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Normal times in business are like a road.
Competitors are all heading in the same direction and, while some might turn away and try a
different path, for the most part, the only way to get ahead is through brute force—to
slowly catch up and take the lead.
That is difficult.
Abnormal times in business, though, when an industry is in crisis, are like a fork in
the road.
The competitors all reach it together and are forced to pick a path.
This levels the playing field.
While the big players have the resources to evaluate the different paths, and might have
experience from times when this has happened before, all companies big and small must pick
a path, and at the end of the day, only one is going to work best.
Crisis can be an equalizer.
It stress-tests the big incumbent firms to see if they’re still the strongest, or riding
on inertia, and gives smaller players the opportunity to make bold choices that could
put them ahead.
This is what’s happening in the airline industry right now.
It’s one of the clusters of companies that, as a result of the Coronavirus pandemic, had
to almost entirely shut down, and is now in the process of turning back on and reinventing
itself to capture a new set of consumers with new needs and wants.
Industry turmoil is happening, and that means that there’s a case to be made that we’re
at that fork in the road—that all airlines are having to pick a path, and that this could
lead to a shuffling of the rank and order of the industry.
There’s a case to be made that right now, for the first time in a long time, there’s
real opportunity for something new—there’s opportunity for airline entrepreneurship.
If you were tasked with starting an accounting business, or a coffee shop, or a landscaping
business, you’d probably know roughly what you needed to do to start—you’d need to
get a license, or a retail space, or some lawnmowers—and, with enough initiative and
a little bit of luck, you’d probably even have a real shot at successfully starting
any one of these.
Meanwhile, if you were tasked with starting an airline, you and I both know that, no matter
your luck or initiative, you’d have almost no shot of ever taking off.
Due to its complexity and capital intensity, successful airline entrepreneurship is one
of the most difficult endeavors in business, but it is something that, occasionally, real
people actually do.
So what does it take—what is step one of forming a new airline?
Well, first, an airline needs a business model.
Now, everything for start-up airlines nowadays builds off of what makes them unique, and
new airlines have to be unique.
You see, fundamentally, for a new company to succeed, they need to do something better
than their competitors—they need to be cheaper, faster, more convenient, or just do something
that others do not.
If they don’t, then why would customers chose to switch to them?
The competitive advantage of major airlines is that they are major—it’s that you can
get on one of their planes on one side of the world and, after a few connections, get
off on the other.
The problem is that almost all of the major full-service network carriers, as those in
the industry will call them, were formed in the early days of commercial aviation, and
grew as the industry did.
Today, it would just be effectively impossible for an airline to launch with enough scale
to compete directly with United, British Airways, or Singapore Airlines, and if they didn’t,
the legacy airlines would crush them faster than they could get to the necessary scale
for their competitive advantage to be considered their size.
Of the ten largest airlines in the US, none were founded in the current century, and in
Europe, only one was—Wizz Air, which nobody would consider a full-service network carrier.
In fact, globally, one of the only examples of a full-service network carrier established
within the past few decades without government support is Virgin Australia, and in their
case, it was almost by accident.
The collapse of Ansett Australia, which was the country’s only major full-service network
carrier aside from Qantas at the time, left a massive void in Australia’s aviation market
only a year into Virgin Australia's operations, which gave the company the opportunity to
grow quite quickly and effectively.
However, even this example gives further credence to the theory that it’s nearly impossible
for a new major full-service network carrier to emerge in the 21st century as Virgin Australia
entered administration in 2020, and is now exiting as a smaller, primarily domestic airline—ceding
the international market to its legacy competitor, Qantas.
So, once again, new airlines need a strong, defined, and unique business model to succeed.
Looking at three of the most promising startup airlines planned to launch in 2021, a strong,
defined, and unique business model is exactly what each of them has.
FlyPop, for example, is planning to launch long-haul, low-cost flights from the UK to
secondary cities in India without existing non-stop service, such as Amritsar and Ahmedabad,
in order to cater to the Indian diaspora living in the UK.
Meanwhile, Play Airlines is looking to reprise the business model of the now-defunct WowAir,
and was even founded by former Wow executives, by focusing on facilitating low-cost transatlantic
travel with connecting itineraries through Iceland.
Then, in what is likely the most promising airline start-up of 2021—as its founder
previously launched WestJet, Azul Airways, and JetBlue—Breeze Airways is looking to
launch what they refer to as “hub-busting” flights on underserved routes in the US—meaning
they’re identifying routes without existing non-stop service such as Tulsa to New York
or Louisville to Los Angeles, and capturing demand by setting up non-stop service.
