Food for Thought

It’ll Hit Us in the Back

Another post in the Cognitive Dissonance series.

Aviation banks say new deals on pause until ‘market bottoms out’ (ISHKA)
The market will be flooded with surplus of 150-seat up aircraft. (ISHKA webinar)

Aside those headlines, two ideas shortly (too short?) addressed in the ISHKA-webinar triggered my thinking:

Is P2F (passenger-to-freight-conversion) a strategy for aircraft owners? And is part-out, cannibalizing aircraft for spare parts, an option?

P2F – Passenger to Freighter Aircraft Conversion

Bill Cumberlidge addressed P2F shortly in the ISHKA webinar. As the need for quick transport increases, the belly-freight in passenger aircraft has gone missing. That increases the demand for classic freighter aircraft. But keep in mind that this is a temporary peak only.

But given passenger airlines taking up that surplus transporting goods in their passenger aircraft, the question now is not if we need more freighter aircraft, but the aircraft owners sitting on “dead capital”, seeking their own bailout – by considering to convert them to freighters seems a good idea. Or does it not?

The main issue there seems not to be the demand for conversions exceeding the available resources, companies with the experience in such conversions.
Then you cannot simply convert all the grounded aircraft to freighters, without flooding the market. Offer and demand will simply result in surplus freight capacity, ruining the prices both for freighter aircraft as well as for airfreight cost. So the idea will quickly backfire. What I heard first from truck drivers, seems now to become an issue in the airfreight industry. Passenger airlines, offering cheap passenger aircraft for ad hoc transport ruining the prices.

While there is a current peak, promising a use of lots of large freight aircraft (A380, B747, B777, B767, A330, A300, etc., etc.) that demand bubble will last maximum one year.

Seabased shipping will still do the majority of transport. And while shipping cost will likely peak, ship-operators (I avoid the word shipping company) will possibly recover their eroding revenues in the crisis. If they don’t make their own mistakes.

But how many containers does a single container giant today transport? And how many of those can you put onboard an A380 or B747? There were a lot of hurray and self-praise of airlines that one aircraft transported 500,000 masks to somewhere. Whereas the population there is a multiple of that number. Airfreight is expensive and a drop on a hot stone.

And the rush now to the common idea everyone follows will backfire and hit us in the back soon.

Parts-Out – Cannibalizing Aircraft

Another, very standard “fallback idea” is the “End-of-Life”-strategy to cannibalize the surplus aircraft for spare parts. Given the immense surplus of 150-240-seat aircraft, this bubble is instantly doomed. In several expert discussions I heard 50%, even up to 70% of the fleets to be grounded. Recovery of likely 80% within two years. Let’s say we decommission 20%. Which ones? Where? Who starts?

Bill voiced a valid concern too. What if airlines neglect the engine maintenance, but use the engines of the grounded aircraft? Sure, once traffic picks up you can lease new engines. Which might be even cheaper than servicing the neglected engines. But. If all airlines follow that strategy, I predict a shortage in new engines to hit us in the back. And we will have hundreds of aircraft engines to be written off.

Cognitive Dissonance: Who Pays the Bill

All those ideas try to secure the profits, moving the losses to others. Whereas we so much promote that we are all in this together, in reality it is very much egoism at play. Back to the good old Saint-Florian’s Principle: Oh holy dear Saint Florian, don’t burn my house, take the neighbor’s one!

A good example is basically the question about aircraft. Airbus and Boeing reduce their production. Because airlines do not take the aircraft as planned. Realistically, there won’t be much demand of their aircraft in the next two years (or more). But could they sustain two years without revenue? Beyond some spare parts.
Then the airlines return aircraft to the leasing companies or cancel orders, even at the expense of financial penalties. Such piling up the dead capital with them. i.e. Brussels Airlines, representing the mighty Lufthansa Group, cancelling their wet lease deals with CityJet. Leaving them out in the cold. Lufthansa style.
And then there are the investors. Who will loose big money as a result of a surplus of aircraft they had focused on. Without realistic concepts how to make money or turn their dead capital to assets again.

