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12 | AFM • ISSUE 71 January-February 2011

FOCUS: START-UP AIRLINES
Launching an airline and ensuring its profitability is not easy, as many failed start-ups have shown. Chris Kjelgaard investigates Allegiant Air, Feel Air and Porter Airlines to examine the factors that new airlines should take into account when trying to ensure survival.

START-UP AIRLINES

CLEARING FOR TAKE-OFF
VIATION FASCINATES MANY ENTREPRENEURS – THIS IS despite it being a notoriously difficult sector in which to succeed commercially and one in which failure is common. The industry’s high profile, its glamorous image and the large amounts of cash sloshing around continue to lure would-be airline tycoons.

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When start-up airlines succeed, they can do so spectacularly, even if they experience a few hiccups along the way. Consider JetBlue Airways, Ryanair, Emirates, Air Asia, WestJet and Virgin Blue. All are household names in their respective parts of the world and yet none of them existed before 1985 – and four of them launched much later than that. Many other start-ups have performed respectably. In the past 15 years, most have used a version of the low-cost model pioneered by Southwest Airlines in 1971. Southwest held the title of the most successful start-up and is now morphing into one of the world’s three largest airlines with its takeover of AirTran Airways. Today, carriers such as GOL, Spirit Airlines, Volaris, easyJet, Norwegian, Air Arabia, Aegean Airlines and flydubai typify a growing group of thriving young airlines throughout the world. But for every successful start-up, there is at least one failure. Where are Zoom Airlines, Flyglobespan, SkyEurope, Canada 3000, Air Littoral, myair.com, Air Comet and Blue Wings now? The European Regions Airline Association (ERAA) calculated in August 2009 that some 85 airlines had failed worldwide since January 2008 and expected another 20 to fail by April 2010. Since April, other carriers – including Cyprus Turkish Airlines, Ghana International Airlines, Viking Air and Hamburg International – have stopped operating. At the time of writing, the jury was still out as to whether Mexicana, one of the world’s oldest and most famous airlines, would begin flying again after ceasing operations in August.

“market sure make
You have to the
– Kai Holberg, CEO, FEEL Air

of

opportunities.

We’re not fooling ourselves. If you

try to create something that’s not there, it’s very dangerous.

January-February 2011 AFM • ISSUE 71 | 13 FOCUS: START-UP AIRLINES FEEL Air's COO. Otto Lagarhus and CEO Kai Holmberg .

Using C$121m ($121. For a start-up. which Deluce and his family sold to Air Canada in 1986 as Canada’s then-largest regional airline.” says Mark Diamond.” Nevertheless.” cautions Diamond. rental levels. Know your market and competitors “Probably the most fundamental thing is to understand the competition and the market – and not to underestimate the competition. Competing at a lower price against existing airlines can establish market presence as will offering a better standard of service to that previously provided. a recipe for disaster. recognised as one of the most impressive North American startups of the past decade. Deluce set up a company in 2006 to buy the terminal at Toronto City Airport.5m) belonging to himself and four investors. cancellation insurance. show tickets and golf-course bookings. Virgin America. says Diamond. or by taking advantage of a newly liberalised market. appears to be holding its own against United at San Francisco. In the US domestic market Allegiant Air has used strategies pioneered by Ryanair to become one of the US’s most envied carriers. Additionally. “Can you find an opportunity where you can take advantage of the weakness of the competition. For instance. Ultralow-cost Allegiant is designed as a unified travel company that not only charges ancillary fees for everything from booking to checking-in but also offers (on its website) a variety of dynamicpackaging options for travel services such as hotels. Allegiant Air. operational scale and scope. which offers competitive fares but primarily differentiates itself by offering slick inflight services based on the latest IFE technology. suitably timed flights to and from certain business destinations. such as whether to ” So start-up magnates have to think hard about the business they are entering. At several major destinations (such as Orlando and Phoenix) the airports Allegiant serves have never even seen a legacy carrier. second-hand MD-80s and has concentrated on markets abandoned by highercost legacy airlines during their massive downsizings in the past decade. although a competitor may use a particular airport as a connecting hub. planned utilisation and service frequency… It can often make sense for a start-up to wet-lease aircraft until it’s cheaper to operate its own aircraft using its own crews. Allegiant’s strategy has been to link secondary and even tertiary US airports with primary domestic-tourism destinations such as Las Vegas. But Diamond says that. Porter Airlines . some start-ups have entered markets already loaded with many airlines and have succeeded beautifully because they offered enough differentiation to ensure their survival. and exploit it?” Such opportunities might arise in finding routes that are underserved or not served at all. says Diamond. Being adequately capitalised is also important in order to weather unexpected operational circumstances and to meet flexibly with competitive responses. unless the incumbents are very weak. Jazz was later floated as a stand-alone company but retained its close operational ties to Air Canada. A case in point is Porter Airlines. Start-ups should ask themselves. frequent-flyer programmes and networks which offer consumers lots of attractive redemption possibilities. banishing Air Canada Jazz from Toronto City completed a 20-year chapter for Deluce: Air Canada had created Jazz from Air Ontario. its banks of connecting flights might not be well-timed to suit locally originating business traffic. Boasting a respected record as a Canadian airline entrepreneur and extensive connections with institutional investors.14 | AFM • ISSUE 71 January-February 2011 FOCUS: START-UP AIRLINES “ Decisions dry-lease. learn how to use ancillary fees as a powerful revenue tool and forge strong marketing relationships with other airlines. car rental. and membership of a global alliance. “Doing the same thing [as an incumbent] on a smaller scale is.” These can include brand recognition. Several challenges must be met head-on if a new airline is to be successful in the long-term. Robert Deluce saw an opportunity to revitalise a business-travel market which he felt had become vastly under-served through the neglect of Air Canada. Only by exploring fully the nature and circumstances of the markets will a new entrant understand where its opportunities might lie. Market research is critical for any start-up. Allegiant operates a large fleet of low-capital-cost. a principal with the airline consulting firm SH&E. kicked Air Canada Jazz out (the lawsuits continue to this day) and then formed Porter Airlines to operate high-frequency services on short-haul routes to Canadian and US business destinations using a fleet of Bombardier Q400 turboprops. A startup might be able to establish itself at the airport by offering high-frequency. In most cases the incumbents have lots of advantages. it is important for the start-up to differentiate its product from those of market incumbents.wet-lease or purchase and whether to acquire new or used aircraft can vary depending on aircraft availability. “Do not underestimate what the competition is capable of. CEO. Porter Airlines and Feel Air Others have adopted different strategies to thrive. it ill-suits a start-up carrier not to position itself differently to those existing airlines which will be its competitors. whatever the opportunity. in many or most cases. Robert Deluce. “If you go in with the same product or service as the competition. which magnifies all the other potential advantages that are already enjoyed. AirTran took on Delta Air Lines in Atlanta where Delta operated the world’s biggest passenger hub and was able to establish itself because it brought much lower costs and fares to the market. At a time when most legacy carriers have managed to trim their costs. you court a serious risk of fare wars. Ironically.

