start the business in Poland and then create branches or frenchise to the other countries. If anyone is interested in the idea, I can send general conditions on priv e-mail.
BRGDS,
Tomek
Hi,
It will work like every other outsourcing idea. Of course there are few difficulties like responsibillities, insurance, brand names and many others, but the general idea is to put financial risk on the client and operational risk on the AOC provider. Client will have to trust in AOC provider's ability to maintain the AOC and he will have to take the risk but for the much lower cost than own AOC structure. There are of course few risks, but as well few strong advantages for the client:
- AOC provider will have experienced team, which is really hard to get on the market
- all agreements incl. handling, fuel, catering, insurance etc. will be already signed, adding an aircraft to the system will an additional cost but it will be lower than in own AOC operating 2-3 aircraft.
- some operations specifications like ETOPS, CAT II etc. will be already in the provider's AOC, nromally in Poland you have to wait at least 6 months to get ETOPS 90.
- AOC provider can split flight crews, operational staff, maintenance and office staff between the clients, especially if two or more clients operate same type
- leasing procedure will be arrange through the AOC provider, which in few years of operation will be able to achieve good rates and get aircraft in shorter period of time (if you are new on the market is almost impossible to get good leasing offer, some AOC companies like Prima Charter are waiting without any aircraft for few month waiting for leasing offer)
It is obvious that after 2-5 years client will build his own AOC but I am sure that most of clients will still outsource some activities like dispatch, quality management, CAMO etc.
BRGDS,
Tomek
I think the only problem is that you will run into a segment already covered by ACMI deals.
This is true, I think most of our future clients will be ACMI providers. There will use our AOC to operate legally. There is still huge gap in Eastern European market in ACMI deals on a/c size from ATR 42 to B737-800.
BRGDS!
Tomek
This is true, I think most of our future clients will be ACMI providers. There will use our AOC to operate legally. There is still huge gap in Eastern European market in ACMI deals on a/c size from ATR 42 to B737-800.
BRGDS!
Tomek
Except you cannot be an ACMI provider without your own AOC to begin with.
Let's say that legally I will be the ACMI provider, business, charter, low-fare operator or whatever. However I can create few brand names for my clients running under one AOC. Flight will be performed under client's brand name, but the invoice will be issued by AOC provider.
BRGDS,
Tomek
Let's say that legally I will be the ACMI provider, business, charter, low-fare operator or whatever.
However I can create few brand names for my clients running under one AOC. Flight will be performed under client's brand name, but the invoice will be issued by AOC provider.
BRGDS,
Tomek
Let's say that legally you're prevented from doing that by Jar-Ops 1.165... .
According to JAR OPS 1.165, as an AOC holder I can dry-lease the aircraft in and wet-lease it out. And that is what I will exactly do.
According to JAR OPS 1.165, as an AOC holder I can dry-lease the aircraft in and wet-lease it out. And that is what I will exactly do.
Which is going back to saying that the wet-lease market is covered for, and what you are doing is effectively providing charter services (which I believe are also covered to some extent) and you will run into exactly the same problems you mentioned i.e i quote
(if you are new on the market is almost impossible to get good leasing offer, some AOC companies like Prima Charter are waiting without any aircraft for few month waiting for leasing offer)
Also when you are leasing out to a non-JAA entity you have to retain all operator functions, so I don't exactly see where and how your client will have the chance to gradually "learn towards their AOC" as you put it.
Further, as an unestablished charter operator hoping that you'll make money by dry-leasing in and wet leasing out is a "wet dream" so to speak unless you have tremendous financial backing, as, unless what you propose, the financial burden will rely fully on your shoulders unless you can exactly match lease-in with lease-out periods (good luck on that...).
I'd be glad to be proved wrong and see you succeed, however I've already seen this fail a good number of times in markets otherwise more awash with cash than Poland...
This is the part of the proposal that I couldn't really follow, as the legal entity that is the operator will have to be nationally certified and granted an AOC.
You can't delegate aircraft operation to another company that doesn't have such certification.
If you are talking about proving generic versions JAR-OPS manuals , MOEs etc to support and help kickstart smaller ventures, then that is something different...
tornado
Also when you are leasing out to a non-JAA entity you have to retain all operator functions, so I don't exactly see where and how your client will have the chance to gradually "learn towards their AOC" as you put it.
As AOC provider I can do ACMI deals as well as holiday charters or business aircraft management, ACMI is not the only possible activity.
We will train their personell in our structure so they can become more independent.
All costs of aircraft leasing etc. will be charged to the client.
