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’sopportunity for airline entrepreneurship. If you were tasked with starting an accountingbusiness, or a coffee shop, or a landscaping business, you’d probably know roughly whatyou needed to do to start—you’d need to get a license, or a retail space, or somelawnmowers—and, with enough initiative and a little bit of luck, you’d probably evenhave a real shot at successfully starting any one of these. Meanwhile, if you were tasked with startingan airline, you and I both know that, no matter your luck or initiative, you’d have almostno 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 offorming a new airline? Well, first, an airline needs a business model. Now, everything for start-up airlines nowadaysbuilds off of what makes them unique, and new airlines have to be unique. You see, fundamentally, for a new companyto 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 customerschose to switch to them?
The competitive advantage of major airlinesis that they are major—it’s that you can get on one of their planes on one side ofthe world and, after a few connections, get off on the other. The problem is that almost all of the majorfull-service network carriers, as those in the industry will call them, were formed inthe early days of commercial aviation, and grew as the industry did. Today, it would just be effectively impossiblefor 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 fasterthan they could get to the necessary scale for their competitive advantage to be consideredtheir size. Of the ten largest airlines in the US, nonewere founded in the current century, and in Europe, only one was—Wizz Air, which nobodywould consider a full-service network carrier. In fact, globally, one of the only examplesof a full-service network carrier established within the past few decades without governmentsupport is Virgin Australia, and in their case, it was almost by accident. The collapse of Ansett Australia, which wasthe country’s only major full-service network carrier aside from Qantas at the time, lefta 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 credenceto the theory that it’s nearly impossible for a new major full-service network carrierto emerge in the 21st century as Virgin Australia entered administration in 2020, and is nowexiting 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 startupairlines planned to launch in 2021, a strong, defined, and unique business model is exactlywhat each of them has. FlyPop, for example, is planning to launchlong-haul, low-cost flights from the UK to secondary cities in India without existingnon-stop service, such as Amritsar and Ahmedabad, in order to cater to the Indian diaspora livingin the UK. Meanwhile, Play Airlines is looking to reprisethe 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 throughIceland.
Then, in what is likely the most promisingairline 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 existingnon-stop service such as Tulsa to New York or Louisville to Los Angeles, and capturingdemand by setting up non-stop service. Crucially, each of these three business modelsdo not involve directly competing with full-service network carriers. Budget airlines like Play Airlines and FlyPoptend to expand the pie by offering prices that stimulate demand from a lower marketsegment that likely would not regularly fly on a full-service network carrier, while BreezeAirways will likely most directly compete with Southwest—as it’s the primary incumbentairline that might offer non-stop, hub-busting flights. In the selection of a business model, notcompeting against the world’s largest airlines is a good choice, because full-service networkcarriers have the time and money to start and win a price war, while start-up airlinesdo not. That’s because it’s very difficult forstart-up airlines to get funding. There just isn’t the appetite for it, becausethe the airline industry has very little upside for investors.
It goes through massive, dramatic cycles ofprofit and loss depending on oil prices and external economic conditions, but even inthe best of times, it makes a very thin profit. Over the past 25 years, even before the Coronaviruspandemic, the industry has hovered around a four to five percent operating margin. Investors could just as easily put their moneyinto something more secure—like the railroad industry, which hovers between a 25 and 30percent operating margin. In fact, that’s exactly what investor WarrenBuffet has done—he’s famously shirked significant investments in airlines, whiletaking massive, successful bets on the American railroad industry. For this reason, many start-up airlines failbefore launch simply because they cannot secure funding, or after launch because they didn'tsecure enough to reach critical mass. For those three most promising start-up airlinesof 2021, though, they each have seemingly found enough money to launch. Play Airlines secured a $42 million investmentfrom Avianta Capital, which is an Irish investment fund run by Aislinn Whittley-Ryan—a memberof an influential aviation family which includes the founders of Ryanair. Meanwhile, FlyPop's exact investor makeupis less clear, but their largest source of funding is coming from a UK government fundintended to kick-start innovative businesses whose launch was affected by COVID.
