Friday, November 8, 2013

Strategy, the most misused business tool of them all

Recently, I have been asked to consult for a start-up airline that was about to launch operations. The company faced its usual hiccups, common for any start-up venture, and with the imminent launch, the board had decided to strengthen the start-up management team with some serious expertise in order to increase customer experience from the start. Needless to say that the board initially did not choose me! I came in only after the original consultant had run away in tears over the company's disorder (as any entrepreneur probably can tell you, you need to be an admirer of chaos when starting-up a company) and nobody else was willing to risk his reputation. Don't get me wrong, the company itself was not worse or better than any other start-up airline. The focus had been on operations - and quite rightly so, you might argue since this is the division at the forefront competing for all those critical and internet savvy passengers out there - and with the usual understaffed start-up team, a direct consequence was that the back office had not gotten the attention it surely was entitled to.

Deciding quickly that the guys could manage operations without my help and that, as a consultant, I could not directly influence finances to the extent it deserved (you either have the money to survive the initial loss making period or you don't), I started focusing on all those nice departments that lack the glitzy and shiny perception of what a passenger thinks an airline is all about. I am talking about administration, human resources, business development... the boring yet necessary fundamentals of any company. So, after I successfully struggled to finally get my personal copy of the business plan (more often than not, consultants are apparently expected to consult on business structures that they do not know the company specific and applied fundamentals about), I started reading and on page one (I always skip the executive summary since I fortunately have enough time to make strategic decisions based on more than a page or two), I encountered the following highlighted statement that immediately started ringing all kinds of bells in my head: 'It is our strategy to provide high quality customer service.' Well, that is nice, obviously, but this strategy statement is missing its inherent point: A strategy of a company should never be about one issue alone. On the contrary, it only has an actual meaning that staff can truly work with when it addresses all aspects of the venture. This statement could very well be one of many goals to provide exceptional customer services, but it never can be a competitive strategy by itself. So, this made me thinking, how many airlines - or general organizations for that matter - have their competitive strategy right? Speaking from experience (including my experience from my own companies, I am not claiming that I have done things always right), not too many, I am afraid, and I believe this is because only few actually understand what strategy is all about.

Broadly, strategy can be divided into two categories: Corporate strategy and competitive strategy. Most corporations mean the latter when they refer to their strategy since corporate strategy is basically an internal plan that specifies which industries the organization wants to invest in and which upstream logistics need to be in-house (or not).
Now, competitive strategy should be based on a number of points raised in one's - hopefully sound - due diligence. These all should encompass the ever so important 'added value' to the passenger. Don't forget that at the end of the day you only receive your salary if your passenger is a) present and b) coming back for more. So, strategy should be laid-out around the following main areas:
  • the targeted audience (not only geographical but also demographical) and its expected to be received service levels
  • the carrier's value proposition (or in other words: perception is reality as far as passengers are concerned)
  • competitive advantage. I.e. you either do it better or you do it for less. As unfortunate as it may sound, and I know that your business management professor told you otherwise, but the reality is that price is the number one factor upon which people decide to buy or to go to your competitor. If I recall correctly, an official study recently published that historically only 30% of all airline passengers have been willing to pay a premium over the lowest offering and then only if the perceived value to them (and remember: perceived is real) outweighs the price increase by far. Contrary to what the business gurus tell you: can you really afford to be different? You can when you are Concorde, you cannot when you are Kingfisher.
  • an optimized value chain (or, in other words, hire-in that expensive MBA to reflect for you on the assets of and their flows within the organization). Ideally, all the customer perceived benefits of the chain should be enhanced whilst all costs to the airline should be reduced. Yet don't make the mistake of changing individual processes without looking at the bigger picture.
So, next time when sitting with your feet on your desk and a coffee in your hand, take a few minutes to think about your organization's strategy. Does it have a clear and communicated (without which the best plans fail instantly) targeted customer base? Do your sales people know that they are required to approach those private inhabitants, not more than 100km from your base, with families with at least 1.25 kids and an annual salary of at least triple the one of the airline's CEO since your flights are actually never more than 2 hours late? Has your audience been told (and I mean in such a way that they actually are aware of it) that they are able to fly from London Heathrow to Stansted without a stop-over in Singapore? Does you audience know that you charge exactly the same price as all the other airlines but your airline does provide them with free smiley stickers for their luggage so that they can easily spot it a the bazaar of their holiday destination? And does your maintenance manager know that he is supposed to find that MRO that is actually qualified to work on your fleet type, even though he has no family working there?

I am being sarcastic, of course. Most airlines have a pretty clear picture in their minds of what their strategy should be. But believe me, communicating the strategy to stakeholders and actually living by it often seem to be forgotten business arts.

