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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 End of the Airport Passenger Fees?

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

As I outlined in my summary on the Hamburg Aviation Conference, my friend Daniel expressed his believe that within 20 years, there will be no more passengers fees.
At the same time, Michael O’Leary was recently quoted that he expects in very short time they will offer the flights for free.
But flying costs money, no matter how good the aircraft engines become, terminal construction and maintenance, ground handling, air traffic control, gasoline, pilots, cabin crews, aircraft, insurance, it all needs to be paid. And no matter how effective you calculate …

… someone has to pay the bill.

Airlines lower their ticket prices, covering the “loss” with “ancillary revenues”. While those “ancillaries” have been understood as services previously bundled (inflight meal, baggage, flight insurance), they meanwhile extend quite into “inflight shopping”.

At the same time, traditionally airport landing fees, split into the landing and passengers, covered for the airports’ cost of operations and development. This basic, sensible model is now threatened. It will change. But how. When the airline and airports fight for the revenue of the passenger – I believe both will loose.

Airport Duty Free, Picture courtesy Gebr. Heinemann — Airport Duty Free

So currently it is a fight between airport and airline for the money of the traveler. I hear airlines expressing their anger about the airports increasingly draining the pockets of the passengers pre- and post-flight. And the airports upset about architectural changes enforced by the evaporating aviation income, forcing them to add shopping in arrivals halls and rebuilding terminals for improved shopping, i.e. forcing the passenger through the duty free store. Or how to speed up the check-in process to increase the dwell time of the traveler to spend more money shopping. And the shop owners about the increasing pressure to cash in on the passenger in order to pay the expensive rental deals with the airports. And, and, and…

And no, it does not help to imply that the politicos should provide airports similar to train stations. Yes, it is true, airlines bring business to the regions. Airports are important infrastructure. But in the end … someone has to pay the bill.

What we will need is a serious, joint discussion about the future business model in aviation. At the moment there is no discussion. There’s the airlines, the airports and business models that cannot work. And we need to have the politicos and the usually government-controlled ATC (and border control, security, etc.), we have to have the ground handlers, the shops and all other players on the table. You can’t reconstruct all the small airports. We don’t need a fight. We got to work together for a sustainable business model. ERA, AAAE, IATA, ICAO, this is your call.

Food for Thought
Comments welcome

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What is ‘Low Cost’?

An interview in ATN with Girma Wake, Chairman, RwandAir triggered a question that spooks around for quite a while now.

ATN: Are you afraid that this new environment will bring more low-cost carriers or do you believe that this model does not fit into the African environment?
GW: I personally believe that low-cost carriers in the African sense will be very difficult to achieve. First, because the cost of fuel in Africa is high, second there are limited secondary airports in Africa, we all fly from the same airports, and third there are few countries where the traffic density is large enough. If you are paying more for everything, handling, fueling, overflying etc, how can you be a low cost carrier?
So the question will have to be modified, may be not so much on the low-cost aspect of it but considers the issue of flying smaller airplanes to smaller airports covering smaller destinations bringing passengers to the major hubs. Such a model will probably work but the low-cost model as it works in Europe and America will take some time to develop in most parts of Africa.

Can a regional carrier with small airlines operate low cost? Can a long haul carrier operate low cost? Why can’t the big ones operate low cost?

Just my idea on that: I truly believe that a small carrier can operate a low cost model. In the beginning the carriers operated large narrow-body like 737-800 or A320 with some 185 seats. More and more, they also operate smaller aircraft like the 737-700 or the A319. And the time the prices were really low are gone as well. In the end you have to cover cost of operations as well as secondary cost like marketing, call center, claims and refunds, taxes and the likes. Not to forget the kerosene as a main cost block, forcing the models to slowly converge. Did I mention Intersky’s regional low-cost operations?