Crucially, each of these three business models do not involve directly competing with full-service
network carriers.
Budget airlines like Play Airlines and FlyPop tend to expand the pie by offering prices
that stimulate demand from a lower market segment that likely would not regularly fly
on a full-service network carrier, while Breeze Airways will likely most directly compete
with Southwest—as it’s the primary incumbent airline that might offer non-stop, hub-busting
flights.
In the selection of a business model, not competing against the world’s largest airlines
is a good choice, because full-service network carriers have the time and money to start
and win a price war, while start-up airlines do not.
That’s because it’s very difficult for start-up airlines to get funding.
There just isn’t the appetite for it, because the the airline industry has very little upside
for investors.
It goes through massive, dramatic cycles of profit and loss depending on oil prices and
external economic conditions, but even in the best of times, it makes a very thin profit.
Over the past 25 years, even before the Coronavirus pandemic, the industry has hovered around
a four to five percent operating margin.
Investors could just as easily put their money into something more secure—like the railroad
industry, which hovers between a 25 and 30 percent operating margin.
In fact, that’s exactly what investor Warren Buffet has done—he’s famously shirked
significant investments in airlines, while taking massive, successful bets on the American
railroad industry.
For this reason, many start-up airlines fail before launch simply because they cannot secure
funding, or after launch because they didn't secure enough to reach critical mass.
For those three most promising start-up airlines of 2021, though, they each have seemingly
found enough money to launch.
Play Airlines secured a $42 million investment from Avianta Capital, which is an Irish investment
fund run by Aislinn Whittley-Ryan—a member of an influential aviation family which includes
the founders of Ryanair.
Meanwhile, FlyPop's exact investor makeup is less clear, but their largest source of
funding is coming from a UK government fund intended to kick-start innovative businesses
whose launch was affected by COVID.
Finally, Breeze took the most traditional funding path, having raised $83.3 million
through the venture capital industry, but that was likely only possible due to its founder’s
remarkably consistent track record of successful airline startups.
The only consistency with start-up airline funding is inconsistency—unlike other industries,
where there is often a defined ecosystem of investors willing and sometimes competing
to fund startups with a strong business model, plan, executive team, and proof of concept,
you just don’t have that with airlines.
The tiny number of new entrants plus the general lack of appetite from investors means that
finding funding to complete the extraordinarily expensive tasks required to set up an airline
is itself the task that prevents most from reaching takeoff.
One of those extraordinarily expensive tasks involves quite simply gaining the legal right
to operate an airline.
Every national aviation authority issues what are typically called air operator’s certificates,
which allows a company to use their aircraft for commercial purposes.
In the US, there are essentially two choices of certificate type for scheduled airlines.
The first, and simpler one, is a part 135 certificate—referring to the section of
the US’ federal aviation regulations that outline this certificate’s operating requirements.
Now, a part 135 certificate is primarily used for cargo and passenger charter operations—which
often includes private jet operations—but it can also be used for certain scheduled
operations.
Specifically, this certificate only allows the use of aircraft with nine passenger seats
or fewer on scheduled operations, with a few exceptions.
One of the largest part 135 scheduled airlines in the US, for example, is Cape Air, which
operates a fleet of 94 nine-seat aircraft to primarily small, government subsidized
destinations around the US and Caribbean.
Because they are on a part 135 certificate, they can do things like operate flights with
a single pilot—even though in practice most of their flights operate with two pilots—whereas
a part 121 certificate holder, like United Airlines, for example, would need two pilots
even to operate the exact same aircraft on the exact same route.
In general, the regulations for part 135 operations are slightly less stringent, and that also
means that attaining this license is a lot easier.
Costs apparently average between $35,000 and $95,000 in legal fees, plus an additional
$50,000 in expenses to attain a part 135 certificate.
Meanwhile, getting a part 121 air operator’s certificate is much, much more difficult.
These are the certificates held by United, American Airlines, Delta, and any other large,
commercial airline in the US, and the process to attain one is so complicated that it’s
essentially impossible without hiring a third-party consultancy to assist.
This, in and of itself, is such as niche process that there are only six FAA-endorsed part
121 certification consultancies in existence.
After all, there are only 104 active part 121 airlines in the US, so a new certification
is a fairly rare occurrence.
While none of the FAA-endorsed certification consultancies publicize prices, a non-endorsed
competitor lists their consulting fee as $1.2 million—which includes things like creating
an operations manual, training management, setting up electronic flight bags, establishing
a drug and alcohol testing program, and almost everything else needed prior to application,
plus the management of the process of actually applying itself.
