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Launching an airline and ensuring its protability 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 industrys high profile, its glamorous image and the large amounts of cash sloshing around continue to lure would-be airline tycoons.

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 worlds 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 worlds 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.

Were not fooling ourselves. If you

try to create something thats not there, its very dangerous.

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FEEL Air's COO, Otto Lagarhus and CEO Kai Holmberg

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Decisions

dry-lease,wet-lease or purchase and whether to acquire new or used aircraft can vary depending on aircraft availability, rental levels, planned utilisation and service frequency It can often make sense for a start-up to wet-lease aircraft until its cheaper to operate its own aircraft using its own crews.
such as whether to

So start-up magnates have to think hard about the business they are entering. Several challenges must be met head-on if a new airline is to be successful in the long-term.

Allegiant Air, Porter Airlines and Feel Air

Others have adopted different strategies to thrive. In the US domestic market Allegiant Air has used strategies pioneered by Ryanair to become one of the USs most envied carriers. 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, car rental, cancellation insurance, show tickets and golf-course bookings. Allegiant operates a large fleet of low-capital-cost, second-hand MD-80s and has concentrated on markets abandoned by highercost legacy airlines during their massive downsizings in the past decade. Allegiants strategy has been to link secondary and even tertiary US airports with primary domestic-tourism destinations such as Las Vegas. At several major destinations (such as Orlando and Phoenix) the airports Allegiant serves have never even seen a legacy carrier. Market research is critical for any start-up, says Diamond. Only by exploring fully the nature and circumstances of the markets will a new entrant understand where its opportunities might lie. For instance, although a competitor may use a particular airport as a connecting hub, its banks of connecting flights might not be well-timed to suit locally originating business traffic. A startup might be able to establish itself at the airport by offering high-frequency, suitably timed flights to and from certain business destinations. Being adequately capitalised is also important in order to weather unexpected operational circumstances and to meet flexibly with competitive responses. A case in point is Porter Airlines, recognised as one of the most impressive North American startups of the past decade. Boasting a respected record as a Canadian airline entrepreneur and extensive connections with institutional investors, 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. Using C$121m ($121.5m) belonging to himself and four investors, Deluce set up a company in 2006 to buy the terminal at Toronto City Airport, 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. Ironically, banishing Air Canada Jazz from Toronto City completed a 20-year chapter for Deluce: Air Canada had created Jazz from Air Ontario, which Deluce and his family sold to Air Canada in 1986 as Canadas then-largest regional airline. Jazz was later floated as a stand-alone company but retained its close operational ties to Air Canada.

Know your market and competitors

Probably the most fundamental thing is to understand the competition and the market and not to underestimate the competition, says Mark Diamond, a principal with the airline consulting firm SH&E. Start-ups should ask themselves; Can you find an opportunity where you can take advantage of the weakness of the competition, and exploit it? Such opportunities might arise in finding routes that are underserved or not served at all, or by taking advantage of a newly liberalised market. Competing at a lower price against existing airlines can establish market presence as will offering a better standard of service to that previously provided. But Diamond says that, whatever the opportunity, it is important for the start-up to differentiate its product from those of market incumbents, unless the incumbents are very weak. Do not underestimate what the competition is capable of, cautions Diamond. At a time when most legacy carriers have managed to trim their costs, learn how to use ancillary fees as a powerful revenue tool and forge strong marketing relationships with other airlines; it ill-suits a start-up carrier not to position itself differently to those existing airlines which will be its competitors. For a start-up, Doing the same thing [as an incumbent] on a smaller scale is, in many or most cases, a recipe for disaster. In most cases the incumbents have lots of advantages. These can include brand recognition; operational scale and scope; frequent-flyer programmes and networks which offer consumers lots of attractive redemption possibilities; and membership of a global alliance, which magnifies all the other potential advantages that are already enjoyed. Additionally, says Diamond, If you go in with the same product or service as the competition, you court a serious risk of fare wars. Nevertheless, some start-ups have entered markets already loaded with many airlines and have succeeded beautifully because they offered enough differentiation to ensure their survival. AirTran took on Delta Air Lines in Atlanta where Delta operated the worlds biggest passenger hub and was able to establish itself because it brought much lower costs and fares to the market. Virgin America, which offers competitive fares but primarily differentiates itself by offering slick inflight services based on the latest IFE technology, appears to be holding its own against United at San Francisco.

Robert Deluce, CEO, Porter Airlines

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Deluce had seen Air Canada neglect Toronto City Airport which lies on Toronto Island less than a 10 minute drive from Torontos 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 400,000 a year to just 26,000. Deluce thought a business-oriented carrier offering high-quality service could turn Toronto City Airport into a vibrant market. By no means a low-fare carrier, Porter Airlines nevertheless saw traffic boom as it launched more routes and kept adding flights in its biggest markets. Porter now operates 20 flights a day from Toronto to Montreal, 19 to Ottawa and 11 to Newark and plans to go higher. Toronto City Airport became the preferred short-haul airport for Toronto business people, fed up with the long, trafficjam-prone drive to Pearson 17 miles away. In 2010, Porter Airlines saw 1.4 million passengers travel through Toronto City Airport and it expects to board 1.9 million there in 2011. Now, Porter is building networks from Montral, Ottawa and Halifax too. So confident was Deluce in Porters ability to sustain operations that, when it started achieving operating profitability in 2007, Deluce immediately began a major round of expansion to take advantage of competitors weakness, even though the expansion set Porters break-even point back three years. (The carriers break-even load factor is just 49 per cent, says Deluce.) Porter Airlines grew rapidly throughout the 2008-2010 recession. Deluce demonstrated his confidence in Porter Airlines viability again in June 2010, when he and Porters four core investors scrapped the airlines 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, says Deluce. As we look back at it now, the markets were in turmoil: timing just wasnt good. Putting it aside and just continuing to focus on our shortterm requirements and our growth and expansion, utilising an internal equity raise as opposed to the public markets that was the right thing to do. And the capital we raised internally was more than enough to cover our short-term requirements

