In this series so far, we have explored airline planning, obtaining finances, and how to begin
putting the key elements of your airline together. But being an airline, acquiring some actual
aircraft is a key part of the process! In this fifth episode of the series, we explore the
options open to a new startup airline when looking at equipping a new fleet to commence operations.
Before you consider the best route to follow to acquire some aircraft,
decide what will work best for your airline in terms of aircraft type, age, and reliability.
The answers to these decisions will need to be aligned with what your budget, of course.
Given that you may have already spent millions of dollars to get this far,
some tough decisions will still have to be made before your fleet takes shape.
When procuring new aircraft, there are various options, ranging in costs and complexity.
First, you should decide whether your airline will lease or purchase its first aircraft.
Alternatively, you may can do one and then the other, choosing to lease initially until you
have built up cash reserves and credibility to purchase later. Numerous airlines have
gone down this well-worn path to building their fleets in the past.
There are pluses and minuses to both leasing and purchasing:
One route may be more cautious or cost-effective than the other.
Everyone would love to start their new airline flying new, factory-fresh aircraft.
However, the reality is not often as straightforward or as practical as this.
First you will need to decide whether your budget allows for brand new aircraft.
If so, or you believe that you will be able to source additional funding to equip your fleet,
then opening discussions with the relevant
manufacturers will be the first step in this process.
Indeed, sales executives at Airbus and Boeing (or any other planemaker)
will be happy to assist any potential new customer. They are also likely to offer you
all kinds of incentives and assistance to persuade you to place an order with them.
Apart from the actual aircraft themselves, manufacturers have been known to throw in
an abundance of sweeteners to secure your order and your ongoing allegiance to them.
After all, signing a new airline onto their order books is a big deal from their perspective,
and they are likely to do whatever they can to secure your business.
Boeing even offers potential new customers a complete step-by-step
guide to setting up an airline to attract their business and loyalty.
Named 'Startup Boeing',
the program provides those potentially planning to start an airline to engage with Boeing early on.
While this may appear a generous and helpful resource to offer by the manufacturer,
it is also just a subtle marketing tactic that this particular manufacturer employs
to get you leaning towards them early on in your planning.
Manufacturers like Boeing and Airbus employ huge marketing and sales team worldwide.
These teams can produce reports on your route structure and development,
aircraft economics, fleet development plans, and more, if you can demonstrate a genuine
enthusiasm for their products (of course, backed up with credible funding plans).
Incentives such as flight crew training programs,
maintenance support packages, finance options, marketing support,
and spares supply have all been known to form part of order packages for new aircraft.
Indeed, when Singapore Airlines decided to swap out the Airbus A340-300s in their fleet
for the Boeing 777-300ER, Boeing accepted a number of the Airbus type from the airline
in part exchange for securing the deal.
Although these aircraft were of no practical use to Boeing directly, its commercial arm
(Boeing Capital Corporation) eventually sold or leased many of them to other carriers later on.
If you are purchasing directly from manufacturers,
there will be various points that you must consider. Delivery backlogs are now
running into years, and you could be waiting a long time for your new aircraft to arrive.
Should you decide to place an order with one of the major manufacturers,
you will first need to agree on a price for new planes. Although manufacturers have what
are known as 'list prices' for their various aircraft offerings, these are guide prices only.
The negotiations start when you know how much you want to spend on your new asset and how
much liquidity you have as a company to pay cash deposits to secure your slots on their production
line. Although this may not be the total value of the aircraft, it could be a considerable part.
Both the value of the deposit (as a percentage of the total
cost) along with the final agreed price will be a function of how well you can
negotiate and how much flexibility you can offer in terms of timing.
However, as a startup with little or no credit history,
no historical financial performance data, and no proven track record of operating large,
expensive aircraft, your negotiating position is weakened before you even start this process.
It is also worth bearing in mind that the price you may agree to pay for
the aircraft is simply that. There are other substantial additional costs to
be considered before your new aircraft is ready to operate revenue flights.
You will need powerplants, avionics, galleys, seats, toilet units, and everything else normally
attached to an airframe before you can start to fly. These supernumerary items are referred
to as ‘buyer furnished equipment' (BFE) by the manufacturers, and it will be up to you and those
in your airline responsible for procurement to go out, source, and order these items and to have
them delivered to the production line as your new plane passes through the process before delivery.
Like a finely worked jigsaw puzzle, all these items will need to come together just at the
correct times to have a complete aircraft ready for the day of the first flight.
You will almost certainly be required to pay the manufacturer pre-delivery payments (PDPs) to an
agreed schedule so that by the time the aircraft is in the final stages of production and testing,
you have a relatively small balance left to pay when you finally come to accept your plane.
Even if you have the funding in place, there can still be several
external factors that may influence when you will receive your shiny new airplane.
As can be the case with completely new aircraft types, the certification process can take far
longer than expected, resulting in delays to deliveries and potential costs to your airline.
As seen in recent times with the Boeing 737 MAX along with the Boeing 787 and
its Rolls-Royce engine issues, even when an aircraft has been certified,
there is no guarantee that an event won't cause the type to be grounded.
As an airline owner, you should be prepared for all eventualities when ordering new aircraft
and have the necessary funding and contingency plans to see your airline through them.