German DLR recently made a study on the fare levels. Comparable flights turned out i.e. an average fare incl. taxes/fees (selected days) like

Ryanair (FR)	78,78
Easyjet (U2)	97,44
Germanwings (4U)	144,33
Air Berlin (AB)	158,64
Wizz (W6)	69,99

With “low cost” and “traditional” airlines offering about the same price levels, it is about cost of operations and you got to cover your cost – low cost or “old model”.

IHS actually reports on the importance of low cost carriers for the smaller regional airports. With cost savings programs reducing services (and service), the “old carriers” loose quickly ground to the ever-expanding, young and hungry competitors. Where Lufthansa services about any German airport in the past, today Turkish Airlines offers more services to German Airports from Istanbul than Lufthansa from Frankfurt! easyJet (with a large base in Berlin) today operates more aircraft (199) than Air Berlin Group (153). And easyJet has 166 aircraft on order plus 100 options (Air Berlin Group 55 orders).

But easyJet can be booked in the GDS. There website even supports to book multiple flights connecting, which I did myself to the U.K. lately (via LGW). As I keep saying: The difference between Lufthansa or Air Berlin and easyJet is NOT that they are only bookable on the Internet (which is simply not true), but that easyJet doesn’t have legacy systems and processes – for easyJet, they focus on the business case! Where “airline sales” often gives special rates to portals and travel agency chains, easyJet does not see a benefit to sell low. They focus to sell high. So if you negotiate with them, you don’t negotiate competing the cheap fares. Also repeating myself: Anyone can sell “cheap”, you need no sales manager to do that.

And two remarks closing: Carolyn McCall, CEO of easyJet is known to understand and promote “service” as a unique selling proposition (USP). And WestJet with its Christmas Miracle had clearly a promotion for the WestJet trade mark in mind. While the “established” airlines keep diluting their own trade marks: What again has “Lufthansa” to do with “Germanwings” (Swiss, Austrian, …)? Ain’t they competitors?

Post Scriptum: ANNA.aero just announced axing of Ryanair, mostly of regional routes.

You should not rely on Ryanair for anything more than a door opener to make your airport known… And as an airport and region, you should have a strategy to sustainably place your airport on the “road map” of the global aviation network. That requires a strategy, incoming, route feasibility studies and all that common homework.

Food for Thought
Comments welcome

In memoriam: Airline Sales Representatives Association Frankfurt e.V

Having addressed “Airline Sales & e-Commerce” in presentations between 1994 and 2007, I became honorary member in 1999. I have tried to raise awareness for the changes our industry faces but now regretfully have to accept the official disbanding of the association effective August 1st, 2014.

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The Right Perspective

New Airport Insider recently published a blog by one of who they call the “Generation Y”, students, getting ready for the travel and aviation industry. What triggered my attention there was a very basic, though very common misperception, what I call “the inside-out-look”.

What’s wrong with that?

That is rather easy. If you provide flight services, you fly both directions. Worse, if you subsidize any airport, you likely do it to attract commerce to your region (tourism is commerce too). You likely don’t do it to make the people in your region to take their money elsewhere. As such, the focus of airports and politicians alike must be on the outside in, or as we say in the travel industry; the incoming.

In the example, which is very common, the French author considered “rail” a competitor to flight. Which is true on the inside-out-look, or outgoing, but it’s simply missing the point once you look outside-in.

Aside of Germany, France and a handful other nations, train is usually no issue. Within these countries, train is very competitive on the local market, especially the high speed trains like French TGV or German ICE. But now I go abroad. Into another country. I go into any travel agency, even in France or Germany and ask for international travel. Give me a guess: How often will they offer you train, even i.e. Paris-Frankfurt? All they intuitively look for in phase 1 is “flight”. Is the city the client wants to connect to bookable on the GDS (Global Travel Booking System)? If not, the agent (hopefully without showing you) rolls the eyes, curses you and starts looking up how the f*** to get you to that godforsaken town you ask for…

In short: If you have an airport “nearby” with scheduled services that link you into the global aviation networks on the GDSs (connections are important), you are visible. Else, you’re an annoyance. If there is an airport “nearby”, travelers may take train, bus, rental car or taxi for the remainder of the trip.

