14.11.2023 Aviation, Aviation Investment, Carbon-Neutral Flying, Impact Investment, Low Cost, Management, Values

Airline Start-Ups – an Unreasonable Risk?

Two (good) articles today about the riskiness of starting up an airline and the comments they got shared with, triggered some controversial thoughts with me.

The Articles + Comments

OAG summarized on the Evolution of airlines since 2019 (just before the Pandemic) to today. While their findings are very interesting, there is a tone in the summary and a resulting summarization by Tim (someone I generally value) that I happen to disagree with. OAG’s John Grant wrote:

“Airline start-ups are incredibly difficult, cash rapidly disappears and securing the necessary operating licences frequently takes longer than expected and that’s even before sourcing aircraft, securing slots, avoiding the competition, and building all the necessary reservations systems and back-office support functions.”

And Tim shared the full post with a comment: “OAG is a great data resource for large scale review and schedule activity. This data really doe strike a chord. Airlines are a very risky business. This is very illustrative.”

The other one was an analysis by McKinsey, checking on the aviation value chain’s recovery shared by Patrick, which he introduced with these words: “McKinsey & Company has done an interesting analysis of the aviation value chain. For each subsector, they’ve calculated the “economic profit”, meaning (return on invested capital – weighted average cost of capital) x invested capital. In other words, are firms in that sector creating or destroying value? Their conclusion: only fuel suppliers and freight forwarders created value last year, and airports and airlines lost a lot!”

The Economist’s (My) Response

As an economist by original education and having experience with Startups and Business Angels, I do happen to believe in a sound “business case”. As an airliner, I learned with American to focus on the business case. Like to reconsider twice before approving any waiver on fare rules or trying to upsell to the more expensive (i.e. more flexible) air fare. But I also learned the value of a renowned brand (AA) and service. Or to treat your colleagues as your most valuable customers – they help you sell each and every day. And can ruin a customer relation as quickly.

In “global fares training”, I learned the cost of a flight transfer, something that I never forgot; thanks Ruth King (our fares trainer), I will never forget you.

At Northwest Airlines, I learned that airlines and their managers just sold “cheap”. With full flights in summer season, the airline generated losses on the transatlantic flights. A lesson I’ve seen later over and again. Most sales staff had neither information, nor idea about the “yield” they had to generate to fly profitable. Northwest focused on a minimum yield (revenue per seat-mile) half of that of American. Then sold at that yield as the standard “special fare” and making group offers or “reseller-rebates” below that rate aplenty. As I summarized 2019 on my article about why airlines keep failing, “know your cost”.

Yes, talking about Why Do Airlines Keep Failing. It’s the same response I have on the above two mentioned articles. And many like them. At ASRA 2008, I emphasized brand faces. But I also told those brand faces – the airline sales managers – that they are not there to sell the cheapest price. Anyone can do that, the Internet lives of that. A real sales manager understands that they have to sell the high-end tickets.

Live story, also happened today. Qatar Airways passengers (mother and three kindergarden-aged kids) arrived with >18 hour delay in Düsseldorf. German Rail (clerk) sold tickets to the customer to pick up the passengers that are neither change- nor refundable. So they had to buy completely new (expensive) tickets. A good clerk of this company renowned for it’s unpunctual trains (<60%) would have mentioned the possibility of a flight delay and sold the slightly more expensive tickets that allow for a change. Or at least the optional insurance.

So thinking back to my experiences with Northwest and other such airlines, it’s my questioning about KPIs as well. If my KPI is load and not revenue, I must expect to loose money. It remains beyond me, why airlines offer connecting flight at what a rough calculation on Ryanair or easyJet CASK/CASM (cost per available seat km/mile) proves as below cost, even without the “stop en-route” (landing fees, complexity, etc.). Those are managers who had a nap, when their tutors talked about sound economical calculation? And I keep questioning, why airlines publish loads without revenue per seat. To date, we have hundreds, if not thousands of flights every day, that fly full but loose money. All this is confirmed by the above mentioned and many other such articles.

The Fairy-Tale of Loss Making Airlines

To claim “aviation” is a loss making business is true and can’t be further from the truth.

Yes, many airlines are loss making. And it fits the common reasons I elaborated before. And yes, you can make airlines very profitable, if you have a management that thinks just a bit outside the box and applies economic rules to their modus operandi (mode of operation). But this also goes in line with route development and other areas. If you don’t have your numbers under control and focus on the ones that are “good to sell to shareholders”, you’ll fail.

Like with any company, with any startup, in and outside the aviation sphere, we must constantly have an understanding of our cost. And of the competition. What is it our customer wants? There is a psychological price. If you missed that in your economics studies, make your Internet-search for it now. If you have sales teams, train them to upsell the seats. Sell the higher yield fares. Not at a discount, but at a value!

This is one reason, I do not believe we can make Kolibri ever happen by taking over an already failing or failed airline. Wrong structures, wrong thinking in place. I learned this lesson with Air Berlin. The force of inertia was simply too strong. There are some airline that make revenue, but even their managers I find often blindly “follow the worms” (a Pink Floyd referral, yes, the picture is lemmings).

(That’s) The Way Airlines Operate

But unfortunately, all investors we talk to, always think inside their boxes. Can’t tell how many talks I had to radically change our approach and take A320 and do like everyone else does. Ain’t that contrary to the concept of Unique Selling Propositions?

And has ever a “disruptive investment” (another investor buzz word) been developed out of the box using the same thinking? The same values (I’m the cheapest)?

The others are usually starting to tell you that you have to start with smaller amount of money. Sure way to burn your money is a cheap business plan. As OAG writes “getting to size is so important”. You can’t produce a low cost in small numbers. For us, the ideal mix is seven aircraft, where the “administrative overhead cost” becomes manageable. i.e. You have the same cost if you maintain one – or seven aircraft. The same reservations office (just less staff and calls), only little less marketing. You must outsource your operations (at cost) to share the necessary organization with other small airlines. Etc., etc.

To date, I am still working with consulting companies reviewing airline business plans. Aside the usual failure issues, size is a recurring issue. Another being the lack of fallback in case of flight disruptions, may they be caused by technical issues, weather or other events. Their focus on cheap “human resources” and missing team building results in friction and internal competition that further weakens their product offering.

But even taking that into account, we believe the business and financial plans we developed are sound. And profitable from the outset. With a focus on services and a military-style responsibility “for ours” (no “HR” in that company), a “service-focused concept”. Everyone to pull on the same side of the rope. Yes, not starting with a dead corpse, trying to revive, adds some bureaucratic hurdles. But it allows you to think outside the box and instead of following the worms (or other airlines), to do things “right”.

So ever since I entered into the business, I learned at American Airlines under Bob Crandall how to do things right. And learned over and again that the same mistakes are made by short-sighted, narrow-minded managers. And I know all the reasoning used to distract and divert off the incompetence to operate an economically sound business. Usually, I account this as “no faith in your brand”. That then goes along with topics I mentioned before, like brand dissolution (airlines are often academic example), missing USPs, etc. – Cobalt CEO told me about their USP shortly before their demise “We are Cypriotic”. Seriously? When I started, Lufthansa was the brand. Lufthanseat was the employee. All employees of American Airlines knew “Proud to be AAmerican”. Then came the button counters. And mighty AAmerican was taken over by their once-small rival U.S. Airways. Another box of memories.

So yes, airlines are often a loss making business. With bureaucrats leading them into disaster. Sometimes fast, often times a veeeery long death. Air Berlin and Alitalia are very good examples. “Too big to fail”? Simply “prestigious”? And there are “the others”. Airlines that have an idea about what they are doing. That know their niche(s). That know their cost and marketing. That value their brand. That build a reputation. Until button counters (aka. bureaucrats) take over.

I hope that someone of my hundreds if not thousands of readers (hard to believe, that’s what my server stats claim I’d have) knows some investor with the guts to understand that profitable aviation and sustainable aviation can be the same thing. That the stories those consultancies and their statistics and reports tell have two sides to the coin. And that we get a chance to proof, that climate neutral flying is no heresy, but the future of flight.

Food for Thought – Jürgen

21.01.2020 Aviation, IT, Low Cost, Management, Religion

Automated Flying and Fallback – an Aviation IT issue

Airbus 2020 vision based automatic take-off

B737max, Air France 447, Asiana 214 – and computer failures reason for the largest flight cancellations in the past two years. Lesson (to be) learned…?

Following a discussion triggered by Airbus’ automated take-off last week, I posted a comment on LinkedIn:

“Just discussed the issue of “autonomous flying”, two examples against it. Asiana flight 214 (there was also a similar incident with Turkish Airlines) caused by a pilot with a semi-religious belief in the Auto-Pilot. Said to have very little experience “flying manual”. And the 737MAX, also to keep in mind the missing redundancy of sensors to safe cost. Also Air France 447 accounted to incorrect sensor readings. One reason I don’t see a “pilot free cockpit”, but a “cockpit flight manager”. Like the flight attendants there in case of need, but usually just monitoring proper systems. “Accompanied” by a drone-operator at the AOC. Having GBAS+GPS a system to constantly monitor the four-dimensional position of the aircraft and if in line with flight plan. If not, maybe a sensor-glitch misguiding the aircraft? Please “Pilot” or “drone operator” override the faulty sensor…”

Several replies, notably the one public response by David Eiser outline the threat: “Too much reliance on automation by both operators and pilots is one of the biggest threats today.”