That self-centered thinking will hit us in the back soon.

Supply Chain Management: We are ALL in this Together

My first boss taught me an important lesson in supply chain management ethics. It is not always about the cheapest offer. There is always someone cheaper. But part of good supply chain management (and beyond) is the reliability of partnerships. Especially when times are challenging.

#weareallinthistogether. Exactly that catchphrase so many now use for #whitewashing. Again. It’ll hit us in the back.

Food for Thought
Comments welcome!

P.S.: Things can be handled differently. If you Think Outside the Box. And beyond. We’re looking for airline investor(s) who understand “doing different” being the core to the Unique selling proposition. We have some sound, profit- and USP-, sustainability and social responsibility focused business out for funding. Contact me to learn more.

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Post-Corona Aircraft Fleets

Status Quo

Airbus announced to reduce the monthly output of the A320 fro 60 to 40 aircraft, citing problems handing over ready aircraft to their customers. Aircraft being parked at Rostock Airport (RLG).

Lufthansa announced their fleet changes, retiring (decommissioning) mostly large aircraft like A380s, A340s and 747s, but also 11 (out of 62) A320s.

— and so on, and so forth.

Aside such news articles it is rather difficult to come by good, hard data about how Corona impacts the industry on a global scale. On LinkedIn, I received a graph by The Air Current.

The Air Current Graph

Corona Aircraft Groundings — Source: The Air Current via LinkedIn

Having discussed those numbers in a conference call, it seems that there are some interesting factors that impact that graph.

Freight Use + Repatriation Flights

Many if not most of those seat miles are repatriation flights as well as passenger aircraft transporting freight! Those are and can be only temporary remedies. In Germany, Condor recently published their foreign farm help shuttles, now the Polish state-owned PGL owning LOT and most Polish airports cancels their rescue-takeover of Condor. Likely the end of that tradition-airline.

Large Aircraft (Twin-Aisle)

Very visible is the mass grounding of large aircraft. The Airbus A380 is already no longer built, now airlines retire, decommission that aircraft in large numbers. Flightradar showed quite some of those aircraft being flown to the scrap-yards, also called aircraft graveyards. The same applies to many 747s, not being “parked”, but decommissioned. The same fate even seems to hit the Boeing 777. Coronavirus also seems to seal the fate of many Boeing 767. For all those aircraft, more than 80% are grounded – many of which are being decommissioned for good.

Midsized Aircraft (Single Aisle)

Coronavirus also seems to seal the fate of many 767 and 757, though American Trans Air seems to have a sound business model for the 757s; an excellent aircraft that might have been the saver bet for Boeing to upgrade instead of the old 737-frames. With Lufthansa not just grounding, but decommissioning not just 11 A320, but also the entire Germanwings with 23 A319 and 10 A320. Reflecting their managements disbelief in the post-Corona market for that aircraft. Boeing had already shelved the production of the new 737MAX and seems to have also trouble to handover the currently produced ones to the intended customers.

What stroke me odd was the Embraer E195, showing 75% grounded, as well as 65% of the E190s. Both very good aircraft. But very few, large operators grounding their Embraer fleet in favor or their Boeing/Airbus operations seem to have resulted in their large groundings.

Generally, the regional sized aircraft with below 150 seats (below A319 or 737-300/700) by the time that graph was compiled operated still 50% of their pre-Corona regional services.

Outlook into the Crisis

Optimists outlook is a two-year return to “normal” (AF/KL). Flightglobal headlines Global airliner fleet returns to 1990s levels, John Strickland writes on Aviation Week For Airlines, The Shock Has Just Begun. At the same time I see and here seasoned airline and other aviation manager expressing an ongoing cognitive dissonance on a surprising level. It’s beyond my understanding how anyone can vouch for unsecured credit by demanding vouchers when we don’t know, if those airlines, cruise companies, etc. will survive. I expect a large number of claims against governments, where such vouchers are legally made normality. Anyone expecting a quick recovery, think again. And yes, that includes people like IATA chief economist Brian Pearce. I consider it a dangerous, if not criminal belittling of this crisis.