Example scenario:
1/ I hold AOC and AOL isued by Polish CAA, I operate few aircraft
2/ Tour operator wants to operate their own aircraft, 2 B737's. They have no aviation knowledge apart from chartering the aircraft from the operators.
3/ We sign an agreement, I add B737 type to my certificate, I lease the aircraft, train crew etc. and charge everything to the client
4/ I am the operator of these aircraft, but as tour operator deals with bookings they get the income from the flights minus all costs and monthly management fee (cheaper than own structure)
5/ They grow and slowly start to take out several activities, start AOC certification process
6/ They have separate AOC
So... you are wet leasing aircraft to a tour operator where you remain as operator with AOC. OK.
...
End game: tour company becomes an aircraft operator with appropriate AOC. OK
My questions would be :
a) assuming that the tour company is capable and wants to make this transition, how can it be achieved ? Its a different industry and by your admission, they have no aviation knowledge. Is your company as incumbant operator going to act as consultants to develops the systems and locate the resources for them to do this ?
b) why would your company providing the wet lease aircraft want to talk itself out of a client ? Unless of course the startup consultancy activity is more lucrative than working as an operator.
tornado
Example scenario:
1/ I hold AOC and AOL isued by Polish CAA, I operate few aircraft
2/ Tour operator wants to operate their own aircraft, 2 B737's. They have no aviation knowledge apart from chartering the aircraft from the operators.
3/ We sign an agreement, I add B737 type to my certificate, I lease the aircraft, train crew etc. and charge everything to the client
4/ I am the operator of these aircraft, but as tour operator deals with bookings they get the income from the flights minus all costs and monthly management fee (cheaper than own structure)
5/ They grow and slowly start to take out several activities, start AOC certification process
6/ They have separate AOC
3/ We sign an agreement, I add B737 type to my certificate, I lease the aircraft, train crew etc. and charge everything to the client
Apart from the fact that this market segment is relatively crowded already, if the client walks out on you, you are then left with two 737 on your hands... Granted you can force your client to be bound for the same duration that you as a lessee are bound to the 737 lessor. However this is something very unlikely to be accepted by a T.O., simply because they can go next door (say Air Atlanta Icelandic) and get better terms not only on duration but also on costs.
4/ I am the operator of these aircraft, but as tour operator deals with bookings they get the income from the flights minus all costs and monthly management fee (cheaper than own structure)
Your monthly management fee will not be cheaper than having an own in-house structure as it includes your own profit. You won't be able to provide cheaper management fees unless you have a large fleet of aircraft to spread your fixed costs on.
Further to this, a T.O will always (well, 99% of the time) purchase an existing charter AOC since one their main line of business is not developing an AOC from the ground up and two most of the start-up costs have already been amortized.
I agree strongly on two points:
a) its a very competitive and crowded market with limited scope for differentiation.
b) a tour operator is unlikely to want to start an airline which it doesn't know and is certainly not its core business.
If I were a tour company I would be more interested in get maximum value and investigating ways to reduce costs of procuring aircraft services from an operator than starting my own airline.
This can only get more acute with improve efficiency of b2b trading such as the empty leg booking scheme you mentioned earlier, of what is let's be honest is an easy commodity to transport :D
tornado
Apart from the fact that this market segment is relatively crowded already, if the client walks out on you, you are then left with two 737 on your hands... Granted you can force your client to be bound for the same duration that you as a lessee are bound to the 737 lessor. However this is something very unlikely to be accepted by a T.O., simply because they can go next door (say Air Atlanta Icelandic) and get better terms not only on duration but also on costs.
Your monthly management fee will not be cheaper than having an own in-house structure as it includes your own profit. You won't be able to provide cheaper management fees unless you have a large fleet of aircraft to spread your fixed costs on.
Further to this, a T.O will always (well, 99% of the time) purchase an existing charter AOC since one their main line of business is not developing an AOC from the ground up and two most of the start-up costs have already been amortized.
Example scenario:
1/ I hold AOC and AOL isued by Polish CAA, I operate few aircraft
2/ Tour operator wants to operate their own aircraft, 2 B737's. They have no aviation knowledge apart from chartering the aircraft from the operators.
3/ We sign an agreement, I add B737 type to my certificate, I lease the aircraft, train crew etc. and charge everything to the client
4/ I am the operator of these aircraft, but as tour operator deals with bookings they get the income from the flights minus all costs and monthly management fee (cheaper than own structure)
5/ They grow and slowly start to take out several activities, start AOC certification process
6/ They have separate AOC
So... you are wet leasing aircraft to a tour operator where you remain as operator with AOC. OK.