A frequent issue I discuss when discussing AOC or APOC (airline or airport operations centers) is the necessity to have fallback procedures in case of IT failure! This is also in line with disruption management and the fact that the major disruptions of the past two years were caused not by weather, but IT failures! Just an example reported by Wall Street Journal.

Lesson Learned?

Back in 1990, I came as a Sales person to the Frankfurt Airport to meet and greet an important FAM-group – FAMiliarization – a group of journalists invited for a trip overseas. To learn the flight would not take off, as the airport check-in-system failed. I got a printed passenger list, a stack of boarding passes and after 10 minutes of preparations issued the boarding passes to the passenger. With only 75 minutes into the process the flight got readied for departure. It was as far as I remember, the only flight that left that day during the computer downtime. Lufthansa used a different system, their flights were not impacted.

That was my day to learn the lesson to have fallback procedures in case of a computer glitch. It was driven home over the years by other failures that became public. But more and more, I also learned that managers developed a semi-religious faith in computer systems. Redundant systems cover for a failure, right? Wrong. Working with AOCs and APOCs – there are no system redundancies. If a system fails, there is a downtime. Period.

Computer Literacy

As Richard Maslen just wrote on CAPA’s Blue Swan Daily: “It used to all be about passes in English and Mathematics, now it is blockchain, cloud computing and analytical reasoning – the changing mix of skills most prized by the business world”. It is another example of the semi-religious faith in IT I talk about. Big Data was the buzzword everyone talked about and nobody had a clue on what it really meant. It’s hip, so it must be good. Now we added blockchain, cloud computing and analytical reasoning. Important buzzwords, but if you look for a business case, it’s for the ones making themselves a business with it.

Cloud Computing

Did you know that aviation was the first large application of cloud computing? Sabre enabled to book flights from anywhere in the world anywhere in the world. I used Sabre-messages back in 1987 – that was years before e-Mail. Tell me about Cloud Computing. On the backside, most recent computer failures forcing airline downtimes were caused by small cloud solutions failing and taking down the airlines’ IT system as a collateral damage. Leaving airplanes grounded, passengers stranded.

Blockchain

Where aviation has a strong requirement to keep a “history” of changes in their IT systems, blockchain might help, but it adds complexity and slows down systems. And keeps the question of the ultimate truth. If there is a data discrepancy between two independent systems, which ones is the right one? That’s not just on A-CDM between different stakeholders, I’ve seen the same problem arise on internal systems aplenty!

Analytical Reasoning

Now on analytical reasoning, it goes with the old issue of who analyses with what intent. As the old saying goes, I only trust the statistics I falsified myself.

Aircraft System Redundancy

Now have we learned our lessons? Speaking to academically educated managers, I find a lot of superficial knowledge. Like the Big Data picture. Someone – usually the IT companies – come up with those buzz words and explain they are important. They are not unimportant. But it boils down to my usual question: Give me a business case. No wishful thinking. Nor divine revelation and forget what the stars foretell!

Boeing managers, in what I consider a criminal neglect, prioritized commerce over safety. In line with FAA and others. “Shareholder Value” is a word that was invented in the U.S. It implies that the only value a shareholder has is short-term profit. I disagree ever since I learned the word back in 1997 in the process of the IPO of Cytric. At the time my baby – yes, the one today owned by Amadeus. Shareholders have different values. Long term profitability. Sustainability, not even linked to profitability. An idea. Something “good”.

Now Boeing used a single sensor to trigger MCAS. And the system overruled the pilots. It crashed two airplanes. The cause? Greed. A mortal sin.

Faith in The Computer

A key-finding on Asiana 214 was a pilot who believed in his on-board computers. Who had thousands of “auto-pilot” hours, but very little experience in manual flying. Who did not grasp that for a wrong sensor his system was wrong. Who made small mistakes on his computers’ settings (i.e. direct input, no landing flaps) ignored the tower’s advise to do a turn-around, to disrupt the landing and start the landing process anew. A similar case grounded a Turkish Airline plane. Pilots like this make a case for autonomous flying. Better a stupid computer than a pilot with blinders.

Another sensor failure caused the crash of Air France 447. GPS giving a three-dimensional point in space, where are the systems that provide that information to the pilots at night? How can it be that pilots and airplanes loose their direction in the air?

And while we talk about GPS and GBAS in aviation, a flight like MH 370 teaches the same lesson. Not the one shot down over Ukraine, but the one that got lost over the Indian Ocean. Airline and authorities are blind over the big oceans. All those fancy systems, satellites, etc. and we have no information, neither in the cockpit nor at the control centers, where the flights are? And trust in pilots following navigational directions (semi-)blind?

Faith in the Pilot

A frequent argument for the cockpit automation is German Wings flight 9525, where the pilot flew the airplane into the mountain. While that was a freak incident, neither pilot nor computers are “fail-safe”. All we can do is to minimize the risk. And while autonomous flying will come, I’m an advocate for a “flight operator”, both in the cockpit, as well as on the ground. Then we have three independent “systems” and any two will override the third. Still, there will be ad hoc decisions to be taken, then who “rules”? If you have another aircraft on collision course. If you have foreign object or another aircraft on the runway.

Fly by Wire, Drones and Air Taxis

Since the development of Fly-by-Wire, airplanes cannot fly without computer aid. If the computer fails, the steering signals from the side stick go nowhere. So we already rely on the computers in airplanes. And a computer failure will result in a crash. Period. But Fly-by-Wire also makes the case for automated flying.

Pilot-less air taxis already require a fully automated system. If you consider them to fly in airport vicinity, they interact with the flight plans of commercial airplanes, today considered a major security risk with an excessive bureaucracy for a single approval for any plane, helicopter or drone entering the airport’s air space!

A similar case is the automated drones as envisioned by Amazon, DHL and others, for automatic passenger delivery. As the air taxis, they will rely on a fully-automated flight planning and flight plan filing with the authorities’ computers. Simply to avoid in-air-collisions.

While commerical airplanes, delivery drones and air taxis follow pre-assigned flight plans and routes, drones are operator-guided… Can we expect manually guided drones in the air space of other operators? Be it air taxis, helicopters or airplanes? I doubt it, I believe this is a short-lived fashion. Soon drones will be so restricted in use that they go back to hobby and in pre-assigned areas. All other operations requiring the filing of a flight plan!

I like the examples in The Fifth Element. Or Doctor Who’s episode Gridlock (image). We’re not talking about individual travel or we risk air accidents, way more potent than any car accident you might imagine today! This can only work in a fully automated environment. You want to change your flight plan? The computers must secure a safe route in four-dimensional space – including the time, beyond what ATC can do today! A constant prediction of traffic for several hours ahead!

My Prediction

I take it with Heinlein, as he wrote in Friday, a 1982 novel. I believe we will have ability for a fully automated flight, which will also improve A-CDM and flight planning. We will have a pilot on board. Plus a drone-pilot in the AOC. Heinlein wrote that the pilot no longer pilots but is there for the sake of passengers’ reassurance. The pilot unlikely to have better ideas than the computer.

The pilots will be turned into a flight operator in the cockpit, plus a flight operator on the ground. Both will be specialists, but I predict that their “work times” will no longer be privileged, but more like computer specialist. Automated flight management will reduce the work load and make those jobs mostly observational. Making privileges in duty times or salaries obsolete. Heresy. To the pilot industry. But in my opinion a “logical consequence” since the introduction of fly-by-wire – which also was the start of the discussion about autonomous flying.

Side note: This will also automate Air Traffic Control, ground handling, etc., etc. – Give take 100 years, likely less, we will have air traffic automated. With very limited manual input by pilots or other stakeholders. Backbone is slot management, scheduled flight planning. Then add “scheduled air-taxi” (air-bus), followed by delivery drones (for people or freight), ad-hoc flights. Think about medical emergency but also “VIP” flights (Air Force One)…

Food for Thought!
Comments welcome

29.12.2019 Aviation, Low Cost, Management

Why Do Airlines Keep Failing

Recently, I attended the ISHKA conference Investing in Aviation Finance: Germany in Munich where one session addressed Why are airline bankruptcies still happening in a booming environment?

There are some, very few, very common reasons. And auditing airline business plans, start-ups and established, I keep raising the same questions.

What’s Your Business?

Back in the 90’s, I became the honorary member of the Airline Sales Representatives Association in Frankfurt. Aside the narrow-minded thinking of sales managers denying to understand that the emerging Internet was about sales channels, it kept and keeps bugging me, that they focused on their “sales channels”, denying responsibility for the new channels, as they had to be handled “by others”. In the beginning and to date, many if not most airlines have no personal e-Mail-contacts for their customers, be it travelers, travel agencies or online portals. The same applies to their smartphone numbers.

My former boss Louis Arnitz used a historic lesson to explain the change we faced converting FAO Travel, a “classic” business travel agency into i:FAO, the first European business travel portal. In the 19th century, rail companies built the railroads of America. Replacing the Pony Express. Then came those crazy flyers, “aviators”, in their small machines transporting mail. To date rail and air travel are not “connected” (very few exceptions). Because the managers understood the building of steel railroads as their business. Not the transport of people. And they still focus on the wrong priorities. Airline and Rail managers alike.

11 years ago, I wrote about the revival of the sales manager.