One of the many dangers that the airline faces, and this is especially true for airlines that do communicate effectively, is, of course, instant imitation by its peers. With real time communications that we enjoy nowadays, challenges for managers to continuously improve their business models - and thus themselves - are greater than ever. As a direct result, micro-managing the value chain - i.e. the easy way out by discriminating stations in the value chain in one way or the other -  has become an unfortunate trend in airlines that more often than not leads to failure of (parts of) the business model. It is always easy to judge a profit centre on its bottom-line numbers. And often it would indeed be a smart and solid decision to outsource the activities of a non-performing division. Yet, as I have already said in my article on network planning, 1 plus 1 does not necessarily equal 2. And by that I mean that the individual contribution of any profit centre needs to be judged against the whole organization. It may very well be that the in-house heavy maintenance division loses money. Yet at the same time its closure and subsequent third-party provider would lead to delayed operational aircraft that in-turn would decrease the value of the airline for its customers. And as said before, perceived value is actual value.

And, as a final word of caution before I let you go back to your well deserved cup of coffee: an airline's business model is often confused with its strategy. 'Our strategy is to be a hybrid airline.' This, as nice a statement as it may be, is not a strategy. Rather, it reflects the airline's business model. A strategy tells you how to achieve your set goals. A business model tells you the operations of your strategy, i.e. how revenues are made and what the costs of these revenues are.

We all know that airlines face huge challenges from within their own industry and from outside. Oil prices sky-rocket while OEMs have not yet developed suitable propulsion alternatives. As a direct consequence, business models are continuously changing. Those that don't will ultimately be left behind and will fail the moment (financial) protection by its state falters. It is therefore necessary for any airline - even those that are currently enjoying solid growth - to have its basics right. As my old flight instructor used to tell me, 'it is better to have a prepared and well thought-of plan at your disposal and not to use it than to fly blind without a clue what is going to happen.' And he was right, of course, as could all those tell you who did not adhere to this wisdom... if they were still able to talk to us, that is.

Saturday, September 28, 2013

University of Connecticut - School of Business: interview on aviation opportunities in the GCC and Africa

I was recently honoured to be chosen by Sebastien Perraud - School of Business University of Connecticut - to provide the intel for his paper on trends and opportunities in the GCC and African airline markets.

I was impressed by the level of knowledge of an 'academic' in matters of practical business, and especially in start-up strategies. The whole conversation grew into a very pleasant interview and I do hope that my ramblings assisted in providing an interesting framework for his paper.

It should be noted that the expressed thoughts and concepts are entirely Sebastien's view so please give him the credit that is due. Sebastien, thank you again for your patience!

Interview Report on Trends

Recent trends & opportunities in the airline industry: Start-up companies in the emerging markets of GCC and Africa

I. Overview of the industry

With 239 IATA member airlines worldwide and hundreds of non-IATA affiliated, the airline business has been a constantly changing industry since its existence. In the United States, the Airline Deregulation Act of 1978 allowed entrepreneurs like Southwest Airlines’ founder Herb Kelleher to compete with major carriers such as the now defunct Eastern, TWA and Pan Am by trying new avantgarde business models (e.g. no-frills low cost carriers). To this day, most business models for flight operations have been experimented and many such as business class-only carriers proved unsuccessful. Majors airlines have to constantly produce new ideas to stay ahead of the competition and most investors in the industry are now looking at emerging markets.

This healthy discussion confirmed the general idea that engaging in the establishment of a new venture in the airline industry in the developed world was not only risky but presented very poor prospects of profitability in the long term. Even though some airlines established in the US during the last decade such as JetBlue or Virgin America have fairly succeeded, most failed. We have to keep in mind that many of these capital intensive structures manage to keep afloat thanks to parent companies (Virgin America). Some European start-up airlines such as Norwegian Air Shuttle, EasyJet or Ryanair have also managed to become market leaders in 20 to 25 years of existence. It will be however interesting to note that these three case examples benefit from factors such as lower oil prices (agreement between Norway’s Statoil and Norwegian), EasyJet employees are paid in average 30% lower than the industry average and Ryanair treats both its customers and employees badly (high fees, trade unions forbidden and arguable EU regulations compliance when it comes to safety rules and labor laws).

II. Introduction of the interviewee

After completing an MSc in Electrical Engineering in his home country, the Netherlands, Alex de Vos attended a flight school and began his career as a pilot and joined Continental after a few years of flying experience. Continental Airlines has been the only major airline/company he worked for. He later continued his career flying private jets in smaller companies, where he also held management positions such as head of the marketing department and operations department. This ground experience gave him the tools to pursue entrepreneurial opportunities in the Middle East, including Saudi Arabia and Bahrain, where he founded a consultancy company serving charter airlines. Mr. de Vos also completed an MBA at the University of Wales. He later founded Eastern Express, a regional airline operating scheduled flights from the United Arab Emirates and sold its shares a few months ago to finance the establishment of another consultancy company, Al Hajjar Aviation.