“You don’t go in just based on wishful thinking – the devil is in the details. however. fed up with the long. Holmberg has 12 years as a senior travel industry executive and has assembled an experienced management team which includes former Vueling CEO Lars Nyggard as chairman. FEEL Air plans to offer a low-fare. the company “only did market research. FEEL Air had yet to announce its planned entry into service (EIS) date – mainly because.and medium-haul routes to (probably) eight or nine destinations. If you try to create something that’s not there. the markets were in turmoil: timing just wasn’t good. We’re not fooling ourselves. 300-seat Airbus A330-200s in underserved long-haul markets from Scandinavia. 19 to Ottawa and 11 to Newark and plans to go higher. FEEL Air does expect to begin service in 2011. Deluce thought a business-oriented carrier offering high-quality service could turn Toronto City Airport into a vibrant market. says Deluce. formerly of SkyEurope. ground-handling providers and caterers are reasonably priced and contain competitive terms and conditions. former SAS Group’s COO and director general of civil aviation at Norway’s Civil Aviation Authority. if we do an IPO it’ll be with some assurance in terms of market stability. even though the expansion set Porter’s break-even point back three years. By no means a low-fare carrier. Otto Lagarhus. fuel suppliers. and Lane Zirnhelt. During FEEL Air’s initial planning. as CFO. and make sure their safety and security arrangements are of high quality.” Intelligent business planning is vital to any new airline. Porter now operates 20 flights a day from Toronto to Montreal. when it started achieving operating profitability in 2007. In 2010.” says Diamond. Porter Airlines saw 1.000. “You have to make sure of the market opportunities. Deluce immediately began a major round of expansion to take advantage of competitors’ weakness. leisure-oriented. Now. utilising an internal equity raise as opposed to the public markets – that was the right thing to do. Porter Airlines nevertheless saw traffic boom as it launched more routes and kept adding flights in its biggest markets.” says Holmberg.) Porter Airlines grew rapidly throughout the 2008-2010 recession. with a fleet gradually rising from two to nine aircraft.16 | AFM • ISSUE 71 January-February 2011 FOCUS: START-UP AIRLINES Deluce had seen Air Canada neglect Toronto City Airport – which lies on Toronto Island less than a 10 minute drive from Toronto’s financial district – in favour of increasing flights from the distant Pearson International Airport to the point at which passenger numbers at tiny Toronto City had fallen from 400. Ottawa and Halifax too. Start-ups must ensure their contracts with credit-card companies. Porter is building networks from Montréal. trafficjam-prone drive to Pearson 17 miles away. The start-up has developed a five-year business plan which calls for it to launch services on 16 long. Kai Holberg. (The carrier’s break-even load factor is just 49 per cent. “As we look back at it now.” .9 million there in 2011. Putting it aside and just continuing to focus on our shortterm requirements and our growth and expansion. then that’ll work as well. And the capital we raised internally was more than enough to cover our short-term requirements … When we do come back [to the market]. Toronto City Airport became the preferred short-haul airport for Toronto business people. Deluce demonstrated his confidence in Porter Airlines’ viability again in June 2010. One proposed start-up which has planned extensively is Oslobased FEEL Air. As of January.000 a year to just 26. when he and Porter’s four core investors scrapped the airline’s planned initial public offering (IPO) after they decided the share price required by the market for the flotation was not high enough. “It was absolutely the right thing to do. the company postponed it in order to mitigate commercial and market risks. So confident was Deluce in Porter’s ability to sustain operations that. If we decide to wait on the IPO and do a private placement.” says Deluce. it’s very dangerous. says the CEO. à la carte-fee service with two-class.4 million passengers travel through Toronto City Airport and it expects to board 1. to a certain extent. as COO and accountable manager under FEEL Air’s aircraft operating certificate (AOC).