Know Your Cost

Speaking about Sales Managers ignorance to the cost of their airline’s operation, I found the fish stinks from the head first being a true proverb. I’ve met too many investors, airline managers, airport managers, not understanding the cost involved. Then they try to compete on the price with the large, established airlines. I have no idea, what those managers learned, I heavily doubt the quality of university education…

The recent failure of Ernest is a “classic”. They take little money, rent Boeing 737 or Airbus A320 family airplanes, in case of Ernest 1 A319 and 3 A320. Then they buy software licenses (COTS, Commercial Off The Shelf). They buy ground handling and maintenance. Something I learned studying Whole Sale & Foreign Economics 35 years ago: If you outsource, it is either more expensive or you they safe from the service levels they provide.

Something I keep telling about consulting. If you need someone with special knowledge for a short time, you “outsource”, you hire a consultant to do the job. If you need something long-term, you hire a consultant to develop the know-how within your company. Again, the job for the consultant is short term.

In both cases you pay for the experience.

Airline managers that do not understand their real CASK, their Cost per Available Seat Kilometer (or mile as CASM), are not doing their job! Airline managers that fire good people because they are “too expensive”, airline managers that save on “service”, don’t understand reputation and brand as important are being doomed from the outset.

So these airline startups come and believe that with some 10 million Euro, leasing the same (but usually older) aircraft, pay for outsourced maintenance, IT, ground handling, etc., etc. They truly believe they can “succeed” in the shark pond where an easyJet owns 70-80% of their fleet. Only some 20-25% being still paid off (until they own them), less than 3% being leased to cover for ad hoc demand. Where they run their own maintenance operation, their own ground handlers where they can. Then they have established processes and understanding of the cost of disruptions and delays – and cover them with an own fleet of spare aircraft. Do those small airline operators have any spare aircraft on hand when their aircraft fails them?

From Cobalt, Germany, Primera (alphabetical order), feedback said “disruption cost”, attributed i.e. to EU261 “passenger rights” to having been a major reason for their financial troubles. Still, most business plans, I was asked to have a look at last year failed to address that issue at all. Or they used “easyJet figures”, neglecting the fact that easyJet has a spare fleet to cover and minimize the effects of flight disruptions.

Even large airlines’ network managers keep ignoring those cost factors and then get surprised when a route fails. Others go to considerable lengths to understand the typical delays they incur on specific routes. Caused by the ground handler, the departure and/or arrival airport, taxi times, the air traffic control – or simply common weather issues like fog in Stuttgart.

So taking all those common and neglected factors into account: What’s your cost? CASK is one value for the entire company – do you understand the performance on the specific route or airport? Why is it often the same airports “failing”? Maybe they shouldn’t be overly optimistic but be more realistic? And yes, that is the same airports believing if they reduce the landing fee, it would have some decision making impact on the airlines’ cost. It’s that level of non-understanding that causes constant and ongoing failures – not just for newcomers or small airlines.

What’s Your USP

Shortly prior their demise, a board member of Cobalt answered my question about their USP: “We’re Cypriot.”
Say what? Competing against easyJet and other low cost and classic network carriers, that is all there is for a USP?

His second answer about USP was “We’re cheaper.”
Okay. You operate 2 A319 and 4 A320. easyJet operates what, more than 330 A320 family aircraft. You think you’re “cheaper”? Really?

Another airline answered my same standard question with: We fly different routes.
Well… Hard to not be nasty. They just wonder that on their most successful routes, the other, bigger carriers kick their butts and take over those routes.

Carolin McCall understood “service” to be a difference maker. Since her leave, very quickly they dropped from my “role model” and preferred airline to “me too”. Taking over aircraft from Air Berlin with additional and “bulkier” seats, I suddenly experienced less leg space. Their airport manager at one of their hubs found himself quickly “obsolete”, the new paradigm being “cost savings”. In turn they seized my (half-sized) cabin bag due to “full overheads”. Aside the seat next to me being empty, there was more than enough space below the seat. Heard meanwhile from many frequent flyers they no longer wait if they have an aisle seat but make sure they have their seat and the cabin baggage with them. Would be indeed interesting to have some statistics how that impacts boarding time.

So what’s your USP? Price? Okay Mr. O’Leary… But what’s an LCC? Ryanair flies into the big airports recently. That’s another story I plan to address in the new year. So again, what’s your USP? How can you secure that people buy your product, that it’s not simply exchangeable with some cheaper airline? Back 35+ years, my boss in whole sale told me: “There’s always someone cheaper.” And several years later, the boss of “low cost airline” Continental Gordon Bethune said:

Interesting enough, in my recent qualification in Online Marketing, P.R., I learned the same values being valid in the online world. Nothing new. What’s your USP? Know your Strengths, Weaknesses, Oportunities and Threats – internally and externally and build your business case. Then you come to your own USPs. And you will likely not invest into some airlines with a few aircraft. Or into aircraft owners with a few A320 or B737 aircraft they try to place in a sated market. If you’re an investor (or know such), send them over to Kolibri.aero ツ

The Virtual Airline

As mentioned above and before and again. I usually don’t believe in the survival of virtual airlines. A few leased aircraft of the same kind than their competitors, outsourced IT, ground handling, maintenance and other “services”, often even the call and service center (to “GSAs”). Then they believe to be competitive to the large players. If you operate in an un- or under-served market, you may be able to ask for the higher ticket prices required by your increased cost levels. Most airlines I see trying to take off or change their business to survive try to compete to the large network and low cost carriers, but without a secure market (using the same aircraft).

Aviation – and the dying continues … Look at the fleet, at complexity at size and type. Do they have spare(s) in case of disruptions? How much do they fly (make money)? Look at the pricing model and if that reflects the higher CASK. I’ve not seen a single failure in the past years that was not clearly a result of those common causes.

Food for Thought
Comments Welcome!

10.12.2019 Aviation, Low Cost

The Financial Impact of Air Travel

Juergen is one of the very few people, I really mean, VERY FEW, people that understand both airlines and airports.

You all know my graphic merging the GFK purchasing power map with the Wikipedia map of airports that I use to visualize the relation between the both.

Now my friend Ged had put together some numbers, simplifying but following mostly what I used myself in discussions with tourism offices, chamber of commerce, politicos and the other stakeholders that in Germany frequently fight against their airports. Those stakeholders keep failing to understand the commercial impact of “their airports”. In Germany, it’s “airport bashing”. Aircraft noise being an enemy. Transportation statistics on environmental issues beautified to condemn the airlines, I just wrote about the #flygskam reality check.

I have some improvements, but maybe you want to see the info about Ged’s presentation first?

https://simpleflying.com/new-airline-routes-are-worth-huge-amounts-to-destinations/

There are some shortcomings that from experience I do address when talking to the local stakeholders beyond airports. But most politicians I found to prefer airport bashing to understanding. And most airports (not all, there is a slow change) work alone on the route development process. Stakeholders like chambers of commerce, tourism boards, politicians or local media focusing on “other things”. And my original use case was Erfurt with Cirrus Airlines, when I tried to attract KLM to Amsterdam with 70-seat aircraft.

So let me quickly adjust Ged’s numbers.

First of all, I prefer frequency over size, so I think we should talk about i.e. a route with 100 seats. Instead of a trice weekly that fails to attract business travelers and suffers such from a higher seasonality, I’d look in turn at a daily service. So let’s keep to the example of an Amsterdam-service with KLM. As operated by KLM will also get you the more attractive ticket prices they can offer.

So over the year, a “daily service” accounts to six weekly flights or about 330 round trips. That accounts (at 100 seats) to 330 days x 1 flight/day x 100 seats x2 (return trip) = 66000 seats. Or slightly more than Ged’s assumption of 29,640 outbound seats we use for typical statistics, we have 33,000. Slightly more, but triggering commercial passengers helps to fill the plane and get some improved ticket revenue.
Talking about 90% load factor – and I agree with Ged, that is minimum what you better plan for nowadays, we need to sell 29,700 seats. For easier calculation, let’s say we must sell 30,000 seats.

Now comes Ged’s mistake, a rather common one, the “inside-out” look.

Passengers never travel only one direction on a plane, ideally they originate on both sides. Different on summer charter flights, I know. But we talk scheduled and low cost services here. So depending on the destination, let’s take the simple equal distribution of in- and outbound travelers. So we talk about 15,000 travelers we target “inbound”.

Next I agree, € 250 total average spend per day for a four day trip is reasonable. But again, I’d adjust slightly here.

Not all travelers go to hotels, there usually is a valuable VFR traffic, visiting friends and relatives. So I’d use only a lower, more conservative €500 for trip spending.
But then Ged fails to use an important multiplier. EU (European Union) usually uses the factor 2.5 (sometimes 3) on the commercial value on any € “spent”. So for any passenger, we talk about 500€ multiplied by 2.5 = 1,250 €. At 15,000 travelers we talk about roughly 19 million € spending by all travelers.

What must be emphasized is the fact that the airline route will also trigger commercial relations with a positive impact to the commerce taxes for the regions as well as the attractivity. Especially on regional airports with such a connection, it will create new jobs, countering the rural exodus so many secondary regions suffer. That is, why the local chamber of commerce (and tourism) have such an impact. If tourism can fill more seats incoming than outgoing, the result becomes even more favorable. A 60/40 in-/outbound results in 3,000 more passengers adding on the incoming value of the flight or 3,750,000 €, totaling the effect to € 22,8 million. Full flights will result in increased frequency or larger airplanes.

If you focus on “holiday flights”, i.e. from an airport like Erfurt-Weimar to the Mediterranean

But given all that, the regions – as mentioned – fail to understand the impact to their commerce. Nor do they understand the financial risk an airline takes, calculating with “competitive” ticket prices they must fill the plane year-in/year-out. If the wonderful biased statistics by the airport marketing fail to materialize the passengers, if the airline looses 10% of the planned revenue, we can quickly talk that many or more million Euros being burned. You may be able to understand why an 80% discount on the “landing fees” are nothing more but an expected risk the airport takes. The brunt of the risk is with the airline.