Finally, Breeze took the most traditionalfunding path, having raised $83.3 million through the venture capital industry, butthat was likely only possible due to its founder’s remarkably consistent track record of successfulairline startups. The only consistency with start-up airlinefunding is inconsistency—unlike other industries, where there is often a defined ecosystem ofinvestors 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 generallack of appetite from investors means that finding funding to complete the extraordinarilyexpensive tasks required to set up an airline is itself the task that prevents most fromreaching takeoff. One of those extraordinarily expensive tasksinvolves quite simply gaining the legal right to operate an airline. Every national aviation authority issues whatare typically called air operator’s certificates, which allows a company to use their aircraftfor commercial purposes. In the US, there are essentially two choicesof certificate type for scheduled airlines. The first, and simpler one, is a part 135certificate—referring to the section of the US’ federal aviation regulations thatoutline this certificate’s operating requirements. Now, a part 135 certificate is primarily usedfor cargo and passenger charter operations—which often includes private jet operations—butit can also be used for certain scheduled operations.
Specifically, this certificate only allowsthe use of aircraft with nine passenger seats or fewer on scheduled operations, with a fewexceptions. One of the largest part 135 scheduled airlinesin the US, for example, is Cape Air, which operates a fleet of 94 nine-seat aircraftto 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 mostof their flights operate with two pilots—whereas a part 121 certificate holder, like UnitedAirlines, for example, would need two pilots even to operate the exact same aircraft onthe exact same route. In general, the regulations for part 135 operationsare slightly less stringent, and that also means that attaining this license is a loteasier. 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’scertificate 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 processto attain one is so complicated that it’s essentially impossible without hiring a third-partyconsultancy to assist. This, in and of itself, is such as niche processthat there are only six FAA-endorsed part 121 certification consultancies in existence. After all, there are only 104 active part121 airlines in the US, so a new certification is a fairly rare occurrence.
While none of the FAA-endorsed certificationconsultancies publicize prices, a non-endorsed competitor lists their consulting fee as $1.2million—which includes things like creating an operations manual, training management,setting up electronic flight bags, establishing a drug and alcohol testing program, and almosteverything else needed prior to application, plus the management of the process of actuallyapplying itself. In general, the reason this application processis so strenuous is because a start-up airline must set up the internal infrastructure forall the extensive safety programs needed to pass the FAA’s review, and then it mustpresent a massive packet of documents proving that it has done all these things. Given the complexity of this process, someairlines decide to purchase, rather than apply for, an air operator's certificate. This is what Breeze Airways initially plannedto do—in July, they applied for the US Department of Transportation to transfer the certificateof now-defunct Compass Airlines to them—but they eventually dropped this plan due to push-backfrom other airlines and Compass’ pilot’s union. Now, Breeze is going through the process ofapplying for its own air operator’s certificate, but it goes to show that buying an existingone is a very real possibility, and it’s something that happens fairly frequently withpart 135 certificates. In fact, there are even websites listing smallpart 135 airlines for sale—which can be bought specifically for their certificates.
Around the world, while each country’s exactprocess is different, certification is quite often a major hurdle for a new airline aseach country’s air regulator needs to see that the startup is fit-to-fly before givingthem their stamp of approval. Of course, these previous steps, of decidingon 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, acquiringairplanes 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, forexample, can launch with only about $90 million in funding, despite the fact that a singleone of their planned flagship aircraft, the A220-300, has a list price of about $90 million. Rather, a startup airline like Breeze tendsto use one of two techniques. The first option is to lease. This works essentially like a car lease, juston a much larger scale. Some 50% of commercial aircraft globally areunder lease, and this option is often more popular with smaller airlines.
The advantages of leasing aircraft are straightforward—itspreads out the cost, without the need to take on debt, and it reduces risk, as leaseterms can be shorter than the useful life of an aircraft, are there can be some optionsto return aircraft before the end of their lease if there’s no longer the need. In addition, leasing aircraft allows airlinesto get aircraft faster. Aircraft manufacturers often have a multi-yearbacklog. Airbus, for example, as of December, 2020,has a 7,000 aircraft order backlog, meaning an airline ordering an aircraft today wouldn’treceive it for many years. Lessors often have aircraft available withinmonths or even weeks, making this the attractive option for startups. Also, particularly nowadays, COVID has madegetting an airplane on lease easier. Existing airlines have been downsizing theirfleets 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 withE190 aircraft and, even though they aren’t directly leasing the retired aircraft of Americanand Air Canada, more aircraft of a type in the marketplace pushes prices down.
Reviewed by Kashif
on
August 26, 2021
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