Likely, not knowing the language, maybe not even the local alphabeth, it’s going to be a taxi or a car from a large (global) rental car company offering navigation system. Or a personal pickup…

Later, the train may become a competitor. But that’s another story. To trigger global commercial interest, an airport is a strategic answer.
But not just the airports, but also the connectivity by scheduled flights, which can be booked in the GDS, connecting the airport to the global aviation networks! Second lesson, most local-minded politicos miss to understand with their inside-out-look…

Food for Thought
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Aviation Network Planning – or: how the Crystal Ball works

There is an updated version of this article that we published on LinkedIn in March 2016

Two bad news hit the media this week. Ryanair removes flights from Budapest and Memmingen looses the scheduled services to Hamburg and Berlin. As Michael O’Leary (the Ryanair boss) had already announced that Ryanair will ground aircraft in winter (last year they grounded 80), this seems to be rather strategic and O’Leary’s argument it would be because of high airport charges may be just a smoke-ball, decepting the media. Memmingen on the other hand…

It gives me reason to highlight and explain a bit of the Crystal Ball used in airline route planning. It starts with an idea. Who brings the idea up is irrelevant, except it may be a good idea to do a bit additional research, if your boss does.

Having the idea, question is: Is it feasible? So as a route manager, you’ll talk to the airport, you check MIDT-statistics about flown passengers on the route or routes from neighboring (=competitive) airports, you check “facts”, such as official statistics on commercial relations between the two regions, attractiveness to potential tourists or “VFR”-traffic: Visiting Friends and Relatives. Statistical data…

The MIDT-data is by nature incomplete. Often it does not include direct sales with the airline, Internet sales, etc.. Even if it does, it is based on historic data that relies on facts that are meanwhile outdated. Have the commercial relations strengthened? Did they suffer from bad connection and have faded away? How much were, are and will the travelers be willing to pay for the ticket? If the flight failed, why … hard facts preferred, not guesswork or interpretations by the airports involved.

There is something called “catchment area”, based usually on isochrones, frequently a wild guesswork by the airport itself, more wishful thinking than reality. While working with Yulia on the basics of the CheckIn.com-isochrones, I found in all cases we checked discrepancy larger than 10% different from the airport’s own figures. And in all but one case, the “catchment area” did not cover at all that there are other airports competing with the traveler! An example: If you live in Minden, Germany you are about equally distanced to four airports: Hanover, Paderborn, Münster/Osnabrück and Bremen. For the CheckIn.com-isochrones, we took into account the size of the airport – number of passengers, as the more passengers, the more likely that people choose the larger airport. The distance – the closer it gets by driving time, the better. And other factors we considered relevant or only partially available – like flights to the destination and the weekly frequency and seats (the higher the more “competitive). But quite some more! From that, the system now calculates “fully automatic” the isochrones. And the results are devastating! Even on a “global” airport scale.

The smallest discrepancy of the catchment given by the airport of how many potential travelers would use the airport to the catchment we calculated was 50%. The high ones +90%. That is just basic statistics.

On top of it, you have the questions we did not take into consideration when we worked on the isochrones. Like VFR, like commercial relations, like tourism interest, like … And you better know, where you got it from, how likely it is to be overly optimistic or (sometimes, rarely) pessimistic…

Having that information, you start fine-tuning. You likely have several possibilities, depending on the passenger potential. Take a bigger airplane with more (cheaper) seats and lower frequency. Or take a smaller one with higher frequency, what the business traveler’s will like, but the seat being more expensive. OECD gave some figures for a rough calculation I found quite reasonable for a first idea: An Airbus A320 or Boeing 737 with 150-180 seats costs about 8c (Eurocent) per seat-kilometer (not mile). Use this form to multiply that with the distance for yourself. That is the “net cost”, so add the (increasing) taxes and surcharges onto that cost to come up with an idea about the ticket price you need as an average for flying break-even…