That said, I remind my readers I am no fan of long-term “airline subsidies”. There are “PSO”-routes, called public service obligation. I would expect the (political) stakeholders of any regional airport to be well advised to fund a PSO-route to one of the big global hubs, but not by “any airline”, but by the hub-carrier. Reminder: German airport association ADV published that most passengers connect online (same airline) or within the airline alliances, there is only negligible numbers of passengers connecting “interline” (between unrelated airlines). Which in my opinion is a result of biased marketing, but it’s like it is now.
But generally, a route shall be set to the right sized aircraft, an attractive frequency and a strong point-to-point demand. Then there can be subsidies, better a real “risk sharing” to establish the route. If the airport/region believes in their own numbers and expectations, they should be willing to guarantee the break even load factor and revenue to the airline. Right? And like any business venture, there must be clear milestones – and an exit scenario if the expectations don’t match the real demand.

Which triggers the other issue. At the ISHKA Investing in Aviation Finance conference we discussed reasons for airline failures. One very common reason is the fact that airline managers don’t calculate according to their own cost base, but try to compete with ticket prices of their competitors. Not just the real ones, also the implied ones. Trying to fly low cost ignoring their different and higher own cost base. Negotiating new flight services, airports but especially the political stakeholders make it worse by “expecting” unrealistic low cost of operation. They demand that tickets must be cheap. If they, like in Germany, add taxes and make flying more expensive, they shoot their own foot.

The financial impact on air travel is a two-sided coin. There is a major impact to commerce and regional income, especially on the incoming travel. But if you focus only on holiday charter flights without incoming, you deprive your region of an important commercial multiplier. In fact, I question your business case. And yes that goes to you Erfurt-Weimar, my prime, sad example.
On the other side, airlines are commercial companies. No airline can keep flying if load and revenue don’t justify.

Food for Thought
Comments welcome!

21.06.2019 Aviation, Low Cost

Quo Vadis Aviation

Side Note

Dear Readers. I’ve spend a quite large amount of my “free” time on qualifying myself on online-PR, -marketing, SEO, SEM, SEA. All those buzzwords that I summarized a bit in the new SEO-optimized page Unhyping Online Marketing (SEO SEM SEA). So I didn’t have spare time to focus on the topics but made note, what to address in the upcoming blog posts.

As I told a friend, it mostly scratches on the surface only, where I could pour some salt into open wounds. Most fun for me was to make that article SEO-perfect, though it does make it a bit hard to read… And it became so much, that I decided to put it in a page, not a blog article (post). If you didn’t read it yet, if you’re in marketing or online, you might want to after reading this post.

What did trigger is the statistics on active users vs. leechers. I know a lot of you read, though most of you I don’t know who you are. I sure do appreciate anyone “outing” themselves to me that they read my blog. Send me a mail to juergen at barthel eu if you don’t want to comment in the blog.

Quo Vadis Virtual Airlines?

Many new airlines come without business concept. What is the business model? What is the USP? Have you made a sincere SWOT analysis? Know your internal and external strenghts, opportunities, weaknesses and threats? Or do you believe with a small, leased fleet, paid maintenance, some commercial off-the-shelf software and some flights in summer to the secondary holiday destinations you can stand up to the existing big airlines? What’s your niche and is it safe and sufficient enough? Else, you simply build up a market for the big ones and find yourself pushed aside – another “victim” to the ongoing consolidation. Nothing new. Nothing unexpected.

There is the saying about how to make a million in aviation. Start with a billion. While I believe with a billion you can achieve something, the usual “airline startup” is 2-20 million. One or two leased A320 or B737. I call them mayflies. They fly one (high) season, maybe two. Then they have no more funds to sustain another low season and “fail”. A failure with prior announcement.

Regional Airlines vs. Low-Cost

Discussing “Regional Airlines” and “Low-Cost Airlines”, all the “experts” keep separating the two models. What they fail to see is the role of low-cost airlines in the regional aviation market.

“Regional Airlines”

The common “definition” of regional airline is to fly small aircraft, up to 100 seats. Often in a mixed fleet. Always at a high cost per seat. So the tickets by nature are and must be more expensive.

“Low Cost Airlines”

Different from Regional Airlines, the Low Cost airlines fly Airbus A320- or Boeing B737- family aircraft with 150 to 200, recently implementing even larger A321 and B737-9/900 with up to 240 seats.

Regional + Low Cost

Both airline types have something in common. Both fly point-to-point. Both classically focus on short and medium haul.

Both also establish some connecting services as their hubs. And airlines like FlyBE try to reduce the cost by using a single-type-aircraft fleet like FlyBE’s 54 Dash 8 Q400, though they have some other aircraft too. Air Baltic converts to a single-type A220-300, their CEO expressed even adding the A220-100 would complicate and increase the cost base. But the choice of aircraft defines the choice of airports and routes. Which leads to the next topic of this article:

The Passenger Airline Food Chain

30+ years ago, when I started in aviation, there was a very clear “food chain”. First came general aviation and holiday charter flights, feeding the demand for certain commercial routes or holiday destinations. When those flights became successful enough, they lost to regional airlines providing scheduled services at fixed times between A and B. The larger holiday charters lost to scheduled airlines and network carriers, taking over those lucrative routes. At the end of the food chain were the large network carriers, connecting smaller cities to their hubs and through the hubs connecting to the world.

Then came the Low-Cost carriers. And everything changed.
… Everything? Really?

The Rise of the Low Cost

So the model of the Low Cost Airlines was to use a single type aircraft fleet, such minimizing the complexity to operate the fleet. Be it exchange of broken aircraft, be it flight crew training (cabin and cockpit), maintenance, etc. Using the highly effective new Boeing 737 models, later also the A320, they focused on one thing. To provide the lowest cost per seat and such undercut the prices that the network carriers with their far higher complexities asked for.

They did not bother about the complexity of hub-services or – god beware – “interlining”, requiring baggage transfer, the need to secure the connection for the passengers, they connected secondary airports point-to-point. Just like the regional airlines, but at lower cost. All they did in fact, they cannibalized the upper end of the regional airlines and also competed with many regional flights of the network airlines. Given their USP of a very, very low cost per available seat kilometer (CASK) or mile (CASM), they covered their niche well and ate away from the profits of both small regional airlines, as well as the large network carriers.

Regional Airports vs. large Hubs

In the past, there was a clear distinction. Regional airports were small airports that were connected to the global air traffic networks by being connected to the hubs. So a regional airport only served a few scheduled flights, plus vacation charter. I had this concept also at the Erfurt-Weimar airport (ERF) 2009/10. Where they did not even understand their Munich flight they subsidized would connect them via Munich to the world. Cirrus Airlines as the operator was “Lufthansa Partner” without code-share into Star Alliance, not even with other airlines in the Lufthansa Group, so all the airport looked at was the few “Lufthansa connections” they could offer from their airport via Munich. Of which some even didn’t connect. In consequence, the locals did not look at those few connections, but focused to fly from Berlin or Frankfurt, both three hours travel time by train. Or they even took the train to Munich. If you know the added time you need in Berlin and Munich to get from the train station to the airport, you understand why I got upset. Simply to date my example of a gross misperception and belittlement of the airport’s value. Even worse, on my first day at the airport, I had to read an article in the main local newspaper that one political stakeholder promoted Arab stakeholders to come to Thuringia. By flying to Frankfurt and taking a bus (four hours minimum). Instead of flying via Munich…

Working with regional airports, my experience is a very strong tendency to short-sell themselves, belittle the own region. It is not made any easier that there are virtually no regional statistics about travel demand and the IT “solutions” are being biased to make big airports bigger and neglect the small airports. As I explained in the December 2017 article about the bias of route viability analyses.

Evolution of regional hubs

Especially in Europe, the political strategy about aviation is “thinking small”, new airports like Berlin are planned too small from the beginning. Airports that were planned for growth, like Munich when moved from “Riem” to “Erding” face political opposition to execute the expansion, adding the originally planned runways. Even London, instead of a bold move to establish a new airport, decided to just add a new Runway to London-Heathrow. A move that will quickly face the same problems Heathrow has today, of inheritance in terminal structures, slot constraints, a limit to the expansion. Should Boris Johnson in the recent turmoil follow Theresa May, there are some hopes that he revitalizes the “new airport” idea for London.

A necessary step to compete with the new “global hubs” in Istanbul, Dubai, etc., build to size of about 150 million passengers. Berlin? Build to 27 million passengers, when finally ready one day. Current news questions the next opening data in October 2020… As German “Postillon24” satire site published 2015: Archaeologists discover historical ruins of unimaginable dimensions in the south of Berlin (link to Google translated page in English)…

With the large hubs increasingly slot constrained, i.e. Amsterdam simply “out of slots”, the only way is to bypass those airports and increasingly fly to smaller cities. An example can be American Airlines, adding Dubrovnik on the Balkan Adria to their destinations. Sure, the low-cost airlines have a history understanding the value of point-to-point services between smaller, “regional” airports. Basel, as a first base of easyJet evolved into a major hub for the low-cost airline. Business case given, the operation of a regional hub can make sense… And didn’t we joke about easyX when Air Asia X flew to London-Gatwick with majority of travelers connecting onto easyJet…

So far, many of the “low cost airlines” (i.e. Eurowings, Norwegian) focus on larger airports as their hubs; Düsseldorf, Cologne, Barcelona and the likes. Their decision makers obviously are not bold enough to leave the beaten path and go new ways. Ryanair moved into Frankfurt, but it’s said they are not doing well there. Wizz and others establish small bases in regional airports and then grow them, benefiting both the airport, the region and commerce in the regions. Given the slot constraints on the “mega hubs”, we will see a lot more development of regional airports, point-to-point services and hubs. For those airports and their regional development stakeholders, one of the main tasks is to change the perception from “feeder airport” to a bold understanding of their own values and needs – which directly served regional routes make sense? I know, this is a recurring topic on this blog…

The Future of Airports

My friends at Passenger Terminal World, also doing the Passenger Terminal Expo, recently collected views on the future of airports. Personally, I found those views rather conservative. Very focused on the adjusting the status quo, no bold jumps at all. But for several years, some bold ideas keep resurfacing of which I’d like to address two.