III. Discussion of the trends and changes

"I would like to express my gratitude to Mr. de Vos for his patience and kind assistance. This interview would not have been made possible without his sharp insight and spontaneity. Thank you."

1. Could you briefly explain the direct effects of the GFC to the attractiveness of the market and the industry?

The airline industry as a whole hasn’t had generated tremendous profits for the last 50 years. Start-up airlines must always produce new ideas to compete with established major airlines, which involves great risks. Emerging markets are less affected by the side-effects of the Great Financial Crisis, while we can qualify present times for established airlines in the developed world as ‘fairly catastrophic’.

2. In recent years, major airlines (Qatar, Emirates, Etihad) of the region have been growing significantly. Do start-up airlines operating regional and business jets also benefit from lower oil prices and operating costs?

The GCC is a small region and these airlines’ growth comes at a price for some of them. Gulf Air has been in deep financial trouble for the past decade, Oman Air is not performing better than a loss-making US-based carrier, Kuwait Airways has been in a time of great turmoil and Saudi Airlines is very conservatively managed, which has as a direct consequence a business model with poor growth prospects. The GCC region as a whole is not performing better than the US or Western Europe. Even though Emirates and Qatar are good examples of wealthy companies, their main objective is actually to support the sister companies in the country, which might generate financial losses but creates profit for the whole GDP (airport taxes, tourism, etc.). Their strategy is to expand beyond any geographical limit by all means, translated into a tremendous growth rate on paper but also an unhealthy cash flow.

3. Incentives for entrepreneurs: is the Gulf Region a good place to start a business?

Definitely, though it has its shortcomings. For example, the legal system is not as developed towards entrepreneurship as it is in the US or Europe since industrial life here has started around the 1940s. However, you are in general fairly certain to find funds for an airline even though it is a capital intensive industry. Petrodollars make the money available in the region and some routes are underserved or simply non-existent. For example, GCC carriers have always focused on long-haul flights and there was no dedicated airline flying domestically in the region. Our second opportunity was that there was no airline established airline based in Fujairah airport, where the infrastructure was state-of-the-art.

The nature of competition in it, and the attitudes and preferences of the customers it serves

4. Who are your main competitors for your consultancy and ad-hoc charter flights activities? What are the general trends in preferences and tastes of customers you serve and how does Al Hajjar Aviation attract and keep them?

Our main competitors are established operational consultancy companies from Europe and the US. People in the region do prefer to see regional or local companies taking part of the economic development process. Basically, regional start-up companies like us compete with large established companies of the Western World, though some happen to fail because of the completely different legal and corporate systems. We have a fairly good advantage over industry leaders such as Lufthansa Consulting because we are trading under local owners, sponsors and names: Al Hajjar refers to the highest mountain range in the UAE.

5. Benchmarking: could you give an example of a major process, product or any other idea you borrowed from a competitor?

When we set up the predecessor of Al Hajjar Aviation, we did not look at potential competitors so we tried to establish the best approach. We have our own and different expertise, which concentrates on the operational aspects of an airline and aerospace design. As a small company you need to focus on a niche.

What new opportunities have these changes created:

6. What new opportunities have these changes created for your activities?

Offering flights from the UAE to Somalia under the name of Eastern Express. It was a war-torn country and our objective was to pioneer in Somalia to get aviation off the ground in a safe manner. Our establishment opened doors for catering and airport management. Our vision of entrepreneurship is to open doors both for you and the others.

7. Which significant regional macro-level market changes have benefited the industry including Al Hajjar Aviation?

Even though the country was facing a reasonable amount of fighting, we saw the end of the civil war in Somalia as an opportunity. Moreover, the country was trying seriously to get out of a war-transition state towards a ‘normal country’. We considered the country safe enough to do business even though we came to the conclusion that we had to implement special safety procedures for our crew, passengers and local partners. Concerning the macro-level market attractiveness, average salaries are extremely low in Somalia and 95% of the population cannot afford an airline ticket so there was a dramatic need to consider a lengthy period of time without positive net income on ticket sales, hence we had to find ways to make profits. The group thus expanded to airline-related operations such as ground handling, which was nearly non-existent in Somalia.

8. With a yearly average growth of 5%, Africa has begun to become the primary focus for new market-seekers in the airline industry while African countries hold close business and diplomatic relations with the UAE: are you going to follow GCC-based companies’ moves to look for new opportunities?

Africa is a fairly large landmass and the Horn of Africa should be the most difficult region to do business. Aviation safety standards are poor and we had to invent the whole process of running an airline from scratch. With traditional cultural links between the two regions, it is no surprise that many GCC-based companies from various industries such as real estate or engineering expand there.