When we do come back [to the market], if we do an IPO itll be with some assurance in terms of market stability. If we decide to wait on the IPO and do a private placement, then thatll work as well. Intelligent business planning is vital to any new airline. You dont go in just based on wishful thinking the devil is in the details, to a certain extent, says Diamond. Start-ups must ensure their contracts with credit-card companies, fuel suppliers, ground-handling providers and caterers are reasonably priced and contain competitive terms and conditions; and make sure their safety and security arrangements are of high quality. One proposed start-up which has planned extensively is Oslobased FEEL Air. As of January, FEEL Air had yet to announce its planned entry into service (EIS) date mainly because, says the CEO, Kai Holberg, the company postponed it in order to mitigate commercial and market risks, however, FEEL Air does expect to begin service in 2011. FEEL Air plans to offer a low-fare, leisure-oriented, la carte-fee service with two-class, 300-seat Airbus A330-200s in underserved long-haul markets from Scandinavia. The start-up has developed a five-year business plan which calls for it to launch services on 16 long- and medium-haul routes to (probably) eight or nine destinations, with a fleet gradually rising from two to nine aircraft. 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; Otto Lagarhus, former SAS Groups COO and director general of civil aviation at Norways Civil Aviation Authority, as COO and accountable manager under FEEL Airs aircraft operating certificate (AOC); and Lane Zirnhelt, formerly of SkyEurope, as CFO. During FEEL Airs initial planning, the company only did market research, says Holmberg. You have to make sure of the market opportunities. Were not fooling ourselves. If you try to create something thats not there, its very dangerous.

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FEEL Air found that nearly three-quarters of Scandinavians travelling long-haul have to fly via hubs elsewhere in Europe, indicating that the Scandinavian market is greatly under-served by direct long-haul flights. After examining potential long-haul markets to ascertain the largest city-pairs, expected traffic growth, and market demographics, FEEL Air applied the analysis to its business and operational models to see how this would interact with its operational planning. What we found was that New York and Bangkok are not only the largest city-pairs [from Scandinavia], 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, says Holmberg.

brand, but also to take into account how we as a company relate to the destinations we fly to.

The aircraft-acquisition decision

Aircraft acquisition is a primary issue for all start-ups. Decisions such as whether to dry-lease, wet-lease or purchase and whether to acquire new or used aircraft can vary depending on aircraft availability, rental levels, planned utilisation and service frequency. It can often make sense (as in FEEL Airs case, says Holmberg) for a start-up to wet-lease aircraft until its cheaper to operate its own aircraft using its own crews. To ensure its brand is properly represented when wet-leasing, the start-up can supply the backoffice functions and flight attendants, who are the only crew members the public sees and who are more quickly and cheaply trained than pilots.

As a result, FEEL Air plans to begin operations by flying from Oslo and Stockholm to New York and Bangkok, which represent If someone is starting an airline, in our opinion its not worth his Scandinavians two favourite long-haul markets. According to while getting his own AOC [air operators certificate] until he has Holmberg, both destinations are under-served from Scandinavia three aircraft, says Shaun Monnery, 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 Continentals 757 flight, and although Thai Airways serves Iceland Express. From four aircraft onwards, youre better doing Bangkok from Oslo. it yourself, and well help you. These three carriers flights from Scandinavia are very much focused on business traffic and some 75 per cent of Continentals traffic to Newark travels on to other US destinations, as will most of SAS traffic, says Holmberg. FEEL Air focuses on point-topoint, cost-conscious leisure travellers, and thus we believe this will be a healthy market balance, he argues. Astraeus offers both an AOC-preparation service and type-ratingtraining service for start-up clients. Accordingly, a start-up contracting with Astraeus does not have to wait to begin operations until it has hired pilots, trained them for its aircraft and completed the regulatory work needed to obtain its AOC. Astraeus can assist with this at the same time that it is operating flights on the new carriers behalf. It can also provide and train cabin crews: Astraeus employs three full crews of attendants, most of whom are qualified to train new flight attendants hired by clients.

Holmberg recognises that during its start-up phase, a new airline is completely dependent on external factors such as economic cycles and availability of the right aircraft and crews. However, he says, as the start-up becomes established it must create a culture, brand and operational set-up that can allow it to sustain itself But you need to know the demand, for the service you are through the peaks and troughs of economic cycles. FEEL Air aims planning, says Monnery. It is the most important thing if you to be a simple, feel-good brand with a rock-and-roll element havent got the seats filled, youve got nothing. You get that bit positioned not only to resonate with the public as a fun, lifestyle right first and well give you branding.