A route planner takes into account much more accuracy, such as real cost of operations, variables depending on aircraft and total hours of weekly/monthly operation. But for a start…

Now comes the next tricky step: How many seats can you likely sell from A to B at this average price, and how many might connect to C but use your flight from A to B? Do you have interline or codeshare agreements at the destination? What air fare do you get? Do you operate the long-haul-sector as well? The cost there likely is cheaper as the aircraft is bigger. But you got to have an idea on connecting services – a science of its own…

So now, at the end of that exercise, you can calculate your risk – how many passengers are you sure about using the offered flights? If you are unsure, your risk is 100%. If you have 50% guaranteed load, you risk less. You also get support from the airports usually, either financial, or “marketing support”. Compared to your operational risk, these are “peanuts”. And in the beginning, you run high risk, so it is wise to not calculate that on your predictive models – if you can’t succeed without, you likely loose.

But then comes the key-point, most airports today fail to have an answer for. Having finally calculated the risk, who takes it? In most cases the airline, virtually alone! Under such circumstances, why should an airline risk a new route with questionable return of investment? In charter flights, the tour operators (sometimes) take the risk, also mostly on their own. Lately, unused seats on some business charter flights, operated by large corporations are being made available to the public, either via Internet or GDS (travel industry flight booking systems).

And if that works well, from such a “business charter” a “scheduled service” with a higher frequency can evolve. But in most cases, the airline is left alone. Any question, why they limit their risk, by pulling the plug when the losses pile up beyond their worse case scenarios?

With eroding net profits, eaten by kerosene, excessive flight crew salaries, taxes and fees, the ability to build a new route in two to three years is very limited. If the route does not take off immediately with a reasonable load factor, the losses pile up so fast, the airline risks extinction if it does not keep a tight control on it.

That’s a short summary into the “science” of airline route planning. If you are an airport who seeks a new route, better do your part of the homework. Can you convince your local “catchment area” population to support the flight, even if the schedule and fares in the beginning may feel higher than from one of the competitive big airports in reach? Will your travel agents sell your flights with fervor – I’ve seen travel agencies at airports offering flights from Frankfurt, Munich, Düsseldorf, but not from the regional airport they were living at! Do you have a grip on the local VFR market? And most important: Can you get commitments from your corporates, business associations (chambers of commerce) or politicians about guarantees on how many seats they could fill? If you are a touristic region: Can your tourism managers qualify, how many people they will have flying on the route? It is fantastic to see, how ingenuous most of the tourist boards are about such basic facts: “Fly and we’ll see”. Flown for a decade, not seen…

Okay. As I’ve put it in the past (as a German saying goes): I take a big long stick and grope in the dark. It requires expertise, experience and good guesswork to do something with all that information you get. Good luck is part of the business.

To summarize planning of new routes:

The quality of figures available, as well as my trust in them.
The cost of operations
From those: A more or less realistic load factor expectation.
Who takes the risk?

The first two factors are subject to an educated guess…

And what about Memmingen and Budapest? Memmingen likely has to do above homework now, there obviously was a discrepancy between expectation and reality. And Budapest? I honestly believe Ryanair simply cuts aircraft there for winter – they may want to talk to others if the routes justify a year-round traffic! That may convince Ryanair to consider the next winter. Or do the above homework as well to match expectations and wishful dreaming with the harshness of reality.

Food for Thought
comments welcome

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Cheap Pizza…

“You can make a pizza so cheap, that nobody wants to eat it”
[Gordon Bethune, former CEO of Continental Airlines]

Being asked about my sanity to invest into Join!, the start-up of an airline network, this article is about “cheap pizza” or why I still think it is a good idea to start a regional airline today.

In order to complete my statistics about the passenger development before / during / after I’ve been working at Erfurt Airport, I had a look at the monthly development, as well as the annual one of Erfurt and Germany (published by ADV.aero) and Europe and the world (published by IATA) as a comparison.