As outlines in my Corona Papers, IMF Managing Director Kristalina Georgieva warns of the worst crisis since the Great Depression 90 years ago!

And while optimists still hope for a quick recovery and flights to recover even within this year, realistically we must expect worse. In many webinars and discussions there is agreement by seasoned professionals that this year and likely next, maybe even beyond we will be living in crisis mode.

Now Flightglobal headlines that Cash reserves give Boeing 10 months of breathing room. The MAX-grounding came at the worst possible time for them. Thinking about their intended acquisition of Embraer, there are already news in the media questioning the value of Embraer in the time of this crisis. Does the deal make sense at all? Not in my opinion. Airbus published reduced A320 output and many of the ones rolling out of production being parked at airports like Rostock (RLG). Until they can be delivered to clients who want them. Clients who can afford to pay for them within the crisis.

Overall, which aircraft will be shelved, either by the airframe makers or by airline and especially aircraft investment companies’ demand.

The Beginning Recovery

What they also agree upon is that whenever the recovery starts, the recovery will be slow and need small airplanes!

Passenger Groups

Operators + Leisure Travel

In a recent conference call, two attending tour operators flight purchasing managers emphasized a recovery on the basis of previously high density high volume routes. They emphasized that while VFR (visiting friends and relatives) will recover a bit faster, the “normal” traveler will be busy recovering their jobs and lives and income – they expect only very little demand for the typical vacation for 2020. And they, as tour operator flight experts raised a question: “Who will want to spend some hours in an airplane having the reputation of being a sardine can?” This will even impact the vacation travel in 2021 and beyond. There will be a revival of ground-based and localized travel at the expense of air travel. It will take time to recover from that blow.

Business Travel

The same conference call had corporate travel managers and representatives of two different business travel management companies (BTM, corporate travel agents). They expected an even more restrictive point of view. Corporate travel managers have for years been made sensitive about their responsibility for the well-being of their travelers. So now they fall-back to what they have been taught, now they will restrict travel to the most needed, qualified as important cases, until the traveler can be vaccinated against Corona.

The Immune

An exception the BTMs mentioned: Travelers who went through the infection and are such immune and noncontagious may be the first to start traveling again. But it was also consensus that a comparison to flu vaccination would be not comparable, after all the hysterics we went through.

Maybe some people won’t vaccinate. But that will not make much of a difference about their reluctance to travel by air for a while.

Slow Passenger Growth

All this lead to the expectation that even on former high density routes, the use of B757, A321LR and such smaller airplanes may be the first routes to recover on long haul. Some very high density routes may recover using larger aircraft such as the remaining B747s or B777s. Where I see Emirates likely to stake their claims quickly, possibly even basing some of their aircraft out of country to serve remote routes.

Also on regional routes, operations using anything larger than a 150-240 seater (A320-family, Boeing 737s) will be very unlikely. It’s also the signal aircraft retirements within the IAG group (BA, Iberia, etc.),

Long-Haul, Hub- and Connecting Traffic

As for the anticipated return in passenger numbers, except for the very high density routes like New York-London, airlines will start with shorter hub-to-hub-routes, like back in the 80s the availability of two-leg-connections between any two cities will be limited, three-leg connections again becoming quite normal. Expectation was also voiced that most operators will shelve most, if not all twin-aisle aircraft.

Given Emirates fleet of A380 and B777, it is expected that Emirates will expand by “round-the-world” services, connecting most of the long-haul/high-density-routes! That in turn will make it difficult for the other network carriers to cash-in on those routes.

Low Cost + Regional Aviation

Given the expectation of questionable safety regarding load factors and demand for 150-240-seat aircraft, this will be a turning point for the low-cost industry. For a long time, I considered “low-cost” carriers (LCC) as a cost-sensitive regional aviation player. Connecting point-to-point without a focus on connecting traffic. As the fleets grew, the routes got longer, the LCCs started experimenting with classic concepts like GDS-sales, hub-services and connecting flights, etc., etc. As the classic airlines learned to adapt to the new competition. It was long questioned on conferences and other discussions, if you can still group LCCs, that dates back even to fierce discussions about the status of Air Berlin as a LCC.