In general, the reason this application process is so strenuous is because a start-up airline
must set up the internal infrastructure for all the extensive safety programs needed to
pass the FAA’s review, and then it must present a massive packet of documents proving
that it has done all these things.
Given the complexity of this process, some airlines decide to purchase, rather than apply
for, an air operator's certificate.
This is what Breeze Airways initially planned to do—in July, they applied for the US Department
of Transportation to transfer the certificate of now-defunct Compass Airlines to them—but
they eventually dropped this plan due to push-back from other airlines and Compass’ pilot’s
union.
Now, Breeze is going through the process of applying for its own air operator’s certificate,
but it goes to show that buying an existing one is a very real possibility, and it’s
something that happens fairly frequently with part 135 certificates.
In fact, there are even websites listing small part 135 airlines for sale—which can be
bought specifically for their certificates.
Around the world, while each country’s exact process is different, certification is quite
often a major hurdle for a new airline as each country’s air regulator needs to see
that the startup is fit-to-fly before giving them their stamp of approval.
Of course, these previous steps, of deciding on a business model, finding funding, and
attaining an air operator’s certificate, have nothing to do with the most fundamental
thing an airline needs to operate—airplanes.
Now, somewhat counterintuitively, acquiring airplanes is actually one of the simpler phases
of the airline start-up process.
The reason why this is is because, quite often, airlines don’t actually own aircraft themselves.
This is part of the reason why Breeze, for example, can launch with only about $90 million
in funding, despite the fact that a single one of their planned flagship aircraft, the
A220-300, has a list price of about $90 million.
Rather, a startup airline like Breeze tends to use one of two techniques.
The first option is to lease.
This works essentially like a car lease, just on a much larger scale.
Some 50% of commercial aircraft globally are under lease, and this option is often more
popular with smaller airlines.
The advantages of leasing aircraft are straightforward—it spreads out the cost, without the need to
take on debt, and it reduces risk, as lease terms can be shorter than the useful life
of an aircraft, are there can be some options to return aircraft before the end of their
lease if there’s no longer the need.
In addition, leasing aircraft allows airlines to get aircraft faster.
Aircraft manufacturers often have a multi-year backlog.
Airbus, for example, as of December, 2020, has a 7,000 aircraft order backlog, meaning
an airline ordering an aircraft today wouldn’t receive it for many years.
Lessors often have aircraft available within months or even weeks, making this the attractive
option for startups.
Also, particularly nowadays, COVID has made getting an airplane on lease easier.
Existing airlines have been downsizing their fleets and getting rid of older, less fuel-efficient
aircraft.
In the case of American Airlines and Air Canada, that meant retiring 20 and 14, respectively,
of their E190 aircraft.
It so happens that Breeze is launching with E190 aircraft and, even though they aren’t
directly leasing the retired aircraft of American and Air Canada, more aircraft of a type in
the marketplace pushes prices down.
There is, however, another mechanism increasingly used by airlines, especially when they need
to get newer aircraft for which there isn’t a large second-hand market.
Breeze, for example, has an order with Airbus for sixty A220-300 aircraft.
Now, this order is directly from Breeze to Airbus, but Breeze themselves could never
pay for sixty of these aircraft.
Therefore, what they’ve done is, before they’ve even taken delivery of the first
of these aircraft, sell five of them to another company, Voyager Aviation Holdings, which
is then going to lease these aircraft back to Breeze.
This means Breeze is effectively getting the exact aircraft it wants, when it wants, but
functionally they get all the benefits of a lease.
It’s to be expected that, as the delivery dates of the rest of the airline’s A220
fleet near, the airline will enter into more of these leaseback agreements.
Of course this is all a simplistic view of the process of airline entrepreneurship, but
business model selection, funding, certification, and aircraft acquisition are the four largest
hurdles—and improper completion of any of these is often the source of a start-up airline’s
eventual failure.
The rest of the process, from hiring staff, finding office-space, crafting a marketing
strategy, leasing space at airports, and much, much more, is much less likely to have a dramatic
impact on their odds of success.
Since the era of the emergence of low-cost airlines, there’s been little successful
action in airline entrepreneurship.
With a business atmosphere primed for disruption, the next few years will prove whether it’s
still possible for new airlines to succeed, or whether the industry is still locked down
by the world’s largest airlines.
What this video goes to prove is that, even for the world’s toughest tasks, like starting
an airline, there’s someone out there doing it successfully.
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