The Circular Runway

The Circular Runway on first sight is an intruiging concept. You could land anywhere, never a “runway overrun”, never the wrong wind direction and while one plane takes off on the one side, another lands on the other. But.

There are some questions that I believe this idea will never make it to reality. Usually, there is a given wind direction and airplanes take off and land against the wind. So instead of a straight runway you have a circular one that allows to take off and land exactly against the wind. While the remainder of the runway remains unused. A nice to have? Or a lot of sealed ground for no gain?

The other setback is if you exceed the capacity. Adding another circular runway? If need be crossing runways use less space and allow parallel operations. # And they can be started with one runway, adding as demand requires.

Given both those issues, I think will be good reason to stick to the existing straight runways.

Drive Through Airport Terminal

The Drive Through Terminal is also an interesting concept that the designers invented for large airports. But in fact, there are a lot of setbacks from such a terminal that make it less ideal for such airports, but more ideal for regional airports. What I like is the possibility of weather independent operation thanks to the roof, as well as the guide rail system to transport the aircraft from arrival to departure.

The first problem is on large airports that there are airline using differently sized aircraft. So you have classic terminals and drive-through ones only for certain aircraft? On regional airports and low-cost airports, the terminal could be optimized for standard aircraft from 70 seats up to A320/B737 families with up to 240 passengers. Should there be a larger aircraft, it can be handled on the apron.

The other problem with the proposed design is the ignorance of what any airport operations manager can sing of: Disruptions during the turnaround. Once the airplane enters the process, there are now ways to replace the aircraft (see image left). On a small, regional airport, that can be overcome rather easily using one or two lanes only, allowing the aircraft on any stop to be “extracted” or “added” into the “line”.

The third issue is the issue of parallel handling, supporting connecting flights. While the first aircraft boards, the other just comes in. But what I think can be a practical approach is to have drive through in a two step process. Disembarking, embarking – go. If there is a problem, on both “stations”, the airplane can be pulled out backwards or front. Several airplanes could be managed in parallel.

The last issue is the passenger facilities, including and not limited to contemporary airport cities

Summary

There are a lot of ideas out there, but the main hurdle is the conservatism. Airplanes to date are serviced on the left, boarded on the right. A relic. But to change such requires not only different airports but also different airplanes. I doubt I will live to see such a change. Other issues can and should come. So I see the rise of the regionals, also the drive through terminal.

Food for Thought
Comments welcome

Back to the introduction. I’d love to hear from you. You can out yourself on mail, WhatsApp, Viber, here in the comments, that you’re one of the frequent readers of my blogs. It is motivational, believe me. And if you haven’t read it yet, you might want to smile about my SEO-optimized summary of three months studies: Unhyping Online Marketing (SEO SEM SEA)

06.02.2019 Aviation, Europe, Low Cost, Management, Values

Aircraft-on-Ground, Disruption Management …

… and the Ongoing Demise of Small and Mid-Sized Airlines

P.S.: While I wrote this article, Germania, an airline that I know from the beginning of my career, who’s team I booked at American Airlines to Seattle to pick up their first 737s, an airline I have had a personal attachment to, went into insolvency grounding all aircraft after many years of financial losses. The demise of Air Berlin 2017 brought easyJet on their home-apron in Berlin in force, no longer some competition, but clear one-on-one. Such the chance to establish lucrative routes in Berlin evaporated. Instead of benefiting from the demise of their largest local competitor, Germania had to sit aside, watching the threat growing.

Germania did, what they had to do, they focused on niches. Niches that were too small, to fragile to give them safety. Routes they developed well always threatened to be taken over by their competitors operating with lower cost. Erbil, under threat of war, Beirut, …? They announced a base in Pristina (Kosovo). They ordered A320neo, in an attempt to stay somewhat competitive to their competitors like easyJet also introducing the modernized aircraft. Else they operated tourism charter flights – which are in great demand in summer, but one after another airline in that market files for bankruptcy at the end of the season. And Germania published financial troubles as early as August 1st, 2018. So they could not do what needed to be done: Generate enough money in summer to succeed across the harsh winter.

You cannot succeed if you play it small, if your cost is not competitive to your competitors. Not the small virtual airline competitors, the other “day flies” lasting one summer season, two at best, but the big ones. The easyJets, Ryanairs, Wizzes, etc. It’s not fuel cost development that kills you. It’s bad management. It’s a strategy without USPs or with very weak ones – there’s reason, the other airlines don’t bother the routes Germania did.
And as I outlined in an article I published on LinkedIn, this was no sudden issue, they lost money for years!

As it is being said, the unexpected increase on EU261-expenses, the “EU passenger rights” also had it’s impact on the financial situation. If you sell a ticket for € 100 and you must compensate € 300, it does impact your revenue. So back to the topic – flight disruptions.

Having worked last year on the business plan for KOLIBRI.aero as well as on projects related to Airport and Airline Operations Control Centers, flight disruptions have reappeared as an ongoing topic of increasing concern. And my experience doing a study a few years ago at delair together with Zürich Airport (ZRH) about the impact of the deicing forecasting and management tool on Swiss (airline) operations at Zürich became a strong source for my advise to airport operations managers.

When working with ZRH “Ice Man” Urs Haldimann on the study, I also got some feedback from Swiss. While managing the deicing in winter is not that much a problem, neither airports, nor passengers understand the rippling effect to the schedule. And often enough, not the airline’s own managers. That in the evening in warm Mallorca, the flight may be late, because of a deicing delay in the morning. So while higher force is accepted for the flight cancelled in Zürich, very often, the airline is required to pay EU Passenger “compensation” multiple the price for the ticket. So a major delay can be far more costly than just related to the immediate flight.

The harsh winter 2013/14 in North America (as likely this recent one) became known in the deicing industry as the Polar Vortex. The accumulating delays forced JetBlue into a “two day network reset”. Crews and airplanes were anywhere but where according to schedule and crew planning they were suppose to be. It took the better part of two days to relocate aircraft and crews back to the planned position, also to make sure the crews received their legally due rest, to then start the new day with a fresh start. As needed as that decision was, imagine the impact to passengers on flights that are booked usually 80-90%.

Disruptions can also be thanks to airport closures for other reasons, delays can be caused by as trivial as a broken baggage belt, a common thunderstorm or a ground handling crew doing a coffee break in the wrong time window – all things I experienced in my professional life. Flight crew duty times and technical delays are more common. Did you know that the Top 10 of “punctual” airlines have 15-20% of their flights delayed? That means 1 out of 5 flights is late. To “celebrate” such achievement is beyond me, I honestly feel embarrassed that our industry cannot do better! Don’t come with the typical “explanations” covering for the incompetence to do better. Needless to mention that this is about “departure delay”, whereas passengers truly don’t care about those as long as the flight arrives on time, right? I was recently on a flight that left “on time”. Doors were close, the aircraft was sitting at the gate, waiting for it’s slot in the deicing and departure.

More recently, Primera Air, Azur Air or Small Planet Airlines closed down. Cobalt Air followed shortly after I published the blog post. At least for two of those airlines the cause was said by their respective CEOs to have been “unexpected” cost for delays and disruptions. Though not reconfirmed, rumors have it such were also the cause for the financial troubles Germania faced in Mid-January 2019, filing insolvency early February (see P.S. above). “Refund portals” organizing refunds for delayed passengers result in higher number of refunds. Small fleets with no spare aircraft causes the ripple-effect to sometimes swap over into the next day(s).

Lesson learned from my research about Zürich delays: It very often is cheaper for the airline to cancel the flight to make sure the further aircraft “rotation” (planned flights for the remaining day/week) are not impacted. Especially if i.e. winter operations allow for “higher force” reasoning of the cancellation. While the airline can show goodwill and help the stranded passengers, in such situation they are not legally forced to add the legal, excessive passenger compensation for delays. It also in fact reduces the overall passenger upset. And Zürich can predict the delays!
What I expected quite a while ago is the information of upcoming delay situation to the inbound planned airlines. The example I keep using: Once Zürich (or any other airport) learns about arrival-, turnaround- or departure-delays would inform KLM before their flight leaves, that it would likely develop delays in Zürich and may have an excessive delay departure, maybe KLM would cancel the flight?
The concern: But if those airlines cancel their flights, then the flights will leave early, so KLM could operate on-time…?
Ain’t that shortsighted? Oh holy dear Saint Florian – don’t burn my house, take the neighbor’s one…
So what would be needed would be a bonus/malus system. If an airline “volunteers” for the sake of the overall operation, to cancel a flight in such a situation, maybe it’s relatively empty, could be merged with the following flight – the airline gets a priority the next time, so the full flight gets an on-time departure. An airline deciding not to join that system will never get prioritized and take what they get – including the delays.

