HOW DO YOU MAKE A SMALL FORTUNE IN AVIATION? Start with a large fortune and launch an airline. Or so the old joke goes.
Like many such jokes, there is a kernel of truth in it. Making money is terribly difficult but the sexiness of the sector is such that there are always people willing to try something new in the airline business.
“There is a high margin of failure of airline business plans,” says respected aviation consultant John Strickland. “It comes down to the very high cost of a plane and often about assumptions of what people will pay and how many will travel.”
The historically low oil prices the world has experienced recently may be convincing more aviation entrepreneurs to give it a go. However, oil prices are unlikely to stay low forever – and it’s not just rising oil prices that can ground your airline, says Strickland. “Government taxes can affect your plans, as well as external shocks, such as terrorism and natural disasters. You need to have money to be able to deal with those.”
Low-cost airlines seem to be here to stay, however. The first, Pacific Southwest, launched in 1949. The last two decades have seen airlines that have reinvented the revenue model soar at the expense of legacy airlines, particularly in short-haul markets. Yet now, the low-costs are reinventing themselves in the image of the legacy airlines they have usurped and realising they can charge for extras. Airlines such as Ryanair saw that they were missing opportunities for people to pay for things to get extra aspects of service, such as flexibility.
Another model tried many times, but without lasting success, is the all-business concept. In early September, La Compagnie announced it was closing its all-business route between London Luton and New York. The airline said the decision came as a result of “the new economic climate and aviation landscape in Europe following the recent UK European Union membership referendum in June 2016”. The airline claimed an average load factor of 77 per cent since June. The planes were reasonably full, therefore, but the average fares those passengers had paid was clearly not enough to support the route.
However, the airline’s CEO Frantz Yvelin said: “It has not been an easy decision, but we would like to emphasise that this is the suspension of, not the cancellation of, the London-NY route.” As a result, the airline has added an extra flight on its Paris-NY route.
At the same time, British Airways is reducing the frequency of its London City to JFK service from 11 times a week to just six.
The aviation landscape is littered with the carcasses of all-business airlines. Who now remembers Silverjet, Eos and Maxjet? Strickland says to make a success of all-business you need to be a big carrier with a lot of muscle. “Business travellers need back-up. It’s about being confident that you are going to be delivered in comfort to where you need to be when you are expected to be there.”
Another burgeoning aviation business model is long-haul low-cost. Norwegian, for example, has built a growing network of destinations from Gatwick. It serves destinations such as New York, San Francisco, LA, Las Vegas and Boston using a pay-for-your-frills service on the Boeing 787.
In the last ten years, the number of destinations Norwegian flies to has grown to over 130, the number of passengers from 3.3 million to 25.8 million, and profits from 28 million krone (£2.8 million) to 246 million krone (£24.4 million). However, it is worth noting that the airline’s long-haul operations only began in 2013 with UK services launching in 2014. In 2014, the airline made a loss of 1,070 million krone (£106 million). “It is very early days for Norwegian’s long-haul services,” says Strickland. “Whether they are able to roll out it widely remains to be seen. There are far more challenges about rolling out low-cost services long-haul than in short-haul where it is easier to differentiate.”
DARING TO BE DIFFERENT
Sometimes a new entrant comes along with a refreshingly different idea of how to make money. America’s One Jet launched last year with a focus on cities in the US with no direct, scheduled service between them. Based at Pittsburgh International, the airline launched with a business model that turned the accepted idea of revenue management on its head: as more people book, the fare goes down. The key to it all was that if no-one booked then the plane, a Hawker 400 business jet, did not fly. The first person to book, the person who needed to get somewhere at a specific time, paid the most. Unlike other on-demand services, such as chartering a private jet, One Jet’s schedule was available in the global distribution system (GDS) and bookable through online booking tools.
However, the reverse pricing model hasn’t quite worked as expected, and the airline has now pivoted to a new way of operating: flying small business jets on business routes with not enough demand for larger planes. For the convenience of flying non-stop, One Jet charges a couple of hundred dollars more but saves the passenger time.