But at least in Europe, the promising routes allowing sustainable services became scarce. And now the passenger growth evaporated, many routes will no longer be viable for the LCC on a “low cost”. Will they increase the ticket prices? I expect so. In fact, I hope so. The number of tickets sold below the average cost per seat will shrink. Then the LCC will be “just another airline”.

In most of the webinars, calls and discussions of the past weeks, the expectation was expressed that as regional flights were the last to be cancelled, they will be the first ones to recover. 150-240 seats are the domain of the former LCCs. There problem will be the very slow growth of passenger numbers post-crisis. Suddenly their “more seats” turn from benefit at full load into a severe challenge. Similar to tour operators, they will focus their recovery on the former high density routes. In a perfect scenario, they would slowly pick up speed. Realistically, they will rush it, risking a lot, flying below cost. How long they can sustain that must be seen. If aviation truly cuts back to traffic of the 1990s, the demand for flights served by 150-240 seat aircraft will be rather limited. A lot of Airbus-320- and Boeing-737-families’ aircraft will be grounded for time to come. With a devastating impact to aircraft leasing companies focusing on those aircraft.

At the same time, while that would have been a perfect business case for FlyBE, the airline was (among) the first to shut down in the crisis, neither owners nor other stakeholders understanding the impact of the crisis to future passengers’ development, nor FlyBEs value in a post-crisis. I expect other airlines operating the smaller aircraft with 50 to 150 seats to be the first to recover and be the winners in the immediate post-crisis.

Beyond Corona

Airlines

Pending question was if there will be enough consolidation to leave enough niches for the survivors. Or if the stabbing and fighting for routes will continue – with the pre-crisis effect on revenues and commercial sustainability of the air carriers. While we all expressed hope for the first, we all fear that airline managers will fall back into their old modus-operandi to focus on marked share and loads instead of revenue and profit.

Especially of concern are the LCCs, suddenly sitting on a fleet of too-large aircraft. Likely to push them in the market with low ticket prices trying to fill them up. Will they understand and be able to adjust their business model to a drained market? Ask for “sustainable” prices, covering the cost of operation of half-empty aircraft? If not, we will see them burning up quickly like a flash in the pan.

The recovery will be slowed down as “low-cost” models at the beginning will such pose high risk – low return, airlines will need to focus initially on low load factors but the need to create profit after the drought.

The recovery will also demand shrunken cost, fleets, etc. – also including a elimination of non-essentials, redundant developments with the teams associated to them. There will be very hard decisions. A lot of developments will be faced with the need to provide hard evidence on USPs, impact on profits.

Investors

Aircraft Investors

With KPMG, ISHKA and other professionals saying that the average return on aircraft fund investments to be around 4% pre-crisis, there have already been the large players as the winners, with many losers. There also was a focus on “me too”, many smaller players, like banks or funds, focusing on the “safe bet” on more and more 150-240 seat Airbus or Boeing aircraft. It was always an issue that those aircraft were leased out to small start-ups, which failed, releasing it at lower return to other airlines, just to minimize the losses.

At the end of 2019 aircraft investors said they’ve been only surviving because of the grounding of the 737MAX. Now suddenly that entire market (finally) imploded. And despite a lot of “experts” expecting the market to recover quickly, all signs are on a slow recovery for that aircraft type. And while a factory new Airbus A320ceo was sold pre-crisis at a cost of 1/3rd of the list price or even less, there is now a fight at play that will turn that aircraft a burden for a long time to come!

What about larger aircraft? The A380 was the warning shot. First the production ended last year, now a large number has not only been grounded, but flown to known scrapping sites. The same true in the few weeks since start of the crisis for 747-400, 777-300 and other large aircraft that was expected to be entering the secondary markets – markets that suddenly evaporated and are unlikely to make it back any time soon. And now there are many reports like Blue Swan Daily‘s addressing the conflicting interests in the current crisis between airlines, aircraft lessors and investors. Everyone following the Saint-Florian’s Principle about who shall take the financial repercussions of grounded aircraft.