9. In conclusion, would you think the industry presents strong opportunities for those aspiring to establish a start-up airline?

Worldwide-seen opportunities for flight operations is getting more and more difficult, since most models have already been tried. There is no strong opportunities for the industry worldwide unless no major improvement in technology, e.g. revolutionary fuel-efficient jet engines. There are however plenty of opportunities even on established markets on the supplier front, i.e. airport handling or consulting. In consultancy, there is a need of having a certain level of wealth to make yourself successful. If you jump into a market at its very early stage, then the wealth is not sufficient to attract third party consultancy services.

IV. Opportunities emerging in the airline business

There are new opportunities in both established and emerging markets. For instance, Japan has always been one of the hardest markets to penetrate for newcomers. Two main major airlines (namely JAL–Japan Airlines and ANA–All Nippon Airways) have been duopolizing the market for both domestic and international routes. Japan is in fact a challenging market: it has one of the
strictest aviation safety regulations and customers expect a very high quality of service. However a dramatic change occurred in early 2012 with the launch of three low-cost carriers: Peach Aviation, AirAsia Japan and Jetstar Japan; the first one is partly owned by ANA, while the second one is a joint-venture between JAL and Malaysia’s AirAsia (which is also Southeast Asia’s leading low-cost carrier) and the third one is a joint-venture between JAL and Australia’s Qantas Group. They have been so far successful on legs such as Tokyo - Okinawa or Osaka - Sapporo especially among low-budget students. Services both in air and on ground are minimal, even though punctuality and a decent customer service are culturally critical factors, things that most European low-cost carrier passengers are less regarding about.

The interview gave us an overview of the market in the Horn of Africa. I personally think that there is also a great deal of opportunities in West and Central Africa, especially in Senegal, Ivory Coast, Ghana, Nigeria, Cameroon, the Republic of Congo and Gabon among others. These countries in particular present cultural advantages compared to other countries on the continent: they are either English-speaking or French-speaking. They are natural resource-rich since they produce and export crude oil, precious woods, cocoa beans, phosphates, and ore in large quantities. The average growth in the region is of 5% and the literacy rate is slightly over 60% of the population. The rising middle class and a somewhat wealthy proportion of the diaspora in Europe compose a growing market. These politically instable and corruption high countries have more or less taken efforts towards a democratic transition but the main beneficiary is the corporate world: foreign direct investment is highly encouraged and free economic zones are created to attract investors and start-ups.

South African Airways, Egyptair, Royal Air Maroc, Ethiopian Airlines and Kenya Airways are among the top 500 African companies and link the continent to the world. They are competing directly with western airlines such as AirFrance-KLM, British Airways and Lufthansa Group on North-South routes thus are more profitable on transcontinental routes. Since the collapse of Air Afrique in 2002, a number of countries have lacked of a flag carrier, which gives many opportunities for entrepreneurs: in recent years, many domestic and international start-up airlines such as CamairCo (Cameroon), Arik Air (Nigeria), Equatorial Congo Airlines (Congo-Brazzaville), Air Côte d'Ivoire, Korongo Airlines (D.R. Congo) and Senegal Airlines have emerged, mainly because of their predecessors’ poor management and bankruptcy or ‘democratic transitions’. In many cases, these airlines are partly-owned by established parent companies such as Brussels Airlines and AirFrance or regional investment funds. Despite high airport tariffs and a highly regulated market–liberalization of intra African tradehas not been governments’ main objective so far – niches are likely to exist both for airlines and industry-related companies (i.e. airport management and consultancy). Culturally speaking, local companies are favored since lowly conscious western conglomerates face anti-imperialist resentment (e.g. Royal Dutch Shell), though European brands in the region are known for being reliable (e.g. Orange, AirFrance). I do not necessarily see new opportunities by adding another airline on the playing field but rather on reshaping it. Freshly founded start-ups in the region can develop and catch up with already established airlines by providing a locally-tailored high quality product at a reasonable price, provided that they encourage intraprenarial behaviors and get full support from government agencies. I have also noted that these companies have a fairly poor and outdated online/marketing exposure. On the supplier side, African airlines will be in need of more expertise and globally-minded human capital in order to grow internationally: hence there might be a future for consultancy companies in this market. All we can hope for the industry and the region as a whole is better governance (less corruption), more regional cooperation for liberalizing markets (lowering or abolishment of tariffs) and more public-private partnerships: macro-level evolutions and social and economic progress will do the rest.

Thank you for your attention.