Founder and CEO Matt Maguire says: “What we did last year was really a pilot of the product. We knew that offering non-stop services from regional bases would be compelling. The biggest question we had was: could you really get mainstream corporate travellers and corporate travel programmes to buy into seven-seat light aircraft, flying for 45 minutes to an hour? We were a new brand in the marketplace.”
The airline got 50 per cent of its traffic in the first nine months from travel management companies (TMCs) such as Amex, BCD and CWT, and signed ten contracts with Fortune 500 companies such as Fed Ex and PNC. “We ran the initial pilot and we are now about optimising profitability,” says Maguire. “Airlines are notorious for losing money – and we don’t want to lose money. It turns out the revenue management equation is very simple. You don’t need to do anything complicated.”
Crucially, the airline has now received commuter authority, which means it can operate any schedule and any route it wants. Now the airline is focused on operating a more traditional revenue management model – but with the smaller planes. All of the airline’s Pittsburgh services achieved profitability in the summer.
“Every route is making money and we started a service to Cincinnati in October,” says Maguire. “The opportunity for us is to provide non-stop services in medium-sized regional markets in the revised airline world that no other airline can service.”
Another option that is growing in popularity is subscription-based air travel, such as Surf Air (see box) and SAS’s Travel Pass.
Travel Pass now accounts for around 4 per cent of SAS’s traffic in Scandinavia and comes in pay-as-you-fly and unlimited varieties. For the pay-as-you-fly variant, called Travel Pass Corporate, companies receive a non-negotiable 6 per cent discount on fares. The unlimited version of Travel Pass costs a fixed amount each month and is best suited for those who travel at least twice a week. Travel Pass products are mainly used on domestic and intra-Scandinavia routes.
“A significant amount of our corporate travel is booked through Travel Pass every month. Corporate clients value the efficiency, and frequent flyers appreciate the flexibility and convenience,” says Catharina Törnemo- Fecko, SAS head of concepts and ancillary.
Ole Mortensen of Danish travel management consultancy AMM Consulting, which acts as an outsourced buyer for companies and advises on change management and strategic development, says the Travel Pass provides “serious advantages”.
“SAS discounts heavily on its flexible fares through the scheme and it has integrated the booking with Amadeus so the TMC can invoice and do duty-of-care. They even show it in the Amadeus e-Travel Management online booking tool, but the booking is made in the SAS system rather than Amadeus,” he says, adding that the system is simple for buyers.
“You agree to a set of corporate fares both with a percentage saving or fixed amounts. SAS provides direct debit if the buyer wishes and also the ability to use a lodge card.”
Mortensen says the subscription model works well in Scandinavia because of SAS’s dominance in the market, at least until the rise of Norwegian. But with SAS facing threats to its survival, he says few companies choose the prepaid version of Travel Pass.
SAS Travel Pass was developed by a company called Braathens IT, which is now selling the idea to other airlines around the world who want to implement a similar business model. Braathens IT has just signed up its first North American airline, the Cape Cod-based Cape Air, and is also talking to other American carriers.
“We are seeing a lot of interest around the Middle East and also in the Far East,” says David Taylor, senior vice-president at Braathens IT. He says the unlimited pass is particularly popular with high-end consultancy firms and architect practices. “Those sort of companies want to be able to organise their travel for the whole year and pay in one go without the need to worry about expense claims.”
He says there are benefits for all parties. Airlines get their money upfront and it also reduces GDS fees. From the corporate viewpoint, it encourages travellers to use direct rather than indirect channels and removes the financial transaction from bookings.
It remains to be seen whether airlines like Surf Air and One Jet can make it work where other innovative carriers have failed. As John Strickland says, the success or failure may depend on external factors that entrepreneurs cannot control.
What is certain is that, rather like the queue of rich oligarchs buying football clubs, there will never be a shortage of people wanting to give it a shot.