If this sounds too risky, expensive and stressful,
then there are several other ways of finding your first aircraft…
If your preference is to own your aircraft outright from the outset,
purchasing used aircraft may be the best option. If you look hard enough,
there are always used aircraft for sale of just about all types, variants, ages and conditions.
Airlines, leasing companies, and aircraft traders are credible sources for used aircraft. However,
one thing to note is that the less commonality there is in your fleet,
the higher your costs will be. Crew training, engineering support, onboard equipment,
and cabin furnishings are all items that will force your costs upwards if your fleet is diverse.
Many startup airlines choose to purchase their first few aircraft from the same source so that
there is fleet commonality from the outset, reducing their cost burden as much as possible.
If purchasing your first aircraft, you might also consider white tail aircraft. These may
be available to buy (or even lease) through the manufacturer directly, through a leasing company,
or through the airline that owns the plane. Being unwanted by the original customer,
white tails are likely available at a reduced price compared to their brand new equivalents.
If your preference is to minimize your airline's exposure to debt, or you'd prefer the flexibility
that renting offers over ownership, then leasing your aircraft may well be the way forward for you.
There are many types of leases available from several different sources.
If you decide that leasing is for you, you must first consider whether you will
lease new aircraft or pre-owned units. If you select the latter,
then age, availability, and condition will be particularly important considerations.
The reality is that pre-owned aircraft will be cheaper than new ones, so if you are working
on a tighter budget, sourcing used aircraft may prove more cost-effective for your airline. Once
you have generally decided on this first point, then you can go on to source suitable aircraft.
If you opt for new aircraft, then going directly to a specialist leasing company
is the most common way of obtaining a new airframe.
Lessors such as Air Lease Corporation and GECAS place large orders with manufacturers and then
lease out these aircraft to airline customers when they become available off the production line.
The benefit of leasing brand new aircraft over used jets is that they're likely to
be more reliable, covered under certain warranties offered by the manufacturer,
and more appealing to your potential future passengers.
If you go for pre-owned aircraft, then your options open up. Sourcing
used airframes through leasing companies, other airlines, financial institutions,
or even through the manufacturers (who might have trade-ins) are all options to consider.
However, keeping up with lease fee payments will be crucial if you decide to lease your
aircraft. Although lessors only tend to repossess aircraft as the last resort,
they will do so should they lose confidence in your ability to pay, or if you breach the
lease agreement by some other means, such as failing to keep the aircraft well maintained.
Leasing is a desirable option for new airlines. It offers flexibility,
cost benefits, reduces the debt on the balance sheet, and can provide instant
solutions should you wish to expand your operation or network in short timeframes.
You can agree on terms that may be more palatable and budget-friendly for your
airline and will often have additional benefits as part of the lease package
(such as crew, maintenance, and insurance), reducing your costs and engineering burden.
Like anything rented, though, you don't own the asset,
and should your airline fall on hard financial times, you will have to
look elsewhere other than selling aircraft to find the necessary finance to keep operating.
The last method of acquiring aircraft is simply piggy-backing, or effectively 'borrowing' someone
else's equipment. If your startup plan is taking longer than expected to complete,
or your Air Operators Certificate (AOC) hasn't arrived when you had been told it would,
there is still another way to begin revenue flights.
Often called the 'virtual airline' route, you assume all the commercial risks of getting started
and commencing operations. At the same time, another operator provides you with the essential
tools you require. In the past, some of today's leading airlines have contracted other carriers
to start flying their routes until they can begin operations with their own metal and crews.
A perfect case of this was easyJet, which was keen to get its low cost operations up
and running as soon as possible. To do so, it sought the use of another airline, its aircraft,
and its AOC, to get its operations started.
The airline chose GB Airways for this purpose. GB Airways provided easyJet with two 737-200s,
its operating license, flight crews, and engineering support to begin operations in 1996.
Although this service came for a fee, the scheme allowed easyJet to sell
tickets to the public and start earning revenue much quicker than it would have,
had the airline waited to obtain its own AOC and procured aircraft, crew, and so on.
Interestingly, Emirates first started by using a handful of
aircraft flown on its behalf by Pakistan International Airlines.
If you choose to consider this particularly novel route as an option for your airline,
you need to ensure that the airline you chose to partner with has all the requisite certifications,
can provide the contracted aircraft and services to keep your operation reliable and safe,
and can continue until you are ready and adequately equipped to go it alone.
By selecting the right partner carefully now,
you should be able to seamlessly transfer your flights to your aircraft and your own operation
as and when you can, with your customers oblivious to the difference between operating models.
There are numerous options available when considering how you will equip the fleet of
your new airline. There are no 'right or wrongs' regarding aircraft selection and procurement.
Instead, you must act in the best interests of your business
and its aspirations for the future when considering your first aircraft.
Taking delivery of your first aircraft (by whatever means)
is likely to be the most exciting and proudest moment of this whole process for you.
At least, right up until your first flight takes off on its inaugural revenue service, of course!
Getting your aircraft selection choices right now will serve
you and your customers well as your airline grows and matures.
Next time, we will look at the certification process and what paperwork your airline will
require to operate safely and legally. But for now, we’ll end with these questions:
How would you prefer to get your first few aircraft? Will you buy direct from
the planemakers? Or will you lease? If you lease, will you begin with a wet-lease? And, of course,
the most exciting question: which type of aircraft will you want to operate?
Let us know about your hypothetical airline plans by leaving a comment!