IATA reports EU, with 9,5% growth 2011, the second strongest market in the world. That is behind Latin America, but before Asia! The market being challenged by political mistakes, increasing the tax burden on aviation. Milking aviation until it collapses instead of strengthening it in its role to attract and support commerce is sure short sighted expression of ignorance. Unfortunately, this political development makes Europe at the same time the global area with the lowest profits world-wide and – to my understanding – has forced the collapse of a number of routes, airports and airlines in the past year. Where the failure of one, opens the opportunity for the other.

ADV confirms Germany, having added aviation tax in 2011, to have only grown by 5,0%, visibly below EU-average. This may also be a result of the struggling by Air Berlin and Lufthansa to cover up for the resulting strain on profits, closing down a number of routes, focusing on their hubs. Which opens opportunity on several of these abandoned routes.

Recently, Cirrus Airlines and Spanair, the one being a code share partner of Lufthansa, the other being a Star Alliance member, ceased their services and filed for bankruptcy, leaving more routes unserved. The failure of one opens the opportunity for others.

Airplus (leading credit card provider for companies and business travel) reports that the business travel in Germany will increase exponentially compared to other markets. At the same time, the average air fares are increasing.

There are some airline operational models, that can be used exclusively or in a combined operation.

Hub & Spoke (Network) Airlines
Low Cost Carriers
Regional Aviation
Business Charter
Tour Operators

Hub carriers usually operate one or several hubs, routing passengers from and to smaller places through their hubs into their networks. This is mostly the classic way, airlines operate since the 1980s. In those days, the airline took the financial risk to establish new routes. Challenged and responding to low cost carriers, their ability to do so has eroded.

Low Cost Carriers compete with, making them virtually a mix between hub carriers, regional airlines and charter operators. They operate point-to-point-services with larger aircraft, offering ability to start with lower air fares. They temporarily profited from the fact that airlines had to build war chests to finance the establishment of new routes. Meanwhile they come to recognize that operating an airplane is a cost factor and as the established airlines responded to their threat, the advantages they built upon increasingly eroded.

Regional Aviation is usually referred to as the operators of smaller aircraft of up to 100/120 seats maximum. Their focus is to establish air services for regional airports with limited passenger numbers. Using smaller aircraft, they can operate higher frequencies required by business travelers, still being of less interest to the low cost airlines, usually operating mid-size jet aircraft (100-180 seats) with a lower frequency and focusing less on the business traveler’s needs.

Business Charter usually fills the gap, where the operation for a scheduled service between two airports is not supported by the passenger numbers needed, but business travelers need to go either on a customized schedule and/or traveling between airports not connected by existing scheduled services.

Just to complete the picture: Tour Operators have aircraft flying leisure travelers seasonal between their point of living and their place of vacation. The aircraft can be owned by the tour operator, it can be charted exclusively by a single one or a group of tour operator(s), or it can be offered to the tour operators. As such, there is a business opportunity for airlines focusing on operations for business travel, to offer their aircraft on weekends, midday or night to tour operators.

On the positive side: Hans-Rudolf Wöhrl, who already founded NFD (today Eurowings), later bought and turned arouned DBA, now joined into the board and invests in Intersky, a smaller regional airline in Friedrichshafen, Germany.

So why attempting to launch a regional airline just now?

The major carriers straighten out their networks, focusing their routes to serve into and out of their hubs. Low Cost operates usually larger aircraft, accommodating the leisure traveler with lower frequency. Many routes are served once to trice a week only, making them less likely to be of interest for business travelers. On the other end, business aviation reports a surge in demand.

Likely the increasing demand for business aviation reflects the reduction of flight services by scheduled airlines (be it major airlines or low cost). Business travelers are not as focused on the air fare. It must be competitive, but their focus is frequency. If needed, they charter the aircraft to enable the necessary business trip.