Speaking to investors about investment in different aircraft with USPs (yes, I talk about KOLIBRI.aero), I was told repeatedly that they prefer those common aircraft models as they know what they are and everyone does it. So now may be a time where investors will recognize that doing what all others do is (and always has been) a paved road to disaster.

Holistic Investment Models

Speaking about KOLIBRI.aero we also talk about holistic investment. Writing this, there is a report on TV about the wake-up-call against “outsourcing” of pharmaceuticals to China. Developing the business plans for KOLIBRI.aero, we intentionally looked at insourcing as a means to reduce the cost. 30+ years ago, my senior manager in the company accompanying my education in whole-sale and foreign trade economics told me what I found true ever since: You always pay for outsourcing. Either by paying more or by loss of quality. A classic outsourcing is consulting. And my rule offering consulting has always been: If you need know how temporarily, you pay a consultant. If you need know how long-term, you may pay a consultant to train someone on your payroll. Temporarily. If you pay a consultant permanently, you do something wrong.

Think Airline

This is the same in aviation. If an airline flies somewhere once a day, it makes sense to order external ground handling. If you have your base or focus city, you better do it yourself. If you have one airplane, you better outsource the maintenance. You acquire flight crews someone else trained. You outsource your IT, your marketing & sales, etc., etc. And pay for it. Better do not expect to be able to be competitive to your local low cost competitor. If you have a fleet of aircraft, you better do it yourself. Lower the cost, secure the quality. Yes I know, I addressed it in my post asking last December, why airlines do keep failing.

Think Aircraft

Now, surprise surprise, the current crisis proves that this is the very same with aircraft investors. If you just look at aircraft but have no idea how to use it, you’re doomed. It will work a while, it did work a while. But even before Corona, this model was doomed and I addressed it. If an investor invests into the aircraft but outsources (the risk of) the operation. Then those small failing airlines return the aircraft after not paying the bills for several months.

While the large lessors could shift the aircraft rather quickly between different clients, the smaller lessors often swallowed losses, accepted leasing the aircraft out at lower rates, all biting into their revenue. There was a lot of “academic believes”, “cognitive dissonance” and “wishful thinking”. And a lot of banks and investors avoided to look into new ideas. New ideas reflecting usually unique selling propositions. Not necessarily all winners. But following the flock ain’t the answer either, right?

Think Different

Since starting to turn the idea that turned out to become KOLIBRI.aero we looked at what I learned back in the very early days of my aviation career. To think beyond. To not “think it can’t work because everyone says so” but to do the maths myself, to calculate ideas. And guess what: Those ideas mostly worked.

Different aircraft, different business model, focus on profit, identify USPs. And Corona did not disqualify our business model. Quite to the contrary. So now all we have to do is find an investor, understanding the value of creativity and interested to make a change. Thinking outside the box. If you try to repeat what others did, look at their failures.

Food for Thought
~~Comments~~ Investors welcome!

P.S. Not all of the links are publicly available but require a subscription. Apologies.

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The True Meaning of Corporate Social Responsibility

For quite a while, I am stumbling over the issue of the common investor understanding of Corporate Social Responsibility (CSR) and their implication that it is the same as Sustainability. Which it is not.

Wikipedia a.k.a. an Academic Idea

Reading the Wikipedia page about it, they see it as a high-level code of conduct for large, international organisations. And focused on the representation of the company towards its customers. I think we must step back and make a change. A change to how we must understand corporate social responsibility. And not just, but especially in times of Corona, this is not a nice to have, it is a desperately needed definition update!

Shareholder Value vs. CSR

If you focus on shareholder value, human resources and only your own, personal profit, you end up in a deep, dark pit. Sometimes, like Boeing’s Muilenburg and others who have been on the Olymp, just for that much deeper a fall. Examples aplenty.

