It's just not plane sailing

14 January 2015

"The world inhabited by airlines is a glamorous one and starting your own airline has never been easier".

Back in 2004 the BBC published an article called 'How to Build your own Airline'. They estimated that for as 'little' as £5.5 million, you could become the next Richard Branson.  Unfortunately, I was in no position to start up an airline in 2004, but could I, and anyone else, take up this challenge now?  Has anything changed in the last 10 years, or should we all start dusting off those business plans and get an appointment with our Bank Manager in the diary?

In terms of demand for the product itself, very little has changed.  The aviation industry is subject to occasional shocks, but flights are often seen as essential for business, and even when they are non-essential, the thought of a holiday often keeps people motivated during tough times, and as such they remain a high priority item.  The aviation industry has experienced the effects of the recession just as the high streets and the trading floors have, and they have also had to contend with near pandemics, wars and security threats, all of which have a tremendous effect on their business.  Yet passenger air traffic has continued to grow on average by 5% annually, and in 2013 net profits in developed countries were estimated to be $10.6 billion up from $6.1 billion in 2012.    

So, it is looking good for my business plan so far.  But things have changed since 2004.  Airlines have become increasingly focused on alliances, partnerships and mergers (for example, in 2011 the International Airlines Group (IAG) was formed, and this has already become one of the world's largest airline groups, encompassing British Airways, Iberia, and Vueling), and to maximise profits many airlines have started to charge for ancillary services such as baggage, seat selection and priority boarding.  In addition, we are increasingly seeing advertising in their promotional material and on the aircraft itself, and the number of on-board 'freebees' (such as food and drink) have fallen dramatically in recent years.  It was reported that by just taking away one olive from each salad served in First Class, American Airlines saved $70,000.00 in 1987.  This just goes to prove that minor changes to a business model, especially if they are hardly noticed by passengers, can lead to a big difference to an airlines bottom line.  

Deregulation has also had a significant impact on airline strategies.  As regulations in commercial aviation have relaxed, airlines gain greater freedom to vary fares in response to competition and demand.   Deregulation has also helped stimulate traffic and network growth, and the resulting competition provides increased choice to travellers.  It is the expansion into new markets that continues to have the greatest impact on network growth.  A perfect example of this was shown in a Channel 4 series, aired late last year, called 'The Worst Place to be a Pilot'.  This programme followed the 'adventures' of a number of pilots working for a relatively new airline called Suzi Air based in Pangandaran, West Java, Indonesia.  The airline has quickly grown from having one aircraft, which flew just a few routes, to a fleet, which now fly to some of the remotest places in the region.  This clearly benefits more than just the airline – adding new destinations to an airline network creates access to new revenue streams for all sorts of business and, in the example of Suzi Air, has accelerated economic development in the newly connected areas and provided vital supplies to its previously isolated residents.

The Low Cost Carriers ('LCC') business model used by Easyjet and Ryanair has also grown tremendously since 2004.  This model focuses on business and operational practices that drive down cost (e.g. flying to secondary airports, offering a single class product, avoiding frequent flyer programmes), and such tactics have helped LCCs to reduce costs by 20% to 40% compared with carriers such as British Airways and Virgin Atlantic.  The number of airlines that now operate in this sector of the industry is huge, and the recent efforts by Monarch (who have transformed from a Charter Carrier to an LCC) prove that this area is almost saturated.  As a result of the change to their business model Monarch have had to seek external investment, carry out redundancies, and their remaining staff have voted in favour of a 30% salary reduction in order to keep their jobs.  Perhaps then this area of the market is not one to be explored for the time being!

One aspect of the aviation business has definitely not changed in the last 10 years.  Despite its fall in price in recent months, fuel is still expected to remain the largest component of an aircraft's operating costs, and this is a commodity which can rise and fall so significantly in price that it can make or break an airline.  To enable the airline industry to stabilise further, efforts will have to continue to be focused on the research and development of alternatives to fossil fuel and airlines must prioritise energy efficient performance of their aircraft.  A Lockheed Martin research team are currently working on a nuclear energy concept that they believe has the potential to "revive the concept of large, nuclear-powered aircraft that virtually never require refuelling".  The end of airline reliance on fossil fuel could well be on the horizon.

Ten years on, starting up an airline seems to be a tough ask.  From start-up airlines to established industry leaders, the process involves constant learning and adaptation, and few businesses have as many challenges and variables.  Airlines are capital-intensive, competition is fierce, they are still currently fossil fuel dependent (often at the mercy of fuel price volatility).  Operations are labour intensive and subject to political influence and government control.  A lot just depends on the weather.

Having said that the outlook is positive.  Boeing forecasts that over the next 20 years the world's fleet of aircrafts will grow at an average rate of 3.6% annually.  This means the industry will also need:

·         More than 36,700 new aircraft (valued at around $5.2 trillion);

·         533,000 new commercial airline pilots; and

·         584,000 new maintenance technicians. 

It may be tough business, but someone is going to start filling those numbers.  But for those of you who are ready to call your Bank Manager, consider first this quote from Alasdair Whyte (editor of Airfinance Journal) who says: "It’s a huge ego thing and it’s a fun industry, but there's more money to be made emptying toilets on planes than setting up an airline."   It's just not plane sailing!

Matthew Collison

Stay connected and subscribe to our latest insights and views 

Subscribe Here