Thursday, September 19, 2013

Network Planning - Mis(t)ery 101

Not so long ago, I was asked by a well known regional carrier in Europe to head their network planning department. Intrigued by the request - I am probably better known to fill positions that require long hours with my feet on my desk and a coffee in my hand rather than doing actual work - I accepted the preliminary discussions with management and found the network planning department in dire straits. This made me wonder, after all the airline was one of the more successful ones in Europe and network planning is an important intermediary in creating the big bucks. What went wrong with this particular airline and with many airlines all over the world in general?

Without doubt, the airline industry is a relatively new one compared to other industries in the modern world. Not that long ago - in fact, my grandfather actually remembers the prevailing headlines of his youth - two brothers hopped a few steps a few meters in the air on an engined crate that we now recognize as the initial predecessor of the B787, F35, and other mighty winged machines of today that are capable of performing incredible endeavours.

It is therefore of little surprise that the airline industry is far from a sophisticated one (but don't tell your passengers that, they might get scared!). Quite rightly, the focus of airlines have lied and still do today on safety, environment, and shareholders equity. Efficiency, on the other hand, is a topic that airlines all over the world, be it in Europe or Africa, still only are trying to get to grips with.

As an example, only in the 1970s was the ever so important topic of yield management developed (or should I say invented?). A lot had to do with regulatory bodies, of course. When IATA tells you that you absolutely cannot fly from A to B for less than 1,000 bucks and you can under no circumstances offer more than a cold, mushy sandwich and a bottle of water on that same route, who are you as airline CEO to worry about yield? Relax, have some coffee. After all, your competitor is bound to the same restrictions.

And network planning is in a similar stage of evolution. Even with large flag carriers of today, network planning is often done by senior managers that have a gut feeling that a certain route might be a good one for the company. Middle management then sets to work on the new route planning, and lower management implements the plan while finding out that the current fleet of aircraft actually is a rubbish one for the new routes! Airlines are high tech? Think again! This article's intent is to give a very brief overview of where the industry stands today with respect to network planning and where I believe it should focus on (and in all fairness, quite a few airlines adhere to the discussed concept, so I am certainly not entitled to that Nobel Price just yet!). I fully realize that I probably kick a few industry seniors against their shins by stating my views but hey, I just return the favour!

When we have a look at the current state of the industry's utilized networks, we quickly can see that airlines all over the world base their routes on two distinct network models:
  1. Hub and Spoke network; and
  2. Point-to-point network.

Of course, as with any model structure, any combination of the individual models is possible, too. We would refer to this combination model as a hybrid model. Since logically a hybrid model comes with all the advantages and disadvantages of the individual models, for the sake of this brief overview, we will not further discuss it in this text.

A Hub and Spoke model is the one that has been in existence since the early days of aviation. A Hub is an airport that is used by an airline to connect revenue traffic from at least two different flights. A Spoke then is an a flight that connects a Hub with a non-Hub airport.

A Point-to-point network is just that. There is no connecting airport, all routes are operated directly.

Both models come with individual advantages and disadvantages. The biggest advantage of the Point-to-point network is that very little network planning is required. This obviously comes with a considerable cost saving making it therefore the ideal network type for low cost (and this time I actually mean low cost as opposed to no-frills) airlines. Hubs come with other disadvantages too. So called banks (a cluster of arriving or departing aircraft to/from the hub) must obviously be scheduled in as short a time window as possible. After all, you do not want your fleet arriving spread-out throughout the day, keeping your resources bound and under-utilized. On the other hand, optimal banks create serious consequences for the hub. Just imagine having twelve A380s arriving within the same hour at the same airport. Apart from stand availability, baggage, catering, and cleaning bottle-necks, the airline would probably lose a considerable number of customers because of long immigration waiting times.

A direct revenue consequence of the Hub and Spoke model is a lower aircraft utilization. It is hardly possible to create equal distance hubs an thus individual banks are difficult to optimize. The latter directly resulting in lower load factors since passengers do not like to wait a longer period of time during a stop-over.

I would argue that this is also the key concept to successful network modelling. Traditionally, network modelling has been done based on individual financial aspects only. Obviously, this has been regarded as the optimum yield generating method. 1+1=2, right? Yet, by optimizing financial numbers on paper, one certainly might be able to please upper management but the most important yield generating parameter of the airline has been completely left out: the customer! An airline is, per definition, a company that renders services. Yet, good services please the customer and therefore generate better revenue overall. As a direct consequence, a low load factor on an individual flight should not necessarily be a reason for immediate termination of this service. If this flight contributes positively to the network as a whole, pro-rated yield could very well exceed individual yields thus creating added value to the network as a whole.

In practice, network planning should therefore consist of three individual major stages:
  1. Network strategy;
  2. Network design;
  3. Network optimization.
The network strategy comes directly from the top. It is derived from the airline's vision substantiated by its mission. For example, FlyHappy might have the vision to become the dominant carrier on Timbuktu to Brasil routes. Or it might want to be the number one feeder to the MilkyWay Alliance in Europe.