In most cases, it’s like the recent decline in employee morale at Lufthansa, Carsten Spohr shelving Germanwings in a “strategic” and likely necessary move, but without the touch to understand the emotional repercussions on overall staff. Them having very well in mind the fate of Contact Air, Cirrus Airlines, but also Air Berlin with their last CEO a Spohr-lackey sent to liquidate the airline. And sure, there is quite some green- and whitewashing involved by such CEOs, having their own “sustainability” and “CSR” departments.

Basic Principle

So what is “CSR” truly about? Or should be? Like with all such “definitions”, there has been a basic idea. Then it was abused to abstraction to #whitewash investments and make them attractive to investors.

To understand the original idea behind corporate social responsibility you simply need to read it. It is everything about the social responsibilities in corporate (organisational) environments. Is it social to support sustainability? Definitely. But not only. Those definitions applied to CSR crippled the original definition. Then the #whitewashing continued. As Wikipedia refers to, there’s a cost-benefit analysis. Don’t get me wrong, it makes sense. But then let’s name it – it’s a business model, has nothing to do with philanthropy.

Micro Level Social Responsibility

Corporate Social Responsibility starts with your immediate environment: Your own organisation!

When I started my aviation career with American Airlines under Bob Crandall, we were a family. My friends at Delta and Pan Am envied us for that family spirit, called us “brain washed”. To date, we were not brain washed, but professionally motivated. Something I miss since the button counters took over. Something Carolyn McCall at easyJet understood and (as I predicted) what left easyJet with her. The top management understanding that humans are no resource and that motivated staff and service are invaluable assets!

Aside the example i used on the different approaches between Alex Cruz at British Airways and Branson’s Virgin Atlantic, there was a noteworthy post by Tony Fernandes of Air Asia. Please read it, this is only a key message out of it:

“What always drove us was our people, our AllStars . It’s what’s drives us every time we are in a Crisis. We must do whatever to protect their jobs.”

CSR the KOLIBRI.aero Style

Co-Founder Ndrec coming from a military background, me grown up with American military and starting my career with American, it was clear from the very start, that developing such a better airline, aside profitability ☑ (check), USPs ☑ (check) and sustainability ☑ (check), we must take care of “ours”. What we considered and consider true “CSR”. From the outset, we such looked at staff management and banned to wording of “Human Resources” and its shortened version “HR”. And we looked at the locations we plan bases for, beyond the company, but the impact such development has to the communities “we serve”.

It might be surprising to the bean counters (accountant-mindset “managers”) that all of our related “cost centers” turned out to be no just driving loyalty, but to be true profit centers and vital in our attempt to melt the cost factors to competitive levels. As a start-up, investing into all the company’s assets, you must be competitive against all those large, established companies like easyJet owning around 70% of their fleet, cost down to maintenance, with roughly 25% being paid off and around 5% being leased to cover ad hoc opportunities (like taking over Air Berlin routes). And while now being a “burden” in Corona times, airlines cannot drop out of leasing either, so the cost still is there. But those airlines can secure credits based on their (aircraft) assets. To develop profit centers that allow to cut down the cost to competitive levels such ain’t a mere strategy, but a vital need.

Summary

As in all my posts addressing moral and ethics, I turn back to my father, who told me that you got to be first and foremost someone you see in the mirror and you like the guy. Secondly, despite all mistakes you do, you must keep your sheet clean. Your sins will backfire on you.

So you got to start with the good old (wo)man in the mirror. Then think about “yours truly”, family, employees. Then look after the extended community, local and work. If you look at all that, sustainability will be a “natural development” for you.

Food for Thought
Comments welcome!