Another ongoing discussion is the promotion of the big players for “SaaS”, Software-as-a-Service, more commonly known as “Cloud Computing”. What in my experience lacks of one vital thing, the fallback for a “line down”. There have been three cases that I (just me) know of last year, where line-down caused major flight delays. Because there is no fall-back in place.

Delta takes weather seriously, with a team of 20+ in-house meteorologists (Photo by Darren Murph / The Points Guy) . Taken from Daniel Stechers LinkedIn article.

That problem is multiplied by data silos. As Daniel, VP at IBS points out, there are too many screens an operations manager in the typical airline Operations Control Center (OCC) or also in the AirPort Operations Center (APOC) have on their desk, using old-style Gantt-charts, weather maps and other “sophisticated tools” that show them what happens out there. Very little tools that analyse the data automatically, giving you decision support on a disruption. Or warning you of potential disruptions giving you decision support how to avoid them.

While we do need to replace those multiple screens with dashboards, highlighting what to look at, I disagree to some extend with Daniel’s implications, as I believe we will need to be able to expand from the problem, onto the relevant Gantt charts, graphs, tables and maps. Worse in my eyes is the underlying reason for those screens, as they are clearly attributed to data silos. And if the left tool does not know what the right does, if the airport, the ground handler, the airline have different “realities”, no wonder we have friction that results in ineffective operation causing “issues” and delays. As I mentioned in my article about APOC, OCC, NMOC five years ago. And if I ask about interfaces and am told “XML” or “ASCII”, we talk about triggered “push” or “pull”, but not about a live interface. Another data silo.

Coming back, to close this FoodForThought-article, let’s come back to Germania and other airlines which we have lost recently. If you have no assets (aircraft leased or sold/leased-back which is the same), if you outsourced everything (to which I include “cloud”), if you don’t have “spares” for covering up disruptions, you make a very good business case on the old joke: “How do I become a millionaire in aviation? I start with a billion.” Or the other one: “Saving, no matter the cost”. It’s called a “virtual airline”. And I predict we see increasingly those virtual airlines to fail, as they lack size, assets and revenue (RASK) to compete with their competitors.

Food for Thought
Feedback welcome

03.10.2018 Aviation, Low Cost, Management

Primera Air, Azur Air, Small Planet Airlines – and the dying continues

After the demise of Air Berlin, forced by Lufthansa and incompetent if not corrupt politicians, we lost Monarch last fall, but the dying continues. This months we’ve been all “shocked” by the demise of Azur Air (Germany), Small Planet Airlines (Germany) and now Primera Air.

Interesting: None of those airlines had any relevant material assets. Working with leased aircraft as most airlines do today, it minimizes the cash-flow. And aircraft are almost not available for purchase, large aircraft leasing companies and the largest airlines dominating the market. No, neither Primera, nor Air Berlin “owned” aircraft. They were all leased.

Whereas Air Berlin struggled, there was an inherited business model that even ambitious CEOs could not overcome. What was Air Berlin? A holiday charter airline? A low cost airline? A network carrier? While Air Berlin tried to be all of that, they failed to be either “properly”. In a competitive, over-saturated market a death sentense.

Now all those airlines have operated Airbus A320 and/or Boeing 737. An aircraft in surplus, a saturated market, flooded not only by the aircraft makers but also by lease offers from the low-cost airlines seeking utilization for their own surplus. And while everyone wants aircraft in summer, the eroding revenues do not pay enough for those airlines to survive the winter. I learned so long ago, an ice cream shop needs to create enough revenue to survive the winter.

And while aircraft lessors add more and more Airbus 320 and Boeing 737 to their fleets, airlines are established without a long-term concept based on clear USPs, those airlines lease the aircraft out in summer and … oops. And then they go broke and the aircraft lessors sit suddenly on their assets without income. Even scheduled airlines like Volotea ground their aircraft in winter.

Even if the airline operates successful, after usually seven years, their leasing contracts expire. And then they understand the need to invest into more modern aircraft, so they do not extend the leasing contract but return the aircraft to the lessors. Who now need to find “other markets” to take their aircraft… Often below cost to minimize the losses!

In consequence, the aircraft financial funds are known to suffer from year 7, often generating losses over their typical 10-year duration. KPMG earlier this year said the average return on aircraft fund are 4%. While some do better, many smaller ones fault. Another consequence is deteriorating market value for Airbus and 737 aircraft, also usually starting seven years after the aircraft is sold into the markets.

A320neo family orders & deliveries (source Wikipedia)

So one of the reason for failure is the attempt to compete in a shark pond, using the same aircraft than the competitors, copying their business model and trying to find a small niche – that upon success is quickly threatened by the big fish.

Primera Air as the most recent failure tried to convert “in a rush” from a safe holiday charter airline operating secure routes for Primera Travel Group, into an – as aero.de said – copy of Norwegian, flying with the smaller A321neoLR across the Atlantic. But also trying to fly a mixed fleet of A321neo and Boeing 737-800, while having orders out for two A321neoLR and 18 Boeing 737 Max 9. As small newcomers do have problem getting access to the new aircraft like the A321neoLR, of which most go to the largest aircraft leasing companies to be placed into the existing fleets of their large (safe) airline customers. Why would they prioritize newcomers that threaten their existing clients they have long, very long relations with?

But which “newcomer” airline can wait for 10 years (at current production rates) for an Airbus or Boeing they order??? Can you plan what is in 10 years?

Then we come to the flight crews. While pilots usually are either type-rated on the Airbus A320-family or Boeing 737-family, a mixed Boeing/Airbus-fleet either requires respective crews for each aircraft or the cross type-rating. While pilots usually pay for their flight training, in return, they require high salaries in order to pay off for their – substantial – investment. Even Ryanair now faces the consequences of their “outsourcing” and slave-kind payments of their pilots. While I keep seeing their pilots recruiters immediately jumping on Primera Air but also trying to convince pilots from South America or Asia, if they don’t change their attitude to their pilots, they will keep having problems. Their recent announcement to close the base in Bremen and Eindhoven and reduce the base in Weeze are simply puffing. As Ralph Anker showed in his Anker Report. Behind each and every dropped route or base are airports, suddenly deprived from services. And pilots and crews, suddenly forced to find work elsewhere, likely move. Ryanair is the airline that does not care. Europe’s favorite airline? I doubt.

Summarizing, I come back to the point I keep emphasizing. Ever since easyJet (1995) and Wizzair (2003) I have not seen a new airline that had a USP and a clear concept. What is your USP? For the investor, the traveler and yourself? Or are you just another copy, trying to cash in?

I believe A320 and B737 families will hit a brick wall. Investing in those aircraft or airline models trying to operate a few of them is high risk. At best.

Food for Thought
Comments welcome!

Side note: Taking all those “natural thoughts” into account, in a team of experts we’ve developed a business model, that now seeks funding. With a unique concept, multiple USPs and under- if not unserved markets. But that does not work with small money. If you want to do it right and lasting, you need to do it right. And invest. Not just building “an airline”, but focusing on development of assets, as a side-effect securing the returns on the investment. If you know potentially interested investors, let me know and I’ll establish the contact to Kolibri. Or refer them to my call for investors.

02.05.2018 Aviation, Low Cost, Management, Values

Long-Haul Low-Cost? Supersonic? Quo Vadis?

While we work here on a business plan for a new airline, we did discuss and disqualified many of the existing airline models. Is that negative? Or realistic?

These days some news hit me in short succession, that make me rethink the assessment my friend Ndrec and I made when discussing possible, viable business models for a new airline.

I did the picture above a mere year ago. Meanwhile Niki is gone too, as is Virgin America. Mighty Norwegian being said to be likely acquired by IAG shortly. We have “new” players like Blue Air. But the question for any new business case must be:

What is Your (E-)USP?

Now Ray Webster, former CEO of easyJet opened the Routes Europe Conference with a keynote:

“I don’t see long-haul low-cost as a viable model. Operating a small aircraft across the Atlantic is not efficient, and low-cost carriers aren’t going to fill a 787 or an A380”

Ray Webster, former CEO easyJet

Even students traveling on longer flights do want more services the longer the flight gets.

In contradiction to that assessment, Eurowings now opens up New York-services, taken over from the late Air Berlin operating from Düsseldorf. We all looked at Norwegian, though their “success story” also seemingly was bought on the cost of revenue, the airline now is said to be acquired rather shortly by British Airways/Iberia holding IAG (also owning Aer Lingus).

Whereas I simply do not understand the “brand strategy” of either Lufthansa or IAG…

IAG: Aer Lingus, British Airways, Iberia, Level, Vueling … Now Norwegian adding to the mix of “it’s not me”?
Lufthansa Group: Air Dolomiti, Austrian, Brussels, Eurowings, LGW, CityLine, Swiss, Sun Express. Also “it’s not me”?

The work on a business plan for a new airline was triggered last year initially by some investors, going down the same “me-too”-dead end using old, inefficient Boeing 737-aircraft. Cheap to get, but their fuel consumptions renders them virtually useless.

BlueSwanDaily believes in the future of Supersonic… Are you kidding me? Yes, I believe supersonic will come, but expensive niche for the rich and wealthy. No real change to the Concorde business model.