indicating that the Scandinavian market is greatly under-served by direct long-haul flights.” for the service you are through the peaks and troughs of economic cycles.” . Holmberg recognises that during its start-up phase. According to while getting his own AOC [air operators certificate] until he has Holmberg. planned utilisation and service frequency. as will most of SAS’ traffic. feel-good brand … with a rock-and-roll element” haven’t got the seats filled. It can also provide and train cabin crews: Astraeus employs three full crews of attendants.” he argues. you’re better doing Bangkok from Oslo. brand. You get that bit positioned not only to resonate with the public as a fun. “From four aircraft onwards.January-February 2011 AFM • ISSUE 71 | 17 FOCUS: START-UP AIRLINES FEEL Air found that nearly three-quarters of Scandinavians travelling long-haul have to fly via hubs elsewhere in Europe. To ensure its brand is properly represented when wet-leasing. says Holmberg. says Holmberg) for a start-up to wet-lease aircraft until it’s cheaper to operate its own aircraft using its own crews. and thus we believe this will be a healthy market balance. FEEL Air applied the analysis to its business and operational models to see how this would interact with its operational planning. a start-up contracting with Astraeus does not have to wait to begin operations until it has hired pilots. “FEEL Air … focuses on point-topoint. “It is the most important thing – if you to be a “simple. brand and operational set-up that can allow it to sustain itself “But you need to know the demand. the start-up can supply the backoffice functions and flight attendants. chief commercial officer and in terms of leisure-traffic capacity and will remain so even director of aircraft leasing for wet-lease specialist Astraeus. UKthough SAS is due in March to launch a daily Oslo-New York based Astraeus has assisted three start-up airlines in the past and service with an A330-300 to complement Star Alliance partner now operates on its own AOC all flights for sister company Continental’s 757 flight.” says Holmberg. “What we found was that New York and Bangkok are not only the largest city-pairs [from Scandinavia]. which represent “If someone is starting an airline. expected traffic growth. After examining potential long-haul markets to ascertain the largest city-pairs. you’ve got nothing. FEEL Air aims planning. lifestyle right first and we’ll give you branding. Decisions such as whether to dry-lease. in our opinion it’s not worth his Scandinavians’ two favourite long-haul markets. most of whom are qualified to train new flight attendants hired by clients. but also to take into account “how we as a company relate to the destinations we fly to”. and although Thai Airways serves Iceland Express. cost-conscious leisure travellers. However. it yourself. Astraeus can assist with this at the same time that it is operating flights on the new carrier’s behalf. The aircraft-acquisition decision Aircraft acquisition is a primary issue for all start-ups. says Monnery. Astraeus offers both an AOC-preparation service and type-ratingtraining service for start-up clients. and market demographics. It can often make sense (as in FEEL Air’s case. who are the only crew members the public sees and who are more quickly and cheaply trained than pilots. he says.” These three carriers’ flights from Scandinavia are very much focused on business traffic and some 75 per cent of Continental’s traffic to Newark travels on to other US destinations. trained them for its aircraft and completed the regulatory work needed to obtain its AOC. FEEL Air plans to begin operations by flying from Oslo and Stockholm to New York and Bangkok. a new airline is completely dependent on external factors such as economic cycles and availability of the right aircraft and crews. wet-lease or purchase and whether to acquire new or used aircraft can vary depending on aircraft availability. rental levels. both destinations are under-served from Scandinavia three aircraft.” says Shaun Monnery. and we’ll help you. but also that they give a tremendous leisure share – and if we combined both routes with the same aircraft we could get a record high utilisation without having to depart during the night. Accordingly. As a result. as the start-up becomes established it must create a culture.