The design of the network then comes-up with a number of banks that fulfill the airline's strategy, simulates their respective profitability to the network individually and collectively, and, as a direct consequence, also determines the ideal fleet mix.

The last step fine-tunes, optimizes and monitors in real operations. This stage can also very well be used to evaluate additions to the network before handing over the network to yield management.

Concluding, I would like to reiterate again that network planning should be just that: planning of a complete network. Profitability of individual routes should be valued against the network as a whole. As my financial professor told me a long time ago, the art of financial success is not to turn individual minuses into pluses, it is to combine many minuses to one big plus. I wonder if the guy should have been working for the airline industry?

Thursday, September 5, 2013

The WRONG investor

You might say that there is no such thing as a wrong investor. After all, any business needs money in order to survive. So who really cares where the money comes from? Well, you are right, obviously, and at the same time you are dead wrong! Confused? Then keep reading, it gets even better!

Let's take, for example, an intelligent, smart and generally nice - and don't forget good looking - serial entrepreneur. He has established a number of companies already, mainly in the aviation industry. Just to give him a name, let's call him Alex.

Now Alex has really done many things right in is illustruous career as a serial entrepreneur. He has managed to personally and professionally challenge himself on a daily basis, he has made a name for himself within - limited - industry circles, and - probably most importantly of them all - he has managed to keep his family not only well fed but also happy with his professional lifestyle! What he has never successfully achieved, though, is to find the ideal investor for his various businesses. Now, I am not talking about his one-man shows in the service industry that requires only minimal capital and where the funding was usually supplied by Alex himself. I am talking proper airlines, requiring big bucks.

Alex has found an tried them all: institutional investors, private investors, larger numbers of investors, just a few of them... it always turned out to be a less than perfect marriage. "Now stop complaining", you will say. "At least this Alex chap found himself money for his businesses. We, on the other hand, have tried to do unsuccessfully, unfortunately, so he really should consider himself lucky"!

And of course, you are right. Without money, no business. Without business, no income, Without income, one unhappy family!

But look at the aspect from a different perspective: As an entrepreneur, you have put limitless efforts in your business idea. You live, breathe, and dream the venture. You know that the company will succeed because, well, it is just a splendid idea that the world is impatiently waiting for! And as a consequence, you do expect that any potential investor buys into your fab idea mainly because he feels the same way about it. The potential investor thinks of you nothing less than a hero who is here to serve the community. He will put in his money, sit back and waits patiently for you to get him his promised return. Simple. And any entrepreneur's dream.

Reality is different though. As you might have found out during your fund raising sessions, the first question is always: "how much"? Good for you if you actually started your presentation about the required capital and not about the business concept. This way, you saved yourself probably many, many rounds of painful discussions.

Any investor, be it a VC, a private equity investor, or any other money investing organization with usually a fancy address in New York, London or Paris as its head office, is interested in one, and one thing only: RoI. True, the fund or private individual might have a scope that dictates certain 'greener' or other society beneficial investments but in the end these funds need to deliver the results to their clients the same way as a conventional investor needs to do. No investor will accept a capital leak under any circumstances. Period.

So what does that mean for Alex and you as an entrepreneur? Well, to put it simply: interference. Interference by the board in operational matters that goes above the mandated supervisory board duties. At best it means a drilling of the company's management team during the regular board meetings with some advice that is expected to be adhered to, at worst it means a CXO - often in the form of a board member - supplied by the investors. After all, especially in the case of an airline, the investors trust the entrepreneur with a considerable amount of money and they would like to be updated of the company's cash-flow regularly and preferably 24/7 in real-time. And what is the next logical step after receiving the intel? Correct. Act on it! And I do not even blame them. If it were my money, I would probably feel the same!

Yet, what investors do not realize is that such behaviour is counterproductive to the company's efficiency and thus its income and bottom-line. Any outsider has per definition only a limited knowledge of the company. He might be a trusted professional in the company's industry but he certainly is not an expert in company internal matters. After all, you, as the entrepreneur, established your business idea on a niche market concept, right? And I doubt that the CXO cum board member has been studying this niche just as you have done over the last few years. And with limited knowledge arises disaster, as any Captain is more than willing to tell you about his First Officer.

Now, in all fairness to the investor, there are two sides to the medal. The entrepreneur - often quite rightly - considers himself the expert and expects anybody else to respect his expertise while the investor has constant second thoughts about his investment strategy - and quite honestly, who wouldn't? - and would like to take an active role in the running of the company since it is a human trait to consider oneself the best in its field and the field of an investor comprises of the world, or so he likes to think. These two sides are obviously not compatible. Even a good ole Swiss compromise would only be beneficial to the company, and thus its generated profits, if the interference comes in the form of a perfect match to the company's culture and knowledge basis. And, by the way, and Rudolf really has a red nose!

