Why Do Airlines Keep Failing

Cognitive Dissonance Resolution

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.

A ship engine failed, no one could fix it. Then they brought in a man with 40 years on the job. He inspected the engine carefully, top to bottom. After looking things over, the guy reached into his back and pulled out a small hammer. He gently tapped something. Instantly, the engine lurched to life. The engine was fixed! 7 days later the owners got his bill for 10K. ‘What?!’ the owners said. ‘You hardly did anything. Send us an itemized bill.’ The reply simply said: 1. Tapping with a hammer. $2 — 2. Knowing where to tap: $9,998. -Don’t Ever Underestimate Experience.-

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:

A good airline is defined by CUSTOMER SATISFACTION not just cost per available seat mile - Gorden Bethune 1996

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

The Virtual Airline

airline money burnAs 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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Ground Damage

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

roiJust reading with great interest in Ground Handling International (October 2013 issue) an article starting:
“Can we ever hope to rationalize the slightly surreal situation that sees a poorly-paid ramp agent driving an expensive unit of GSE around a multi-million pound aircraft? Alwyn Brice considers ground damage solutions”

Reading “[…] drew our attention to the fact that an insurer has no obligation to conclude a deal with a handler if he (the insurer) feels that the risk is poised too high.”
Just a reminder: Insurances are modern betting companies. Here, they bet that the ground damage stays long-term below the insurance fees. Insurance wins. If you mess up their risk-evaluation, they get rid of you as quickly as (in-)decently possible. Unfortunately, they rather frequently happen to tell their friends (the other insurances) about you. And yes, that’s the case for insurances anywhere.

That said: It is in the “common” interest to have experienced, reliable staff operating. One approach can be, to demand that in the contract. Just not yet part of any contract I’ve seen.

Ground Damage
Ground Damage

And every time (airline) managers tend to “outsource” existing business parts, they most times do know their new “partners” provide lesser quality for less money, safe on salaries and training quality – as the airline sure tweaked their operations already to cost effectiveness (within internal quality levels). The only the ground handler can become cheaper is to compromise quality. What worries me often, is the nonchalance with which security and safety are as such willingly put at stake by senior aviation managers “for the sake of business” (cash).

Not to misunderstand me. There are business cases that make outsourcing reasonable, I know General Sales Agents (GSAs) and Ground Handling companies serve a purpose when there is not enough “own business” to justify own staff. And in such cases they can provide better quality by consolidating business and having the advantages coming with the larger scale of operations.

Food for Thought
waiting for comments

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General Sales Agents

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

GSAThis week I addressed the issue of General Sales Agents (GSA).

In general, the GSA is a very good idea. If you cannot afford your own staff, why not share with other companies just as yours? There are two major hurdles:

1. In many cases, the GSA is considered a “second class employee”, as they only spend a part of their time on your product. My recommendation: Have the key people (reservations, sales) invited within four weeks to your location to get familiar with your product, philosophy and work style. Have them meet the decision makers personally they need to have contact to. This will not only motivate them, but also make them truly represent you in their respective markets. Repeat this frequently. Your GSA sales representative(s) usually should be invited to attend your sales meetings. I have seen results by thus motivated staff, that exceeded the results of an entire airline office in another market. And listen to them. Their prime interest is (or should be) to increase your revenue and make your product sales stable.

2. In other cases, GSAs work on a “minimized effort” scheme. Instead of sharing the resources properly, they try to tweak the last dollar out of you, until you recognize they just drain you. Ensure to have an as close contact to their sales teams as you have to your own. Ensure to have a clear manpower commitment. It is reasonable for a GSA sales person to have three or four, either similar or complementing products. I have seen cases where one person was asked to fully represent six or more products.
That might work, if the products are complementary, but that is not the common case.
Assure to have your GSA benefit fair from all sales in their region. In that case they are interested to support you to spread your distribution channels. Otherwise they will try to keep all dropping through their office, limiting the market awareness.

So GSA can be a very good thing, there are many very good and motivated GSAs out there working 150% in their client’s interests. But ensure that the principal and the GSA work on the same goals. Set targets. Find a GSA that has experience in your market. Not only the branch, but also the global region. Ethics, work style, etc. do differ.

The GSA is not a panacea. They need reasonable funding. But usually, you can pay them a base fee covering their normal operations, with marketing funds depending on the revenue they generate. But check what interest they have to sell you!

If you have questions or wish to select a GSA in Europe, ask me. And if you want to build your team and seek experts for sales, business development, reservations, etc., let me know, there are some good out there seeking a decent job 😀

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