...
End game: tour company becomes an aircraft operator with appropriate AOC. OK
My questions would be :
a) assuming that the tour company is capable and wants to make this transition, how can it be achieved ? Its a different industry and by your admission, they have no aviation knowledge. Is your company as incumbant operator going to act as consultants to develops the systems and locate the resources for them to do this ?
b) why would your company providing the wet lease aircraft want to talk itself out of a client ? Unless of course the startup consultancy activity is more lucrative than working as an operator.
tornado
a/ We will train their resources, it this just an example and I will not know what will be their aviation know-how at the beginning, but let's place it 2-3 in 1-10 scale
b/ We do some consulting at the moment. The idea is to link consulting business with the AOC structure. Of course consultancy is more lucrative than operator business, but if operator incom = x, consultancy = 3x, operator + consultancy will be 4x.
I agree strongly on two points:
a) its a very competitive and crowded market with limited scope for differentiation.
b) a tour operator is unlikely to want to start an airline which it doesn't know and is certainly not its core business.
If I were a tour company I would be more interested in get maximum value and investigating ways to reduce costs of procuring aircraft services from an operator than starting my own airline.
This can only get more acute with improve efficiency of b2b trading such as the empty leg booking scheme you mentioned earlier, of what is let's be honest is an easy commodity to transport :D
tornado
You are of course right on some points. I am talking from experience on the Polish market, some examples were taken from real life.
The idea of this project is to achieve break even with 3 or more clients, of course I can,t charge all my costs to the first client.
Regarding B2B trading, I am very interested in B2B as well as B2P aviation industry web portal. But I don't wan't to make a mess in this discussion, so I will state it in a new thread.
The idea of this project is to achieve break even with 3 or more clients, of course I can,t charge all my costs to the first client..
Bear in mind that using your example, if you want to operate under your client's brand, not only will your client have to agree to take the full brunt of leasing say two 737s for a fixed period of time at a premium, but also your client won't be able to recoup costs by subcontracting planes to other operators since a it most likely won't be in his statutes and will have no experience of subchartering and b no competitor will willingly fly planes with another TO's brand sprayed on them.
BusinessAviationMalta
19-04-2008, 05:12
I have not read all the posts in this thread, but since this blog original intent was to discuss corporate aviation, I thought I put in my two pence worth. I recently posted on my blog a piece titled, Airlines Vs Business Aviation (http://businessaviationbusiness.blogspot.com/2008/04/airlines-vs-business-aviation.html). My point is that the main problem with commercial scheduled airlines is that, this industry has become in my opinion unsustainable, the advent of low cost, made it even worse. The cost element of an airline is very high and the profit margins are very slim, if it all they can be called profit margins. High labour costs, high capital outlay, ever increasing fuel costs. It makes no commercial and business sense to sell tickets at 1.00 €, yet airlines keep undercutting each other on fare prices. I'm no airline expert but if I had to identify one problem with the airline industry is that there is no sense of measure between the price paid for a fare say from Malta to London, and the actual service rendered, that is, the cost of the slots, the landing fees, the security checks, the level of training of the staff, the fuel expense, not to mention the cost of the equipment itself namely the aircraft.
Business Aviation on the other hand is completely a different cattle of fish. Although the costs of operation and equipment are very similar the single most important difference is the customer. The customer will fly on a business jet only if they afford it, the customer expects his business jet to be significantly more expensive than the airline fare, and is prepared to pay for the convenience, security, comfort and efficiency. Companies that offer aircraft brokerage and business jet management, have fine tuned this business to an art, where the capital risks are pretty much all borne by the end user, the labour cost is directly proportional to the actual workload, and the route flown is always the one paid for by the customer.
Those of us who would like to make a small fortune in aviation, should leave the ego for the customer, let them fly and buy a business jets, while we go for our meetings on a low cost carrier, in any business the measure of success is not by how many clients you serve, or by how big your office is, neither by how expensive your equipment is, but by how big and sustainable your profit margin is. Bigger is not always better.
It makes no commercial and business sense to sell tickets at 1.00 €, yet airlines keep undercutting each other on fare prices.
Actually it does. You can think of it as almost free advertising. There are a very limited number of tickets going for 1EUR, and the fuel penalty for carrying two or three quasi non-rev passengers is minimal.
I think it makes there's no point in comparing the capital structure of corporate jet brokers and business jet managers with either airlines or private jet operators. But that is just me.
