SO YOU WANT TO START AN AIRLINE!
These days no one can make money in the airline industry. The economics represent sheer hell.
Cyrus Smith, past president of American Airlines
A recession is when you have to tighten your belt; depression is when you have no belt to tighten. When you’ve lost your trousers – you’re in the airline business. Sir Adam Thomson, founder and chairman of British Caledonian Airlines
CHARACTERISTICS OF THE INDUSTRY
Vulnerable to weather
Let us explain what these mean:
There is no tangible product.
The product is perishable; you can’t sell seats on yesterday’s flight today or put cargo in yesterday’s holds.
New aircraft may cost between USD 70,000,000 and USD400,000,000
depending on the size and configuration.
You will need maintenance equipment and spares, for example, a RR Trent 900 engine costs around USD30,000,000.
You will also need Flight Simulators to train the pilots. You may be able to borrow these from other airlines who use the same equipment – at a cost. A Flight Simulator will cost USD10,000,000 upwards. For a full motion Flight Simulator reckon on it costing about the same as the aircraft it simulates.
As you have seen, you will need lots of money.
WHERE TO GET THE MONEY
Depending on the country, you operate in and it’s banking laws, it may be difficult to borrow money from banks or, in other countries, they may put a gun to your head and force you to take an unsecured loan.
Governments generally are very free with taxpayers (you) money. They probably won’t be as generous if there is already a state subsidised airline in existence.
Stock exchange listing
This, like banking, depends on the country and its stock exchange regulations. In South Africa, for example, it is very difficult to get a listing and even more difficult to keep it. Other countries are not nearly so fussy; in some countries you can be listed without having any aircraft, staff, offices, or routes and people will queue to buy your shares.
Finance companies will purchase the aircraft and lease them to you.
If you make a profit, which is unlikely, you can finance new aircraft out of the profits.
Who works at an airline?
Pilots are the men and women who fly the aircraft. Actually, that is not entirely true; aircraft are flown most of the time by a system of computers; the Flight Management System, sometimes even taking off and landing the aircraft. The aircraft’s Flight Management System does the routine flying but pilots fly the difficult phases like take-off and landing and problems. Pilots are people with very rare abilities as many thousands of passengers who are alive today, will gladly testify. For this reason, pilots earn high salaries. For safety purposes, pilots are limited to a certain a number of flying hours in a month. If delay might cause a pilot to exceed the limit, another pilot will have to take over the flight. This can cause havoc with crew scheduling.
These are men and women seen by passengers. They serve the meals and drinks and clean up after airsick passengers. They are also responsible for ensuring that the passengers are as safe as they can make them. For example, they ensure that seat belts are fastened, seats are in the upright position, and cabin (carry-on or hand) luggage is safely stowed away.
The job requires great tact and patience, qualities which are not common.
These people train the flight and cabin crew. They also train the ground staff.
These are the check-in staff and all the other support staff whom you may never see. For example, airlines will have one or more people in the baggage area in case passengers have lost their luggage.
Check-in / gate staff
These people weigh your luggage, charge you for overweight bags, take your ticket, and issue you with a boarding pass. The boarding pass is taken from you at the aircraft gate and you are given another piece of paper. This, of course, depletes the world’s forests which are needed to take up the carbon-di-oxide released by aircraft in flight.
These are the staff that maintain and check the aircraft. This is highly skilled work and your life and that of your fellow passengers depend on their conscientiousness.
Airline staff are unionised, as are their supplier’s staff! You may be the best employer in the Galaxy but if your ground handler’s staff goes on strike, your aircraft can’t be loaded and you can’t operate.
It doesn’t matter if the strike is right or not, you will lose money; as we saw before, passenger seats are perishable. The same applies to perishable cargo – you can’t transport week-old fresh fish.
You will fly more passengers during holiday seasons, weekends, and sporting events like the Soccer World Cup and the Olympic Games. This means you will need bigger aircraft which will fly almost empty during off-peak periods. This will cost as they will use more fuel and require maintenance that is more expensive.
Passengers like to arrive at their destinations more or less on time. However, with the best will in the world, weather conditions will affect their airlines schedules. No airline will fly its aircraft or passengers in a thunderstorm or typhoon so teams of meteorologists are continually busy trying determine wind patterns and precipitation that may delay flights. Severe weather like hurricanes in North America and snow in Europe can cause delays which will affect flight schedules all around the planet. For example, if a 380 is due in Johannesburg from Europe with most of the passengers transiting onward to Cape Town is due in at 08:00 then allowing for offloading most of them will take flights around 9:30 to Cape Town. The airlines will have booked those passengers on the Cape Town flights, possibly scheduled a larger aircraft. If the flight doesn’t arrive until 10:00, there may not be places on later flights to Cape Town. The airline may then decide to play with the schedule and put on a special flight for the stranded passengers. This will affect all their other flights causing delays on other routes. Aircraft are very expensive so airlines cannot afford to have aircraft standing idle, just in case.
