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.