So it needs careful route analysis. How many people will travel between A and B? Flying between A and B with a 50-seat aircraft twice-daily service (daybreak) plus twice on the weekend at 80% load factor generates 25.000 seats a year. That means 25.000 return tickets to be sold – of 50.000 one-way tickets. Double this for a 100-seater… And when you fly that, what do you do with the aircraft between the morning and the evening rotation? Can you utilize it at night? An aircraft standing around looses money. So you better consider the options for a secondary service that utilizes the aircraft in midday. And if you have local tour operators interested to charter the smaller aircraft for their services, utilizing it on the weekends or at night adds to improve the return-of-investment for the aircraft and its operations.

But yes, no matter how well you qualify your route potential, it remains a risk. So you got to find investors to believe in your route analyses and believe (or need) it. You can also talk to other involved parties or bodies, such as airports, chambers of commerce, politicians, companies and reduce the risk by having commitments for tickets. Remember, we talk about 50.000 one-ways every year… But in the end – this does not have to be subsidies, it could be commitment to sell a certain amount of tickets.

That said: There are many routes, which require business-frequency with smaller aircraft and would not work with lesser frequency but bigger aircraft (and fares), as the business traveler would not fly only one-way. Increasingly, the retreat of the major carriers from the regional airports opens up opportunities for smaller airlines. Our idea of a “network” offers those small, “individual” operators access to know-how, distribution, services and quality usually available only to larger scale of operations.

Every failure or retreat from a route or airport opens opportunity for someone else. Though the times, the airlines’ take the risk alone are over – if you start up, you better find out, who comes with you on the journey.

Food for Thought. And yes, I appreciate your thoughts.

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

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Job Challenge or Play It Safe?

I am recently faced with the question, if I shall take up a very challenging position, asking the best of my abilities, thus meaning fun, but at high risk of a temporary assignment … Or play it save and go for a job I can do good, but which does not pose any real challenge but routine work – in return for a safe job?

And many friends face a similar question. Do they leave their “secure” job for another one around the corner they don’t know how “secure” it truly is? Monetary thoughts, very high valued by the bosses are of minor interest to most. It must be decently paid. No question about it. But if that is the case. Would you trade safety for some risky challenge? Sure – this answer did change quite a bit since the financial market turned the entire world into a madhouse.

So we all have to think about this question and give it serious consideration. But it can not be generally answered. Any one’s risk assessment is different. It depends on obligations to others, family, credit for a house, etc., etc..

If we have a challenging, well paid job and loose it? It is sad to see friends going broke, their spouses leaving them when times are no longer luxurious. So what values are important in life? At the same time, there are many companies speaking not of personell, staff or “our people”, but of human resources… What messages do we get from that?

Reconsider your values…

Food For Thought

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Revival Of The Sales Manager

In the past months, IATA secretary general Giovanni Bisignani has published one horror scenario for the airline industry after another. At the same time, I have worked with an airline that had always addressed e-Commerce as a part of the sales portfolio and in the past year increased their sales force beyond the airline’s growth figures. At the same time, they announced record revenue and earnings where their direct competitors struggle to survive.

The following focuses on airlines, but is similar in other industries (i.e. hotels).

Since 1994 I address Airline Sales & e-Commerce in my annual ASRA-presentations… One concern I try to communicate ever since is the need for airline sales managers to adopt the new technologies into their product portfolio. The stronger e-Commerce gets, the more important that knowledge becomes. But just lately a friend of mine, being Manager Scheduled Flights Procurement – sitting on the other side of the table – complained that many airline sales managers have no idea what their company does in regards to e-Commerce… Say what?!

In fact there are two issues I see in need to be addressed:

1. The new role of the airline sales manager
In a highly dynamic development on Airline Sales & e-Commerce, the new airline sales manager has to be fit to not only know what the own company does in that field, but he is also the scout to monitor what goes on in the market and report it.
But: Few airlines have yet build the structures and hirarchies to promote a cooperation between the IT and sales department! In many airlines, IT is higher valued than sales, so IT projects are pushed forward without sales justification. Say what?!