Alexander
21-04-2008, 13:57
It is the load factor and the Passenger Revenue km that should be the key metrics (for an airline). It doesn't matter if your aircraft has 100 passengers paying 10EUR and 38 paying 1000EUR if the overall aircraft yield is sufficient. I agree with Aar in that advertising such cheap tickets generates interest in itself, even if the cost can be 60EUR plus once charges are paid.
The low cost airline odel bears no resemblance to that for corporate aviation pricing.
Alex
BusinessAviationMalta
21-04-2008, 16:40
It is not my point. I'm well aware of the differences between corporate and low cost airlines, yet it is precisely this difference, which makes corporate aviation viable and low cost less. The corporate traveler affords to be using a busness jet, while in the airline industry, and not only low cost, we have a very expensive industry, due to cost of equipment, cost of labour, and highly regulated, trying to be cheap. If you play enough with numbers they will tell you want you want to hear. Low cost aviation can never work in the long run, however as long as there are people with a large fortune eager to make it a small one, there will always be people who believe that they know better and will make it work. Even in corporate aviation, the smart companies are moving away from owning jets and moving into management, the reason being that unless in the first place, the customer is willing to pay for the true value of the service, we have large fortunes turning in small ones.
Now that I have more time, I'm going to go more in detail on this.
. High labour costs,
The labour costs are non-negligible, however bear in mind that for commercial airlines as an aggregate they are being pushed down rather than up. And still, they're only about 11% of the total (am talking about crewing here).
high capital outlay,
That is a variable geometry statement. If I were in the States I could buy a clapped out 737-200 out of the desert for minimal cash and start my airline. If I were in Europe I could lease, again with minimal initial capital outlay.
I'm no airline expert but if I had to identify one problem with the airline industry is that there is no sense of measure between the price paid for a fare say from Malta to London, and the actual service rendered, that is, the cost of the slots, the landing fees, the security checks, the level of training of the staff, the fuel expense, not to mention the cost of the equipment itself namely the aircraft.
Well, actually there is and that's how companies know what loadfactor to aim for in order to achieve a specific yield over a specific route...
Companies that offer aircraft brokerage and business jet management, have fine tuned this business to an art, where the capital risks are pretty much all borne by the end user,
As long as you don't confuse end user with the passenger, we agree. Someone has to buy outright the equipment though, and that is not the passenger.
the labour cost is directly proportional to the actual workload, and the route flown is always the one paid for by the customer.
I can sort of dispute that. Flying crews do not have 100% variable retributions and ground labor costs are definitely not directly proportional to workload.
Low cost aviation can never work in the long run, however as long as there are people with a large fortune eager to make it a small one, there will always be people who believe that they know better and will make it work.
Do you think Southwest is long term enough to prove the viability of the concept?
A key point in the low cost arena is the reduced barrier to entry. Almost anyone can lease a few aircraft, get some slots from an underutilised airports, find some eager pilots and start and airline. The protectionism and Freedom of the Air rules are being broken down and so the competition is extreme (eg Airfrance operating 7th Freedom ZRH-LCY).
The difficulty is to differentiate on service, which is very difficult when the customer is buying almost entirely on cost.
Corporate Aviation is completely different. If the aircraft is owned and used by just one party then its utilisation is likely to be low and hence very expensive to the customer.
Increasing the utilisation through sharing, hire out and fractional ownership are potential solutions but assuming that the aircraft is not an ego purchase, then the benefits can be quantifiable in terms of executive conveniences and time-saved. This is discussed in detail elsewhere I think.
I think it is will lead to most significant profit gains by maximise utilisation : increasing your revenue (and variable costs) and simply minimise downtime in a corporate aviation scenario.
I don't see how corporate aviation is winning where low-cost is failing. The competitive advantage is achieved in completely different ways.
tornado
It is not my point. I'm well aware of the differences between corporate and low cost airlines, yet it is precisely this difference, which makes corporate aviation viable and low cost less. The corporate traveler affords to be using a busness jet, while in the airline industry, and not only low cost, we have a very expensive industry, due to cost of equipment, cost of labour, and highly regulated, trying to be cheap. If you play enough with numbers they will tell you want you want to hear. Low cost aviation can never work in the long run, however as long as there are people with a large fortune eager to make it a small one, there will always be people who believe that they know better and will make it work. Even in corporate aviation, the smart companies are moving away from owning jets and moving into management, the reason being that unless in the first place, the customer is willing to pay for the true value of the service, we have large fortunes turning in small ones.