The Business of Aviation

“How do you make a small fortune in aviation? Start with a very large fortune.” This phrase is relevant today because in order to create a multi-billion dollar company, you have to pump billions and billions of dollars into a start-up airline that may have a high-risk level in this industry. It isn’t easy to start an airline. You need a thorough business plan, accountants, lawyers, auditors, etc. Malaysian Airlines is an example of an airline that continues to dwindle down to a “failing” airline, mainly because of public relations matters. Without a doubt, the crash of MH17 and the disappearance of MH370, both in 2014, didn’t help Malaysian Airlines’ reputation.  This goes to show that the public and media has a very powerful manipulation mechanism that can lead to a company’s downfall. According to an article from Fast Company, analyst Mohshin Aziz said, "In the current form, I firmly believe Malaysia Airlines won’t be able to survive. They will largely exhaust all their capital and won't have any money left to continue flying by the middle of next year." The airline was already dealing with its share of adversity even before last week's attack. CNN Money reports that even before MH370 disappeared, "a difficult business climate forced the airline into the red for three years in a row," leading to a loss of $1.3 billion over that time period. The airline is expected to pay the families of victims of both crashes an initial payment of $150,000 each, per international law (Gayomali, 2014).

On the other hand, one of the most successful airlines of our time is Delta Airlines. However, just because a business is successful, doesn’t mean it hasn’t gone through a downfall, and Delta is an example of that. Before it sought bankruptcy protection in 2005, Delta had revenue per available seat mile that was 86% of the industry average. By the first quarter of 2007, Delta executives were pleased to proclaim that RASM (revenue per available seat mile) was 96% of the industry average (RASM, n.d.). The carrier emerged from bankruptcy protection on April 30, 2007.  While all of the major airline bankruptcies in the first decade and a half of the 21^st century have been successful, enabling the carriers to profitably restructure, Delta’s was probably the most uniquely successful. As for Delta, it used bankruptcy to remake itself. Delta has one of U.S. airline industry’s best assets: the Atlanta hub, the biggest single airline hub in the world.  Before the bankruptcy, Atlanta was squandered, used largely to connect passengers between the Northeast and Florida – a leisure market with little potential to provide revenue premiums. Now Atlanta has 970 daily departures to 210 destinations including 62 international destinations.  Overall, Delta serves 59 countries (Reed, 2014).

There are a handful of currently growing airline companies that continue to profit. According to Terry Maxon, a frequent aviation contributor on the Dallas Morning News’ website, U.S. carriers make up nearly half of the list of the most profitable airline companies. Two low-cost U.S. airlines, Spirit Airlines and Allegiant Air, rank second and third. Regional carrier Republic Airways is fourth, and Alaska Airlines is sixth (Maxon, 2014).

Rank	Best	Margin
1	Copa (Panama)	22%
2	Spirit (U.S.)	18%
3	Allegiant (U.S.)	16%
4	Republic (U.S.)	16%
5	Ryanair (Ireland)	15%
6	Alaska (U.S.)	14%
7	Japan Airlines (Japan)	12%
8	Aegean (Greece)	12%
9	Hainan Airlines (China)	12%
10	Delta (U.S.)	11%
11	easyJet (U.K)	11%
12	WestJet (Canada)	11%
13	Southwest (U.S.)	11%
14	American (U.S.)	10%
15	Air Arabia (United Arab Emirates)	10%
Rank	Worst	Margin
1	Pakistan Int’l (Pakistan)	-27%
2	SpiceJet (India)	-16%
3	Jet Airways (India)	-9%
4	Malaysia Airlines (Malaysia)+	-8%
5	Tigerair (Singapore)	-8%
6	Thai Airways (Thailand)	-7%
7	AirAsia X (Malaysia)	-7%
8	Skymark (Japan)	-6%
9	Garuda (Indonesia)	-6%
10	Air Berlin (Germany)	-6%
11	Philippine Airlines (Philippines)	-4%
12	Volaris (Mexico)	-3%
13	Virgin Australia (Australia)	-3%
14	Kenya Airways (Kenya)	-3%
15	Norwegian (Ireland)	-2%

