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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

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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 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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The EUSP Elevator Pitch

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

With World Routes now behind us, since I wrote it, I had several discussions about my Routes pitch and why all companies should have a business plan and have their employees know it.

The first step developing a business plan is the Elevator Pitch. It is the very summary of what you are doing. Usually, it starts with an essay, then you boil it down. To three minutes (a quick introduction), then to three sentences. Or less. Including a friendly greeting for a good first impression! And it’s a good idea to think about a slogan there, Best for the slogan are three to five words, something that sounds catchy. Like we used “The Isochrones People” for CheckIn.com. “People” we used to emphasize that despite the focus on “data”, it’s made by and for people. Positive emotion.

But the elevator pitch is meant to make your audience curious. Curiosity is one of the most universal and positive emotions. Curiosity opens more doors than any other emotion!

That is why the focus shifts from the Unique Selling Proposition (USP) to the Emotional (ESP) one. But you need both. And you need to boil them down to their core. Not one of your customers will keep more than two or three key points from any given presentation. So if you have your USP(s) and ESP(s), you can make sure your message stays consistent. If you have more than one product, solution, different “client types”, “target groups” or present to clients, investors or your own people, you will create variations. But when you write the different chapters of your business plan, when you develop a presentation, when you communicate, you review them that you always stick to your consistent message(s).

And this is, why I changed my presentations for start-up business development replacing the USP with the

EUSP – The Emotional Unique Selling Proposition

Because it is not about the USP only. Or the ESP. It’s about both.

These days, in a job interview, I heard a senior and very “seasoned” manager (engineering background) again telling me about the technical benefits of their wonderful tool – in my opinion totally loosing the potential client (that was me). Yeah, I’m “tech-sawy”. But people buy not products and fancy technical gadgets, but they buy for their personal benefit (or that of the company).

Improvements to the processes such have to result in “personal” improvements. For the same reason I believe, A-CDM has adoption problems, as ops people believe they shall be replaced by those tools, they are expensive and the focus is on the technical benefits, neither on the cost savings nor the improvements for the people in the process. I’ve not seen a single “elevator pitch” or a “business plan” in use there either.

When you work on start-up companies and their business ideas, you quickly learn the value of a business plan. And to start with the elevator pitch(es). Not for the investors and banks and such, but for yourself. Bring your thoughts into a structure. Communicate consistently And I can only recommend the very same to anyone in business.

That is the elevator pitch. It just opens the door. But it keeps your message consistent.

And to wrap up, there are some examples, what an EUSP is not:

Not an Answer. Curiosity is the emotion that opens doors!
Not a Mission Statement. That’s a separate thing you should have in the business plan, focused on you, not really on your customer.
No Hot Air. We’re the biggest, best, most advanced, sexiest, bla, bla, blubber.
No Sales Pitch. Yeah. That’s tough. But you tell what makes you different. Not about price. Or focusing to close a sale.

You’re not selling a car or insurance on the door! With the EUSP you introduce yourself. All the ‘ugly’ selling comes once you created interest (curiosity!). And Trust.