Aeroji Blog

Could Now Be The Perfect Time To For Airline Startups?

Introduction


This question was part of the Airline Economics Growth Frontier Hong Kong conference agenda during the panel "Financing & Investing in Aircraft & Engines in a Cyclical Industry" some weeks ago.

The panel concluded that the pandemic and crisis experiences are not new, only the level is unprecedented and the global impact is much higher compared to the more local pandemic outbreaks and crisis in the past. At the same time the recovery is postponed to a later stage. Each month within the pandemic the leading aviation experts analyse the impact and develop new multi-faceted forecasting models. It is taken into account not only the medical developments related to the pandemic spread or potential vaccines, but also the psychological, demographic and socio-economical aspects.

Can the new airline startup teams leverage the lessons learned from existing flag carriers and LCCs and adjust their business models in order to utilise in the best way possible existing opportunities? Furthermore, can they build up strong strategies to mitigate risks and challenges?

Interestingly the opinion about the potential of startup airlines during the crisis and the recovery is mixed. On the one hand the airline startups, similar to the established ones, need to follow the usual demand economics. If the demand is low it is tough to enter the market even with slightly lower fare prices. On the other hand the airline startups are usually well capitalized and do not have history related problems like debts or labor issues like some others. They are able to build strong brands and enter regional markets with alternative routes operated by turboprops. The amount of anticipated airline failures in a crisis period can open up room for bubble operations and build up maturity during the recovery. These are reasons why airline entrepreneurs pop up like mushrooms. But would you be brave enough to startup an airline in 2020 as the risk of failure stays and luck remains potentially a factor? There are a few factors that could convince you.


Aircraft and Engines' Market


The initial industry expectations and expert opinions were very clear for aircraft retirements planning and the used serviceable material market - retirements will peak and the USM prices will drop over the next years. However this wave of retirements is not here yet. Aircrafts are grounded by either parked or stored, that's true, but the number of teardowns and dismantling activities seems to not peak at this point in time. Leasing companies and even operators would be happy to remarked their stored and/or parked assets as it would reduce their efforts handing back leased aircraft.

Orders from traditional operators for Airbus and Boeing aircrafts are down and expected to stay down for some time. However, there is a chance to bypass the usual order queue now if you are able to build up a business case with new and shiny aircrafts. Potentially even the financiers will be keen on such a trend in support of their environmental friendliness strategies.

A lot of opinions were shared on the topic of green time engines in the last months. That being said there will be a higher level of available green time engines that airlines could use to avoid shop visits but with the addition on more pressurized lease rates. Moreover this will have a detrimental impact on MRO shop visit demand, too. All in all green time engines are seen more as an opportunity rather than a problem. And there are still buyers available for specific models that will have a good economic characteristic during the recovery like CFM56 -5B, -7B and the V2500 variants.


Skilled Staff


There is no doubt about the fact that airlines cannot generate sufficient revenues to maintain their assets, the human ones as well as the operational. The huge wave of restructurings, and we all know what it means for the employees, as well as voluntary leaves is on its way through the year 2020 and will continue flowing in the next years to come. This qualified and motivated staff is available now to support the endeavors of new airline startups. Any new airline will be able to pick up a skilled cabin crew, ground crew, and pilots in an blink of an eye. This could be an opportunity for airline startups with focus on teams and with lean business models.


Operational Business Models


The balance sheets of current airlines will have a chaotic and outdated character nowadays and even with established restructuring approaches, many airlines could struggle and go bankrupt. It is a difficult landscape for traditional aviation involving banks to operate. Initial deferrals and postponed maintenance activities for clean balance sheets will be the key for present and future airlines. And even if the new airline startups succeed to present such lean operations and clean balance sheets, they will need the optimal routes. One further important aspect of the operational models are the support functions like customer support including cancellations and rebooking, as we are heading in a second global lockdown which will provoke further governmental restrictions and travel bans.


Financing & Investments


It was noted by many aviation industry experts that airline startups are able to build up strong financial backups with solid investors. Especially from the private equity segment as the commercial bank market seems to be dried up in the current crisis. Pockets with capital are still available and long term asset values will remain. However, the cherry picking approach and risk avoidance will be in a much stronger focus now. Airline startups will have to provide proper documentation on what is agreed and what not when it comes to negotiations with capital lenders but also with asset lessors. Also many investors are concentrating on new product families mainly and the question remains whether they will be willing to support business models build up on used but well-shaped aircraft assets. In a nutshell, capital is cheap these days and asset prices are almost one third lower than before. That makes it an excellent time to invest, in theory at least. And still, burning cash will be inevitable for any new airline during the recovery years and very brave executives as well as financiers will need to be found. Sounds like a usual business model for the startup ecosystem.


New customer segmentation?


During the most panel discussions of Aviation Industry experts one segment was accounted to be lost almost for ever - Business Travelers. Business travel recovery seems to be an impossible challenge for airlines in the next months and years to come. Digital alternatives for business meetings seem to be a dominant factor when it comes to business travel recovery. Yes, some meetings can be organized in a more efficient way compared to a lot of face-to-face meetings. And still, without a face-to-face meeting it is a tough task to develop and especially maintain your customer and partner relationships. However, there will also be various industries and segments that will either stay strong during the economic downturn or emerge with strong growth projections like digital service providers, vaccine focused companies or e-commerce companies.

Leisure travel seems to be a low hanging fruit and will be the first to recover, once a clear path will be visible for governmental restrictions and quarantine regulations. The European recovery during the summer time perfectly showed the power of leisure travel. But this type of travel will also be very much dependent on the global and local development of the GDP as we are in the biggest economic crisis since decades. Or at least on the onset of such a crisis.

The cargo market was and is one of the bright-spots during this pandemic. The strong e-commerce growth during the last year was able to keep the cargo market strong and also establish even growth projections. It is a corner stone now for revenues and will have a lot of investments into it, especially for long term oriented businesses supported by a lot of passenger-to-freighter (P2F) aircraft conversions. However, the freighter operation will depend strongly on the GDP developments the next months and years, too.


Case Study: Avatar Airlines


How does a case study of a new US based combined passenger and cargo airline startup look like?

It appears that Avatar Airlines is taking up the challenge of today's aviation. Below you will find some key facts regarding Avatar Airlines and their operation:

Financing & Investments
  • Transparent appearance and information provision for investors
  • Financial plan with maximised share value, high profits and low costs
  • Planned IPO with transparent ROI

Business Model
  • 'Debt-free, well-capitalised, profitable and loved by the public', states Founder and CEO Barry Michaels
  • Low fares with integrated subscription models and third party service add ons
  • Multiple revenue streams
  • No baggage fees. No seat selection fees. No Wi-Fi fees.
  • Low fare ticket insurance

Customer Segments
  • E-shopping (Cargo)
  • LCC coast to coast

Team and Brand
  • Experienced 747 'Queen of the sky' pilots, no training, low head count
  • Experienced aviation professionals for operations and young professionals for brand awareness and marketing

Asset Strategy
  • Initial 747-400s fleet of 4 aircraft (Perfect size for envisaged passenger/cargo split and high density markets)
  • Good availability on the aftermarket
  • Reliable, well-known and trusted
  • Upgrade to 747-800s during the growth phase in second and third year (30 aircraft)

Based on the case study analysis, it looks like Avatar Airlines is well prepared to ride the opportunity wave and master the challenge hurdles. We wish Avatar Airlines the best possible success!


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Aviation Business