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The Sky is Home

“Don’t believe what your eyes are telling you. All they show is limitation. Look with your understanding. Find out what you already know and you will see the way to fly.” [Richard Bach, Jonathan Livingston Seagull]

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The Corona Papers

The posts since 06. March focused on the Corona crisis have been moved to the static pages (see menu on the right)

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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

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There are Investment Alternatives to Shares

This article has originally been published on my LinkedIn page (moved 2020-02-11)

There are Investment Alternatives to Shares

Published on January 14, 2020

Jürgen Barthel
Think Outside the Box

8 Articles

“2020 will unlikely be able to keep up with 2019. But more speaks for shares than the lack of alternatives”

I’m kind of p***ed off by that statement by German DWS’ CIO and his conservative, visionless analysis headline. It reflects exceptionally well on German investors and asset managers (yes, I also talk about those banks) believing in risk-free, high-return investments. ECB frequently accused German banks to not understand the reason for their negative interest: To make deposits at ECB unattractive and force the banks to invest into companies, ideas, visions. Instead to such do their own job and a proper due diligence on good ideas, they focus to co-invest after others did the job, on “established models”, investing into aircraft available in surplus (A320/B737). Or in shares, as there would be no alternatives. Yes, if you have blinders on, you might be right.

Bold investments? Investing into sound ideas and business concepts developed by seasoned managers? Not in Germany. Nor much in Europe. Invest in shares, for the lack of alternatives? Or for the lack of vision? Blinders.

Disrupt. Or be Disrupted!

It’s our experience seeking funding for Kolibri.aero. A disruptive aviation business concept. Different. It’s called “USP”. It’s not “me too”. If you know investors that are open to vision, change and “something new”, please refer them to the Kolibris. Or me.

Published by

Jürgen Barthel
Think Outside the Box

8 Articles

German DWS (asset management) says shares are must buy because they lack an alternative. How wrong can you be? European Central Bank gives negative interest to promote investment into entrepreneurship. German banks park the largest amount in ECB instead of reinvesting.
#whatsyourusp #thinkoutsidethebox #cognitivedissonanceresolution #investinchange #investmentstrategy #riskmanagement

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The Dying of Social Media

“For those who agree or disagree, it is the exchange of ideas that broadens all of our knowledge” [Richard Eastman]

Look to Book

… or the question of leeching.

Social networks become more and more inactive, “leechers” that consume but not share their own opinion even with a “like”. In “online booking”, we called that a “look to book ratio”. In Germany, we call it the “caller in the forest” (echos, but no replies). In modern times it’s called the “social media bubble”. Which statistics say consist of 100:1 or worse “data corpses”.

But this is about success eating its children. The larger your network, the more information jumps up on the timeline. With little to no “filtering”, much of those “news” showing on the timeline becomes “irrelevant”. The more often you post, the more the social networks show your news on your followers timeline. Whereas I would like to be attracted every time someone posts who does not post that often. But then we come to Post Expiration and Information Flooding:

Post Expiration

How long are posts visible in social networks — Source: Sprocketwebsites (click on image)

In my last years qualification on “online marketing”, there were some interesting statistics about post visibility, that I found quite interesting.

What is not covered here are the increasingly used online chat tools like WhatsApp, Skype, etc. – posts there are lasting minutes.

You may remember my articles sharing my experience with LinkedIn articles and also media campaigns. As a result, already four years ago, I discontinued writing “articles” on LinkedIn, but with ongoing visits to my blog archive articles, LinkedIn articles (different from the normal posts) have a life span of about three days – older articles are not having relevant visitor numbers ever after.

Now companies, SEO-experts etc. tell you to post constantly to show constantly on those “channels”. But that turns, no it backfires into

Information Flooding (1)

For which there are two reasons. And both reasons are in reality counterproductive.

In the beginning, Facebook promoted to post “everything”. Other companies built on that and developed i.e. restaurant reviews and posting of food, selfies from the weirdest places on Earth, etc. – now people post all relevant and irrelevant stuff and clog the timelines. Where it was nice in the beginning to get input from friends, now the flood of irrelevant information makes the tools largely unusable. A business friend recently asked me why I did not respond to his latest posts. Well, I was busy with real life and did not even see those posts, they were long gone when I logged in again. Don’t get me wrong, I did the same mistake. Posted irrelevant things, missing out on relevant news.