I myself worked out a “green” concept a few years ago, but we’re neither getting there… The project got grounded in the wake of Lehmann Brother’s and a world financial crisis and the original interested investors gone never took up speed again. [Update: The Korean Wingship seems a ready-to-go WIG, though using conventional fuel, no green hydrogen or battery powered e-engines]

So we looked at models that differ from the existing ones. Where are unservered or underserved markets and why are they not served well? One issue sure is the airline analysis tools misleading their users to “established routes” and airports.

So we started with the original intent of a small scale operation. And recognized why so many such projects are doomed. There is a pilot shortage hovering on the horizon, Ryanair running pilot acquisition as far as South America and Asia. Most airlines do not value their workers but drain them.

And having discussed the very same issue again yesterday with friends who must relocate in the automotive industry as a direct consequence of overpaid managers, back again, using old images:

Maybe. Just maybe. I believe Ndrec and I came up with a sound business idea, which requires far higher investment than we originally envisioned. Coming with a round and sound business plan paying off that major investment in 10 years safe. Because we do have a unique selling proposition (USP). Because we do have an emotional USP. Because we thought it through and instead of failing at the first obstacle, we save cost from day one and make this a company to work for?

And working on that, we learned a big deal about the faults of the airlines we see in the market. And it boils down to the normal questions: What’s your (emotional) USP? What makes you different, why should the intended consumer decide to use your product. We see too much “me too” in the market. Buy your market share in the B737/A320 shark pond?

30+ years ago, my training officer told me that joke:

A man starts a business selling screws.
His friends questions him: “You buy
the screws for 1 €, you sell them for 95c?
How do you want to make money?”
“Oh, the quantity does it!”

My training officer told me to look after yours. Not only in the company, also your supply chain. Make sure you have long-term suppliers selling you the quality you need for a good reputation.

Later I learned the same lesson from space shuttle Challenger, management ignoring their own experts warning them of the temperature being below safety specifications. Shuttle Columbia dying of a piece of foam worth a few cent perforating the heat shield. Of Concorde crashing from a “minor” piece of scrap metal.

I’ve paid very high (in hard Euro) for another lesson. Starting with a sound idea (regional airlines’ franchise concept to share cost and operate a larger scale of operations), it turned out later that the stakeholders did not look for a franchise, but a means to start their own small operation and “share” the cost with the other small players. Clearly understanding the small operations to face obstacles they cannot overcome on their own. Could not. Cannot. Will not. A costly mistake I made. But lesson learned!

Then at delair I learned about airline disruptions and how our industry uses historic processes to “manage” somehow. How airlines use manpower instead of intelligence to cope i.e. with a winter storm.

With Ndrec, I found a seasoned manager understanding the need to either do it right – or don’t do it. And we got surprised how much money we save if we do it right! Not short term, there we need more to invest. But then very shortly, within less than 10 years. Now we reached the point of the reality check: Will we find solvent institutional investors helping us to pull this off? Cross your fingers.

For all those other airlines out there… Do your homework. First and foremost: What’s your USP? What’s the business case?

Food for Thought
Comments welcome

04.10.2017 Aviation, Europe, Low Cost, Management, Values

Air Berlin, Monarch Airlines, Ryanair – Lessons Learned?

“Our Heads Are Round so our Thoughts Can Change Direction” [Francis Picabia]

In the past weeks, we got shocking news. Where the insolvency of Air Berlin was more or less expected, the grounding of some 20 thousand flights impacting more than 700 thousand passengers by Ryanair – attributed to a “pilot shortage” – as well as the recent demise of Monarch Airlines came more of a surprise.

Air Berlin

Air Berlin sure was no surprise. In fact, when Lufthansa senior manager Thomas Winkelmann in February joined Air Berlin, everyone in the industry knew that he wasn’t taking such post leaving Lufthansa Group, but to prepare for a takeover by Lufthansa. At the same time (February) Etihad “extended” their cooperation, Etihad, being main investor at Air Berlin’s arch enemy Lufthansa? Then they wet-leased 28 aircraft (all A319 and many of their A320s) to Lufthansa’s low cost subsidiary Eurowings, five more to Lufthansa subsidiary Austrian Airlines…? All 321s to be given to Niki, former Air Berlin subsidiary, in December 2016 Air Berlin sold all stakes in Niki to Etihad. Niki now being rumored to be sold to Austrian Airlines…?

To be surprised like Ryanair’s Michael O’Leary, now calling “fire” such is hypocritical. What I do find questionable is the handling of long-haul flights, Lufthansa has (never had in my opinion) the intention to take over Air Berlin, they just positioned themselves for a prime spot, preparing the inevitable insolvency to secure the prime pieces for themselves. Yes Michael O’Leary is right, but a surprise? Calling now for “law and order”, him who bends the rules every time he can?

Air Berlin made many mistakes, trying to evolve from a specialist in tourism flights with a strong USP with their hubs in Nuremberg and Palma de Mallorca to become … something? A low cost airline? A scheduled airline? Operating a mixed fleet of A320- and B737-family aircraft, but also small Bombardier Dash-8 Q400 (50 seat turboprop). Trying to operate low cost, but also doing feeder flights for Etihad? And long-haul flights using five A330 aircraft? As a German saying goes: “Alles, aber nichts richtig”: Everything, but nothing right.

What I see mostly critical is the intentional “mismanagement” of the A330, also the Dash-8’s seem more like a neglected annoyance, not an asset. And a management considering a success to save 80% of more than eight thousand jobs. So 1.600 will loose their jobs. Well done Mr. Winkelmann, I’m sure you will get a bonus and a job promotion for that (blistering sarcasm).

What I find fascinating indeed is the interest of Lufthansa and easyJet in the A320 aircraft. But that I’ll come to below.

Ryanair

So now how about Ryanair? Ryanair used an “outsourcing” model, where Ryanair did not employ pilots directly, but through some questionable constructions (typically Ryanair that) they made the pilots operate as self-employed, only paying them for flight hours. No social security, sick-leave, guaranteed vacation. Several countries (including Germany) started legal investigations in that model.

I have questioned that approach ever since I first heard of it, as everyone in the aviation industry knew that we face a shortage of pilots. Given availability and demand, with the large number of aircraft orders, easyJet and Ryanair both are known to seek to sell aircraft from their enormous back-log of orders they placed with Airbus and Boeing. At Paris Air Show this year, I discussed with experts, confirming that this already backfires on both Airbus and Boeing, as they have to lower their own prices as those airlines handover the substantial discounts the gave the low cost airlines for their humongous orders.

Canadian CAE released a study at Paris Air Show claiming “50% of the pilots who will fly the world’s commercial aircraft in 10 years have not yet started to train”.

So aside a saturation of the European market with A320 and Boeing 737, we are short on pilots. Now Ryanair “pilot management” increasingly questioned, it is no wonder that pilots are open to “competitive offers”. It’s about how you treat your staff. Now Ryanair pilots not really employed by Ryanair, what keeps them from taking up better offers? Then Ryanair decided to change the fiscal (and vacation) year to the calendar year and did not take into account that this will result in a shift in vacation demand in the process? Obviously the managers did armchair decisions, not thinking them through.

To my believe, this situation is a mix of Ryanair bending the rules, offering tickets at prices below any reasonable levels. Confirming my concerns about “hidden income” Ryanair applies. It would be interesting to have a look into Ryanair calculations as how they can offer flights with average fares below the common cost of Kerosene. Not even talking about the aircraft, staff, administration and maintenance. Though yes, I know markets where they also charge more reasonable “average fares”, seems they not everywhere find ways to milk the regions for subsidies of questionable legality.

Monarch Airlines

Some smart-asses say that was already clear from last year that Monarch would have to close down. But Monarch did quite some development in the past year and it hit about anyone I know rather unexpected – as well as passengers, airports, media! Not having any true details on that, it only confirms by view about Boeing 737/Airbus A320 families.

Update: Financial Times reported 750 thousand future bookings having been cancelled, other media says more than 800 thousand future passengers, of which more than 100 thousand are stranded and only a minority covered by tour operators’ insurance for packaged travel…

Boeing 737 / Airbus A320 – the Work Horse…?

All A320 / B737 – What was your USP again?

I have worked on projects with investors buying into Boeing 737. Instantly I questioned the business case for that aircraft. On the one side I hear from airline network planners how increasingly difficult it is to find viable routes for their aircraft. 189 seats usually. On the other side, being bound to those aircraft families to keep the complexity = cost in check, they now add even bigger aircraft with 220-240 seats to their fleet. How that should “improve” the situation is simply beyond me. All that can do is to cannibalize other routes, fly less often.

Now there is a pilot shortage, airlines operating those aircraft are fighting to utilize the aircraft with a sustainable revenue. Insolvencies like Monarch Airlines with 35 aircraft and their flight and cabin crews will likely result in a short relieve for the likes of Ryanair. But given the new aircraft deliveries, that is a drop on a hot stone.

I believe, the market is oversaturated. When “Low Cost” started, the A320 and B737 offered the best cost per seat and loads to compete with existing airlines on the “common” routes. For regional aviation, that aircraft was and is too big. Nowadays we see a consolidation of airlines operating that aircraft, be it Alitalia, Air Berlin, Monarch but even Ryanair, though for different reasons.