So, what is he solution to this dilemma? Well, one obvious possibility would be to start companies that require a cash amount that you are able to provide yourself only. It might not be very practical but this solution comes with an added advantage: if something goes wrong, you only can blame yourself!

However, it would be a sad day if an entrepreneur can only succeed with concepts that require a capped amount of cash instead of ideas that he believes in. So here is my advice: if you find that your potential investors like the financial gains you promise them but are not interested at all in your product, say politely 'thank you for your time' and look somewhere else. Also, if your potential investor has a little knowledge of your specific industry, prepare an executable document that specifies the exact roles of the investors and their representatives. If your investors do not want to sign this, walk away! Remember, a little knowledge is a dangerous thing. And obviously, if your potential investors try to divert your idea to a path you do not believe in or you even have moral objections to, thank them for their time and call somebody else, right now. I mean it, right now!

The idea of turning down hard cash might be a frightening one but believe me - I mean believe Alex, of course - he has been there when interference of a shareholder resulted in the collapse of an otherwise very valid business model. And the legal consequences of such a mess usually take all the entrepreneur's time that he rather should spend on a new business concept! Believe me, I, err Alex, has been there!

Tuesday, May 28, 2013

Headhunters – right in harm’s way

My twenty or so years in the aviation trade have seen me using a number of times the assistance of a recruitment firm. Sometimes I was the job seeker, and other times I had a position to be filled. The big difference between the two situations is that in the former you hardly get an acknowledgment from the headhunter, in the latter you get swamped with references to 'ideal' candidates that most of the time do not even know how to spell aviation. The most bizarre incident of a skewed trade perception happened when a headhunter – one of a very, very highly reputable executive search agency, I might add – called me to ask if I were interested in expanding the firm's aviation department. Not knowing an awful lot of this side of the consulting industry, I prepared a number of questions that I would have liked to discuss. And guess what, the reply I received by the headhunter was short and crisp: "I don’t have time to answer these questions, good luck with your future career." Needless to say that this executive recruitment firm does not figure high anymore on my company's preferred supplier list.

This incident, certainly one that made my library of anecdotes that I tend to spill over startling party guests, made me think: what is nowadays the added value of a headhunter to one's organization? Regardless the side of the desk you are currently at, we all are witnesses of the current labour market situation, especially in the aviation industry. There is an abundance - and I do mean a large, large quantity - of qualified resources at all levels available, all desperate for a (near) quality position. And with internet platforms easily accessible, such as LinkedIn, Twitter, and to some extent even Facebook, it is easier than ever to connect to a company on the other side of the world and pop the question.

Of course, there are a few headhunters that do go the always promised extra mile for you. Similarly, there a few that are the preferred supplier for certain companies and thus are capable of offering positions unknown to the outside world. However, and my experience as somebody within an organization who actually tries to attract quality staff seems to underline this, most recruitment agencies seem to connect to an endless number of companies and individuals in the hope that someday these contacts might come in handy. By following this strategy, these particular recruitment agencies not only do not add any value to the recruitment process, they – maybe more importantly – tend to give a bad name to the industry as a whole.

After all, it is as easy for me nowadays to connect with Far Away Airways via the internet as it is to connect to the flying club across the street. And when I am looking for a new position, I certainly would network the heck out it, wouldn't I? And by providing a large number of questionable – to say the least – resumes when asked to search for a certain quality professional, the respective recruitment agency most likely upsets the hiring manager to such an extent that the latter will reluctantly utilize the services of any headhunter in future. In the end, as Human Resources I would like to get pre-screened professionals, hopefully all more than capable of performing above standards. And don't forget that with virtual job fairs on the internet, it is as easy for the organization to connect to prospective candidates as it is vice versa.

So what would be a solid strategy for the impasse the recruiters are in nowadays? Consolidation of the industry as a whole? Hopefully not, we all have seen where consolidation leads to and quite honestly, nothing seems to be a bigger paradox than a headhunter looking for a job.

Monday, March 4, 2013

Budgeting 101 in the airline industry

A few years back, when trying to pitch my first aviation company to the people with the deep pockets, I passed my financial projections to my dad for a quick inspection. The quick scrutiny prolonged somewhat – to state it mildly – and when my dad, who has no aviation experience whatsoever, handed my pride back to me he passed me a fairly long list of comments as well. The most grave certainly being: “Your profit/loss and cash-flow statements are in a completely wrong format! How on earth do you expect financial analysts with little time on their hands and probably dozens of business plans in their in-trays to adjust to non-common financial projection layouts? You just have killed your project!”