2. The new value of the airline sales manager
Why is it that companies like Easyjet or Southwest Airlines operate a network of sales managers and lately increase their sales forces? Might it be possible that “traditional sales” has an impact to their revenue…? Isn’t it enough to focus on Google Adwords? And why the heck are these airlines having a sales force continue to have the higher service classes (First, Business) and fill them? Could it probably be that the sales managers can sell these “high end products”, where e-Commerce competes mostly on the price level? Exclusively on the price level?

As I emphasized in the past years: Everybody can “sell” cheap. You do not need a sales manager for that. But to sell out of season and to be able to sell at higher rates, it is reasonable to look at all distribution tools and channels: IT/e-Commerce, Yield Management, Sales and Marketing. And run them in a concerted way to assure best outcome. And hey: This is called “Sales”… Say what?! 😀

Food for thought! What do you think about this?

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The Fairy Tale Of The Best Available Rate

This represents the core of a quite lengthy and detailed discussion.

A hotel manager regretted the change from the RAC-Rate to the BAR (Best Available Rate) and compared it to Yield Management in Aviation.
Three misinterpretations in one sentence…

The rack-rate (off the Rack) has always been – and is – the rate, anyone “selling” a room was allowed to book at. Unconditional. That rate – in that definition – exists until today and must exist.
Many hotels fixed a rate and called it “rack rate”, published on the indoor or in the locker… But the rack rate is as variable through the year(s) as is any other “rate”. So there seems to be a misinterpretation of a definition by some…

What is the Best Available Rate? It”s one of these meaningless phrases, these politicians manqué in Marketing love. See next.

Third misunderstanding: Yield Management.
I experienced the development of yield management in American Airlines, who made this an art first (late 1980s). And it is an art! The definition for yield management was explained to us at an employee conference with Bob Crandall himself (to date a model “airline manager” to me). In short: They are there to optimize the own pricing structure to achieve the “best available selling rate”. To do that, they got tools to monitor the prices of competition, they took into account long term developments, including public holidays, regional vacation periods, congresses, events, … And they talked to the local sales teams to assure to be aware of trends – something you cannot do to date with technology only! Within two years after launching the department, it employed more than 3.000 of the best people American could find or hire and had achieved a revenue increase making that effort very valuable. I do recommend to have a look at the Wikipedia article on Yield Management.
Today, most managers believe, Yield Management is purely technical. But it is a predictive art. Many managers only look at a single puzzle piece: A good yield manager can be worth an entire sales team. But that does not say you can replace it. In most airlines, the yield management rarely speaks to sales, they stick to the “electronic reports and figures”. Stupid, they miss an essential “early warning system”…

Best Available Rate… The boss of my business training (whole sale) emphasized two rules I found invaluable:

Don”t bleed out your supplier. He has to live. If he lives safely, it”s also to your own benefit.
Price dumping is a Pandora”s Box. They undermine the trust in your products.

And there was a joke that at the time was historic already: “You purchase a box of these screws for 1 Dollar, you sell them for 99 cent, how could you?!” Answer: “You stupid don”t understand that. It”s the quantity that counts!”

Our industry (aviation and hotels alike) have paniked themselfes into price dumping. To date, I question the competencies of any manager, blindly following that path. In 1997, a senior airline manager (unquestioned by his peers) alleged that brand has no value any more. Customers would only purchase by price. I did argue strongly against it. And today argue no less for brand. Everyone can sell cheap. But you get no cheap loyalty with customers, you need brand loyalty!

So what is the Best Available Rate? Can that be the dumped price? Is it the best selling rate? How does it link to the Rack Rate? I don”t blame the pricing managers, they only do what their senior managements ask them and express as expectations. But maybe you should reconsider your pricing “policy”? Create one…?

Food For Thought…
Your comments sure welcome!

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Tag: Yield Management

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In memoriam: Airline Sales Representatives Association Frankfurt e.V