Getting an airline off the ground has become a lot more treacherous. High oil prices these days mean carriers must fly full planes to turn a profit, and smaller airports just do not provide enough passenger traffic. At the same time, the major domestic carriers are more entrenched than ever in their own hub airports, making it harder for a new entrant to wrangle gates there. And investors have become more cautious about lending to just any airline. “Why would you ever want to start a new airline?” asked Michael Boyd, an aviation consultant with the Boyd Group International. “The business is very capital-intensive, the returns are rotten and the track record is terrible. Plus, there’s simply no market for a new carrier today” (Mouawad, 2012). However, there are some guidelines to starting up an airlines. To create an airline or aviation business (or improve an airline, for that matter), it’s imperative to form an accurate business plan. The following is a start-up outline plan for an airline:

-Provision of a sufficient cash reserve to assure timely payment of the leasing or finance payments and operating costs of the aircraft through at least the first six months of operations.

-Marketing, advertising, and public relations costs, including costs of setting up a website capable of offering flight and fare information and making online sales and reservations, and related Internet marketing, as well as conventional print and broadcast advertising, and public relations activities.

-Costs associated with recruiting, training, and certifying flight and ground operational crews.

-A reserve to cover overall operating costs, aside from aircraft operating costs, over at least the first six months of operations.

-Administrative and legal costs incurred in setting up the business and the airline operations (Airline Business Plans, n.d.).

Although it’s a cliché joke, “How do you make a small fortune in aviation? Start with a very large fortune” is a pretty accurate phrase in reference to starting up a successful airline.

References

Airline Business Plan. (n.d.). Retrieved March 31, 2015.

Gayomali, C. (2014, July 24). Will Malaysia Airlines Go Out Of Business? Retrieved March 30, 2015.

Maxon, T. (2014, September 20). Seven U.S. carriers among the world's most profitable airlines. Retrieved March 30, 2015.

Mouawad, J. (2012, May 25). The Challenge of Starting an Airline. Retrieved March 31, 2015.

Reed, T. (2014, May 10). How Delta Air Lines Mapped A Path To Success And Followed It. Retrieved March 30, 2015.

What is revenue per available seat mile (RASM)? definition and meaning. (n.d.). Retrieved March 30, 2015.

Global Aviation and the Global Market

The aviation industry is one of the biggest contributing factors of the overall economic market. These are just some of the global factors I think will continue to shape this industry boom over the next 15-20 years.

There are many areas of the global aviation market in which US commercial airlines have grown exponentially since the last aviation market dip. One of these areas includes the growing competition of carriers in the Middle East. The Middle East has been leading the way with global aviation growth. Middle East airlines claimed the strongest passenger growth worldwide in the latest data revealed by the global aviation industry body. Traffic for Middle East carriers jumped 11.7 per cent in November, from a year earlier, the International Air Transport Association said. Globally, international passenger demand advanced 5.4 per cent in November, compared with a year earlier. All regions except Africa saw a year-over-year increase in demand. However, growth had slowed in most regions compared with October of 2014 (El Gazzar, 2015).

Moreover, as the global price of oil continues to drop, you would think that airlines all over the globe would see a generous boost for the aviation market. However, Only U.S. airlines are reaching the level of profitability that allows them to recover the cost of capital. The airline industry is forecast to benefit significantly from the drop in fuel prices, and part of the improvements will be passed on to consumers in the form of significantly lower fares. The association believes airlines will make a combined profit of $25 billion in 2015, up from $19.9 billion this year, $10.6 billion in 2013 and $6.1 billion in 2012. “We see falling oil prices to give a great boost both to the industry and consumers,” said IATA Chief Economist Brian Pearce (Flottau, 2014). On the other hand, with lower fuel prices comes less efficient aircraft maintaining operation. “As a result of falling fuel prices, aircraft fuel efficiency improvements will slow down from 1.8% in 2014 to 1.6%. This is because less fuel efficient aircraft are still in operation” (Flottau, 2014).