Another issue is a feedback I got from a financial expert. There are financial funds for aircraft. All those funds currently suffer as soon as the initial leasing is over from eroding revenue, often resulting in substantial financial losses even before the end of the first 10 years. Thanks to the eroding prices of A320 and B737 aircraft, thanks to the low cost airlines passing on the substantial discounts they received from the aircraft makers on their mass-deals, result in a faster drop of value than anyone anticipated. As FlightGlobal reported already back in 2014 in their special report Finance & Leasing, Norwegian established their own leasing subsidiary to try to sell or lease their surplus orders. And they’ve not been the only one, easyJet and Ryanair do the same, trying to get rid of the liability those aircraft became.
While that gives airlines access to competitive (low) priced aircraft, it ruins both the aircraft makers own price policy, as well as it cannibalizes the business model of the institutional aircraft lessors.

With order books exceeding delivery times beyond 10 years, only large airlines or institutional investors have the funds to invest over a time frame of 10 years. With new aircraft makers building aircraft competing with the Airbus, offering similar or better economics and substantially lower delivery times, airlines using “The Work Horse” take a more or (likely) less calculated risk to bet their money on a work horse. I wonder if there’ll be some (Arab) race horses suddenly and unexpectedly coming up with new business models and more efficient aircraft using the unbeaten path as a shortcut?

And yes, we just work on a business plan for such a “new model” making use of new ideas, unique selling propositions for investors, travelers and airports. No magic involved, just some creativity and willingness to think different.

Food for Thought
Comments welcome

12.09.2017 Aviation, Low Cost, Values

Changing Roles

As many of the readers of this blog know, I am somewhat personally attached to that little airport in Central Germany, Erfurt-Weimar.

Last week I was taken into a discussion by Thuringia’s Minister President Bodo Ramelow, about how to stop the down-spiral of emigrating Thuringians. Which reminded me about the likewise discussion we had in 2009 shortly before I joined Erfurt Airport with the task to stop their downward-spiral on their passengers.

Real Life Example

What I was faced with was an extremely negative image of the airport within the region. And a lot of demands on how to do business from amateurs in the industry, politicians, tourist offices, etc.

First day at work, the GM of Tourism Thuringia, Bärbel Grönegres was quoted in the local newspaper (TA, 02Mar09), having visited the United Arab Emirates to promote medical tourism to Thuringia. Having a Munich-Erfurt flight by Lufthansa-Partner Cirrus Airlines at the time, she recommended the Arabs to take a flight to Frankfurt, to be picked up with a bus for a +3 hour tour to Thuringia. Tourism material did not contain reference to the airport. Questioned about the reason, her reply was “Who knows, how much longer we will have that flight”. Ever since, that became a prime example I use for “negative thinking” or “calling for disaster”.

The next winter, the Thuringian Olympic athletes brought home a record number of medals. But at the following ITB, it was more important to promote Franz Liszt, who lived a dozen years in Weimar. The fact that the Russian-Orthodox chapel, Grand Dutchess Maria Pavlovna who’s invitation brought him to Weimar has built and got buried in is under direct protectorate of the Russion Orthodox “pope”, the Patriarch, such making it a pilgrimage site for the Russian Orthodox church has completely failed to trigger any support by Weimar or Thuringia Tourism. Air Berlin reported it to be a “known reason” for a substantial part of their Russian Berlin-passengers to add Weimar to their travel plans.

In order to promote the government-funded route, after fierce discussions, Cirrus Airlines agreed to offer a low-cost ticket at 99€ return, having only about 6€ after the high taxes on the ticket. That offer was made available especially to the Thuringian government offices and the state development agency (LEG). Nevertheless, LEG planned and executed delegations traveling with the train to Berlin to take flights from Berlin, instead of promoting the route. The same also for the ministries and ministers. Even the responsible minister taking flights from Frankfurt and Munich instead of using the PSO-route he signed responsible for. During the months we’ve actively promoted that 99€-fare also to the industry and the travel agencies and also had it largely available, not one of the flights used up the 99€ tickets allocated to them. Being at the verge of a bankruptcy, Cirrus Airlines finally ceased to operate that route in December 2010.

By the time, working with the local industry associations, political parties I have been able to increase the passenger numbers by about 20 percent. In fact, to date, the airport is far from the 320 thousand passengers I left them with. With Weimar being the neighboring but historically better known city internationally, I pushed forward the renaming to Erfurt-Weimar with the attempt to improve the incoming for the airport. Paid almost completely from the limited marketing budget. A strategic decision executed after our parting-of-ways in December 2010 after my two-year contract was not extended in the wake of the retreat of Cirrus Airlines. A strategic decision though made obsolete by the “political” decision by traffic minister Christian Carius to not replace the route as I recommended with an Amsterdam-service. Sad decision indeed, as with our parting ways, the discussions with KLM were simply discontinued (KLM calling my number reached someone speaking German only, I was gone) and despite their interest in a PSO (public service obligation) financial route support, we had discussed flights based on mere startup incentives and marketing support.

Opposing myself ongoing subsidies, to demand a route but to leave the (substantial) risk completely with the airline is neither the answer. Whereas comparing the CheckIn.com-data about airport catchment areas with the data provided by airports we found that data to be completely off-set in a majority of cases. It caused us to make basic data available for free. But if the data provided by the airport is not hard, but guesstimates or outright lies, when the airline starts a flight based on that data, the airline takes the risk. To not only does the airport sneak out of the responsibility, they increase the airlines’ risk – is that a game? Or serious business?

Fraport Bulgaria’s more than doubled “population within two hours” can not result from the “drive time off-sets implied by Fraport Bulgaria investigating the discrepancy.

Changing Roles

Now since I started in aviation 30 years ago, the market has drastically changed. In the good old days, there were (often highly subsidized) “national airlines”, used to promote the country. Back in my early days, the airlines were the executive for the tourist offices and also worked closely with commercial development agencies. But ever since, those national airlines have either adapted or went out of business. The emerging “low cost” airlines virtually evaporated the income of the airlines, competition becoming fierce.

As I keep emphasizing with my updated image of Purchasing Power and Airports, there is a relation between a strong airport and the regional purchasing power. It is indeed a hen/egg issue, but if you are a small airport in a weak region, maybe it makes sense to consider how to attract travel (tourism, commerce) to your region. Not how to drain your region of the money by sending the population to the Mediterranean for vacation, but by having incoming, scheduled services, by adding point-to-point routes and to attract low cost airlines.

If we do not talk about PSO (Public Service Obligation) where the government pays for basic flight services, if you build an airport and wait for airlines to find you, keep on sleeping (and burning money). So if you are a small airport and you have little to no money, what can you do?

Having an airport is not enough any more.

The airport is part of the region’s infrastructure. As such, it needs to be integrated into a political and commercial strategy. Whereas in the example of Erfurt-Weimar, the airport is being kept as a scapegoat, being challenged in one sentence for the aviation noise (a good joke with so few flights) and for not having flights. A political punch-ball.

Other, successful airports like Memmingen in Southern Germany are integrated into and understood as a strategic value for the regional development. In fact, Memmingen is not politico-owned but owned by more than 60 co-owners from the region’s industry. Such, instead of being a scapegoat for political power games, everyone in the region understands the need to actively support the airport. Anyone harassing the airport confronts everyone in the region. A political suicide!

At Erfurt, I was asked to establish flights to Moscow. One company. 10 employees. Even with a small (expensive) 50-seat aircraft and weekly flights only (which are usually not sufficient for commercial demand), we talk about 40 seats by 52 weeks in two directions or 4.160 tickets to sell every year. But for a decent offer that is useful to the industry, you need at least twice weekly flights.

Leaving that task to attract airlines to the airport alone, at the same time running blame games and scapegoating, the airport cannot justify such flight. But what if the state development agency and the chambers of commerce, on demand by the political PTBs (powers-that-be) qualify the demand from all those small and midsized companies? Not on a low-cost, but with reasonable ticket prices. Not at prime time at the maximum risk for the airline. Maybe instead of a weekly, can the region sustain a double or even triple-weekly flight making it interesting for the companies in the region? Are those companies willing to support the launch period by committing to use the flight, even if slightly more expensive than a flight from Frankfurt or Berlin? Keep in mind, the people have to get there, you also pay for gasoline/parking or rail. Transport to those hubs is not free either. And the longer check-in times make them even less attractive, right?

Interesting approach. I’ve talked to several smaller airports where they agreed that their chamber of commerce and regional development agencies “pre-purchased” tickets at the cost of the average ticket price needed to cover the operational cost. Then they to sell it to their members. Not covering the full cost of operations, but simply taking their share of the risk! Why should they not, if they believe in the numbers and data they provide to the airline to promote their business case?

Then talk about Tourism. Given such flight, are the local tourism PTBs ready to promote such flight in the outlying region? What about other promotion? Don’t leave it to the airport! Is there a joint concept by the political PTBs, the state development and commerce PTBs, the tourism PTBs on what flight they want, how they will promote the flights?

“We have an airport”. That’s nice. But not enough.

And for a Minister President even only on a state level? You better think about a strategy. Or close down the airport. Having flight to summer vacation is not enough. It drains money from your region into those destinations. What’s in it for you? Why do you fund an airport? No scheduled services? No incoming? Do your homework.

Changing Roles

It’s no longer the job of the airline to promote your region! They simply don’t have the funds to do that. It’s not their business case.

It is the job of the political, commercial and tourism PTBs to qualify what they finance an airport for and come up with ideas and business cases for airlines to take the risk to fly there. And no, a “business case” is not necessarily paying subsidies. If you have a good business case that the airline will make money on the route by flying paying passengers, I can rest assure you that the airline will prefer that over subsidies that are usually associated to political nightmares.

Compiling sound numbers is a good start… And yeah, I might be willing to help you with that.

Food for Thought!
Feedback welcome…