Airline-In-A-Box!

The eternal misery of the aviation sector -- currently in full throttle -- is no accident. Despite the fact that running an airline might feel like a "heavy" industry of sorts, it's actually very easy for new entrants to attack the major players, and to establish an instant competitive advantage. Consider a few factors:

• Jet fuel is a huge cost of running an airline and large airlines don't have competitive advantage in sourcing jet fuel. Everyone pays the same pay.
• Upstart airlines can start with a young fleet that is cheaper to maintain than an old fleet.
• Upstart airlines can operate with a single kind of craft, again making it cheaper to maintain and source spare parts.

So once you get the capital formation part done, all you have to do is come up with a hook (TVs, more leg room, better food, etc.) and then pick a route or two (NYC-Miami, NYC-Peoria) and get going. Unless we return to a period of iron regulation, where new airlines are prohibited by law from competing, or we enter a new era of energy efficiency and planes that don't need repairs, then the cycle will continue.

Are you interested in starting a fleet? Should I start StalwartAir? That has a nice ring to it no? Anyway, as I ponder this big business move, I checked out an awesome resource from Boeing called StartupBoeing, a complete guide to starting an airline.

Starting an airline is tough.  Running a profitable airline is even tougher. From startup airlines to established industry leaders, the process involves constant learning and adaptation.                            

Few businesses have as many variables and challenges as airlines. They are capital-intensive. Competition is fierce. Airlines are fossil fuel dependent and often at the mercy of fuel price volatility. Operations are labor intensive and subject to government control and political influence. And a lot depends on the weather.

But the intrepid entrepreneur is not alone.  The StartupBoeing team assists entrepreneurs in launching new airlines. From concept through launch, StartupBoeing

offers guidance, review, analysis, data, resources, contacts, and referrals to qualified startup airlines.

Check it out. They offer guides on everything from market analysis, to plane selection and finding mapping tools. It's almost a turnkey, step-by-step guide to starting an airline, kind of like VeriSign's e-commerce store in a box.

That being said, I might choose to wait until energy prices come down a little bit. It's tough to make money when oil is at $115. Plane Buzz helps run the numbers:

Plugging the cost per gallon of jet fuel into a simple matrix that calculates the fuel burn of a commercial jet airliner is a simple matter. Then it becomes a exercise of masochism; how bad you want to make yourself feel?

Oil at $150 a barrel means jet fuel at ~$3.60 a gallon, and that means a 737 burns up almost $3,000 an hour for fuel alone. At an 80% load factor with 130 coach seats that means almost $30 per onboard passenger goes for fuel on a one hour flight. (Check my math; [5500 LBS/hour for a 737-300 x 6.84 gallons of jet fuel per pound = ~800 gallons/hour] x $3.60 = $2,880 / 104 passengers). Plug your own numbers in for your favorite aircraft, and adjust the fuel burn numbers for a longer average stage length if you'd like.

Using my simplistic model, outside of fares, a lot of things get smaller when oil gets that expensive; fewer short flights in a 737, fewer passengers (due both to higher fares and less service) flying on even fewer airlines, and the ATC and Airport Security problems diminish (there is a silver lining).

Play it forward - how high can the price of oil go? $150? $200? Higher? The absolute number doesn't really matter. The price of oil will be what the buyer is willing to pay and what speculator thinks it will be worth in the future. Oil price volatility is the new "re-regulation", forcing airlines to remove themselves from markets that don't make economic sense and presenting a significant barrier to entry to the industry for new carriers.

Comments

[Jason]

Maybe it is my overally simplistic view of the world, but I am confused by the fact that the passenger airline industry continues to lose money year after year while freight airlines (Fedex, UPS, DHL, etc) seems to produce profits.

How is hauling human cargo that much more of a challenge than hauling any other cargo?

[Joe]

An interesting question. One think I can think of immediately: a freight airline doesn't have a chance if it doesn't have national scale. There's little value in a company like that if they can only deliver to five cities. So right off the bat, it makes barriers to entry much higher.

[Vincent]

Yes Joe, I think you're right. With air freight, you drop a package off at the airport and let it walk itself to its final destination. You thus need a pretty complex logistics management system. No only do you fly the package from pt A to pt B, but you also need to get all the packages to the airport, consolidate them, and then later de-consolidate and get them to each destination's door. Thats really where the barrier is. I think it helps a lot to both own the planes and have the pt to pt logistics down pat. If you just owned the planes and tried to do a few high volume routes, maybe it would work, but I would imagine you would end up giving up a lot of margin to logistics players. So a start up needs not just the planes and a few routes, but also a system for consolidating and deconsolidating packages to and from the airport.

[Vincent]

My comment above was meant to say "you CAN'T drop a package off and let it walk itself..."

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