Globalization in manufacturing also plays a big part in non-leveled playing field. With faster growing markets, fierce competition arises. When people think about manufacturing aircraft, they think of Boeing, Airbus, or Lockheed Martin. China is on an aggressive course to build a world-class commercial aviation manufacturing base. Mexico continues as an important supplier to the North American industry. But which companies will supply the new aircraft? “In Boeing’s latest outlook, the world will see demand for 35,280 new jet aircraft from 2013–2032 at a value of $4.8 trillion, with single-aisle aircraft accounting for most of that demand. (Globalization, 2015). Below is a graph that depicts aircraft demand by region for the years 2013-2032:

Finally, while researching the topic of labor costs for this blog, I came across the American Airlines’ approved contract that was voted two-thirds in favor of a new five-year contract that gives them 23 percent pay raises this year and 3 percent pay raises on Jan. 1 for the next five years. “By voting in favor of the JCBA, our pilots will benefit from higher pay rates. In effect, the pilots of American Airlines made a business decision,” Keith Wilson, Allied Pilots Association president said in a statement” (Maxon, January 12, 2015). APA will now focus on further engagement with American Airlines management to address ongoing shortcomings in our contract. Our total compensation will still trail industry-leader Delta, while work rules affecting our pilots’ quality of life need meaningful improvement. There’s a lot of work remaining to achieve the industry-leading contract our pilots deserve,” Wilson said. The decision avoids a scenario in which the Allied Pilots Association contract combining US Airways and American Airlines pilots under a single agreement would have gone to binding arbitration (Maxon, January 30, 2015). A "no" vote would have sent the pilots and management to binding arbitration, which would have capped wage gains to zero percent for December 2014, 3 percent for January and an extra 13 percent a year later, per an agreement that the pilots union had accepted during the merger (Dastin, 2015).

Overall, I agree with most of these findings from the writers of the articles, which is why I used them as sources. Obviously, there are a great deal of things to consider in order to level the playing field when it comes to growth of the aviation market. The aviation industry is one of the biggest contributing factors of the global economic market. It has a number of factors going into the growth of the latest industry boom, including the various different factors I have researched above. I believe we can make this a level playing field by allowing countries to grow and compete healthfully alongside large U.S. carriers, like American or Delta. If oil continues to drop, it may have an up-and-down effect on the global market as it is now. Raising the pay for pilots, not just in the U.S. but all over, can have a great impact on the job outlook for many future pilots. I think larger pay is playing a big role in capturing a prospective pilot’s eye. These are just some of the global factors I think will continue to shape this industry boom over the next 15-20 years.

References

Dastin, J., & Ajmera, A. (2015, January 30). American Airlines Group pilots approve contract to
            raise pay. Retrieved March 17, 2015, from http://www.reuters.com/article/2015/01/30/us-
            american-airline-workers-idUSKBN0L31XC20150130

El Gazzar, S. (2015, January 8). Middle East carriers lead global aviation growth. Retrieved
            March 16, 2015, from http://www.thenational.ae/business/aviation/middle-east-carriers-
            lead-global-aviation-growth

Flottau, J. (2014, December 10). As Oil Price Falls IATA Sees Steep Profit Rise, Traffic Increase
            In 2015. Retrieved March 17, 2015, from http://aviationweek.com/commercial-
            aviation/oil-price-falls-iata-sees-steep-profit-rise-traffic-increase-2015

Globalization of aircraft manufacturing: New markets, new players. (n.d.). Retrieved March 17,
            2015, from http://www.pwc.com/us/en/industrial-products/commercial-aircraft-industry-
            future/globalization-new-markets-and-manufacturers.jhtml

Maxon, T. (2015, January 12). American Airlines says proposed pilot contract would raise its
            2015 costs by $650 million. Retrieved March 16, 2015, from
            http://aviationblog.dallasnews.com/2015/01/american-airlines-says-proposed-pilot-
            contract-would-raise-its-2015-costs-by-650-million.html/  

Maxon, T. (2015, January 30). American Airlines pilots approve new contract, with nearly two
            thirds in favor. Retrieved March 16, 2015, from
            http://aviationblog.dallasnews.com/2015/01/american-airlines-pilots-approve-new-   contract-66-34.html/