HOW DO YOU PLAN AIRCRAFT YOUR AIRCRAFT FLEET AND SCHEDULES?
AIRCRAFT FLEET PLANNING
You must have the right size aircraft for the route and the season and destination.
Some airports may have short runways suitable for smaller or specialised aircraft only. London City airport and Pietermaritzburg airport, for example.
Air traffic Control en-route may be poor or non-existent. This might prompt you to use longer-range aircraft to avoid unsafe areas or to operate more modern aircraft which have more capable navigation systems.
Governments may impose restrictions on the size of aircraft, number of flights, number of passengers, amount of freight carried on foreign airlines serving their country.
THE AIRCRAFT USED BY AN AIRLINE
If a distant aunt has died and left you an airline, you will want to evaluate:
The age of the current fleet; modern aircraft can fly for up to 50 years; older aircraft with the exception of the Douglas DC3, have much shorter lives. Older aircraft are also more expensive to operate. There is currently, very rapid development of more efficient aircraft and Environment friendly aircraft. This means that a 50-year lifespan is of not much practical importance. On the other hand, new aircraft models are more expensive.
The routes you operate will depend on the amount of business you can expect on the route modified by the Fleet-Planning factors we mentioned before. Some governments see aviation as an easy way to raise money. So, different countries and/or airports charge widely differing rates for services like flying over the country, landing at an airport or parking at an airport. These charges can be very high which will affect the profit you can make on the route.
LOW COST AIRLINES
How does the right mix of aircraft apply in Low Cost airlines? Low Cost Carriers have lower input costs by reducing administration and labour costs. These airlines generally use only one type of aircraft as this saves maintenance and pilot training costs. Low Cost Carriers operate only profitable routes unlike State-owned airlines which are often obliged to operate loss-making routes for country marketing or political purposes. Some countries discourage Low Cost Carriers.
REVENUE AND COSTS
WHERE DO AIRLINES GET REVENUE – NOTICE, WE DIDN’T SAY MAKE A PROFIT.
Passenger fares are the bulk of airline revenue. These days’ ticket sales do not account for as much of airlines revenue as it did in the past. Airlines, these days, make a large portion of their revenue from ancillary services such as, early boarding, overweight or oversize bags, meals, and many more.
Mail – charges for carrying mail on behalf of the State Post Office.
WHAT ARE THE COSTS OF RUNNING AN AIRLINE?
I really don’t know one plane from the other. To me they are just marginal costs with wings.
Alfred Kahn, an American professor, an expert in regulation and deregulation, and an important influence in the deregulation of the airline and energy industries in the United States.
Costs are either direct or indirect costs. Both have fixed and variable elements.
Direct costs are incurred when and aircraft is used. In other words, they can be traced to an activity.
Indirect costs are those which are not directly associated with operating aircraft.
Fixed costs are those which you incur whether the aircraft operates or not.
Variable costs depend on the volume of the activity.
Interest on loans
Depreciation of equipment
Aircraft and equipment must be insured.You will also need liability insurance in case of accidents.
Lease charges on aircraft and equipment
These depend on the number of cycles flown.
Ground staff salaries
Maintenance of aircraft
Landing and navigation fees. These vary from country to country and airport to airport. Some airports are very expensive
Ground handling; loading and offloading aircraft
Crew refresher training
Government taxes and fees
Airport charges – if an aircraft is parked at an airport, whether it operates or not, you will pay.
IT systems and Web sites
Maintenance of non-aircraft equipment, airlines may handle their aircraft rather than outsourcing handling.
Passenger services which depend on operational activity
Ticketing, sales, marketing, travel agent commissions
Compensation for bumped passengers
Accommodation costs for badly delayed pax
As you will have deduced, you may classify some costs differently from the above depending on your company and country accounting policy. For example, in a country which has bad weather an airline may treat “accommodation for badly delayed pax” as a direct variable cost.
For the purposes of this piece, it makes no real difference, just as you are aware of the broad distinctions.
Airlines, generally, have a very high cost structure which results in a very low return on capital which discourages investment.
I think historically, the airline business has not been run as a real business. That is, a business designed to achieve a return on capital that is then passed on to shareholders. It has historically been run as an extremely elaborate version of a model railroad, that is, one in which you try to make enough money to buy more equipment. Michael Levine, Executive VP Northwest Airlines