Now I will intentionally limit my Facebook to less but higher quality posts. So this week I deleted my all the old content (since 2008) of my Facebook profile. I decided to keep my profile but only for an occasional look, the most important “updates” and use of the messenger to reach out to my friends. But it took me three days to remove all that data, even using Chrome Apps that allow bulk cleaning – with some bugs to slow you down anyway. Now I can “restart” with focus on quality, not quantity.

Back in 2016, I removed my “articles” from LinkedIn, after I found them to be seen just a few days with little interaction, whereas this blog, with the same little interaction except from the same people, has several thousand readers meanwhile and a constant flow of readers on the “old” articles as well. Except for a few readers they do not interact, not even with the easy “like” button I’ve added to all posts some years ago. It keeps motivating to hear on conferences that people obviously follow my blog, referring to my articles.

Information Flooding (2)

I also last year discontinued to actively use Skype and drop WeChat. Same reason. In business and with friends I now mostly use Viber, WhatsApp (another Facebook-company). Many years ago, I decided to stick my newsletters to ten. As I can’t keep following the flood of information, it distracts from doing business and make money to sustain my family.

A friend on a conference talked about the “first screen” on the mobile phones. While they become bigger, you also need to decide, which apps make it to your first screen. My new smart phone has space for 30 app icons. I may be unusual by having my apps grouped and using folders, even on first screen, but yes, I have my few important ones.

Social Networking – Lessons Learned

In the expensive Social Media lectures I attended last spring, on which I shared my lessons learned, I mainly learned that if you are a good marketeer, the same rules apply on- and offline. It also confirmed, I can spend all the time someone wants to pay me for, to analyse the online performance with KPIs that are the same useless as the QSI (Quality Service Indicator) as they are set and defined by the analyst with an intentional or (rarely) unintentional outcome in mind: “you are going to get very quickly to ‘factors’ and ‘coefficients’. And that they are variables, subject to interpretation and weighting, they are “relative values” (from The Bias of Route Viability Analysis, Dec. 17).

We all know of headlines that celebrities (and companies) bought and buy “followers”. Implying that all those leechers make an impact to your business. While it may take longer to grow your real “Stammkunden” (patrons, regular customers), only the ones that “buy” or stimulate a purchase by recommendation are valuable to your business. In the end it you got to pay your bills!

Marketing is about reputation management, it’s about indirect sales, but in the end, marketing is a part of sales and sales support. Brand is marketing, but in the end it is to stimulate memory and reputation and bring the brand to mind in the purchasing process. Neither marketing, nor brand, nor sales or public relations are an end to themselves. They are to stimulate business and keep the coin rolling.

So where do “Social Networks” fit in here? Same issue. Commercially, it does not help to have leechers. You need either buyers, or ambassadors. That must be first and foremost on your activities. Privately, you neither want leechers, you want people that share information with you, to discuss, agree or disagree, help you to evolve.
So I split my activities to two layers. Connecting with friends. While I appreciate a lot of Facebook “friends”, interaction is limited to very few. I will keep posting occasionally there, but just personal and limited to friends and only the “important” news, not to “flood” my friend’s timelines! I use LinkedIn for business and have some other responses there, confirming the value of the network. Xing is a German social network, but I keep finding them focused on job opportunities. So don’t expect me to do much there.

Instagram? Twitter? YouTube? Tik Tok? Yes I could do more there. If you convince me to drop LinkedIn for better impact to my information exchange with friends…?

And if you want my opionion, feel free to reach out to me or to share. I’ll keep watching my Facebook timeline for updates and on occasion also look at Instagram. You can reach me directly using Viber or WhatsApp (if you have my number).

And again, it boils down to my early mentor Richard Eastman‘s favorite quote:

“For those who agree or disagree, it is the exchange of ideas that broadens all of our knowledge”

It is all about interaction, about exchange. Without a “feeback loop”, writing blogs or posting on Social Media becomes boring – in turn, more shares turn to leechers – and the slow dying of Social Media continues. And if you like this post, click onto the little like button… If you did not, let me know what I could do better or where I’m far off in your opinion. Preferably not by e-Mail or direct message, but use the comments function this blog has.

Food for Thought
Comments welcome!

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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!

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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?

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!

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