And he was right, of course. Once an entrepreneur, with his headlines of the business plan, has finally managed to catch the attention of a potential investor, he needs to follow-up with streamlined, and easy to understand facts. And that includes an accepted set of financial projections in an understandable form.
Fortunately, ICAO can serve here as the cavalry that gallops-in to the rescue. In all their wisdom, ICAO has established a set of accounting rules for airlines that, if nothing else, establishes a set of conformities. For the budding aviation entrepreneur, but also for seasoned airline managers as a brief fresh-up, I present them here for you with a short discussion. As we will see, even ICAO has made some questionable rules that are hardly practical for an airline.

Generally, costs of any venture can be divided into

        I.            Non-operating items;
       II.            Operating items.

Non-operating items can be defined as costs that are incurred regardless the operating status of the organization.  In the case of an airline, these comprise mainly of:

·         Gains (or losses) from retiring property and equipment. Or, in another words, the difference between the depreciated book value and market value.

·         Interest and dividends paid and received on/from financial instruments.

·         Profits (or indeed losses) from affiliated companies, such as catering companies.

·         Forex gains and losses, and gains and losses from shares and securities.

·         Received government subsidies and payments.

Operating items then are items related to the operations of the company. In the case of an airline, they re associated with the aircraft operations. These are further divided into Direct Operating Costs (DOC) – costs that are directly affected by the operation of the aircraft - and Indirect Operating Costs (IOC) – operating costs that occur regardless the operation of the aircraft.

Direct Operating Costs consist, as per ICAO, of:

a)      Costs of flight operations, including

a.       Flight deck crew salaries and expenses;

b.      Fuel and oil;

c.       Insurance of flight equipment and crews;

d.      Rental of flight equipment and crews.

b)      Costs of maintenance and overhaul

c)       Costs associated with depreciation and amortization, including

a.       Flight equipment;

b.      Ground equipment and property;

c.       Amortization of route development costs and crew training;

d.      Other depreciation.

  Indirect Operating Costs then consist of (as per ICAO):

a)      Station and ground expenses, including

a.       Airport and en-route charges;

b)      Costs of passenger services, including

a.       Cabin crew salaries;

b.      Passenger liability insurance costs;

c)       Costs associated with ticketing, sales and promotion;

d)      General and administrative costs;

e)      Other costs.

Now, before we shout hooray and praise ICAO to the limit, let’s have a closer look at what ICAO actually recommends.

Costs associated with the depreciation of ground equipment and property do not rely on the aircraft operation. It is true that headquarters of airlines do seem to grow bigger when the airline’s aircraft types get bigger – probably to shelter the increased ego of the CEO - yet, this is hardly the aircraft’s fault. As such these costs should belong under IOC.

Similarly, airport and en-route charges and even cabin crew salaries do change with different aircraft types operated. A Saab340 with one cabin crew on-board shows a smaller cabin crew salary account than the one for an A380 that is manned (or mostly womanned) with the population of a small town. Thus, as per the definition, these costs should fall under DOC.

Clearly, the template provided by ICAO has its minor flaws but it does serve as a solid foundation for budgeting and accounting purposes in the airline industry. The recommendations also generate magnificent benchmarking figures for you to compare your airline’s financial viability with. What they do not do well, however, is to provide a viable platform for cost structure analysis - what the financial industry calls management accounting.

From the structure provided by ICAO, it is difficult to derive which costs are here for the short-term and can thus directly be influenced by managers – and find me a manager that does not like a quick fix -, and which costs the airline would need to live with, at least in the longer run. Or in other words, which DOC has the greatest change potential on the costs incurred?

To this end, DOC are often further divided into fixed and variable DOC. Fixed DOC do not vary in the short term while variable DOC could be avoided, at least to some extent, if a flight is cancelled. The so received structure allows for in-depth analysis and thus can very well prevent you from making very stupid decisions. Just don’t forget to factor-in a very high salary allowance for the so needed analyst. They do not come cheap!

Sunday, February 24, 2013

Rotana Jet – Now or never

Mid September 2012, Rotana Jet (IATA: RG; ICAO:RJD) started operating scheduled domestic flights within the United Arab Emirates from Abu Dhabi International Airport (AUH) to Fujairah International Airport (FJR) and to Al Ain international Airport (AAN). Abu Dhabi Al Bateen Airport (AZI), the airline’s base, followed later as a destination in the carrier’s network. The equipment utilized is two Embraer RJ 145 (ERJ 145) regional jets. The company had been operating VIP-charter flights on a Gulfstream 450 and flights under the mandate of the Tourism Development and Investment Company (TDIC) to the islands of Sir Bani Yas and Dalma just off the coast with the capital Abu Dhabi.

Almost six months into the venture, it is time to see what has materialized from the heavily announced first UAE domestic airline. After such a short operational time span, financial success or a break-even can hardly be expected. Yet, half a year should show the viability of the business model, its – hopefully correctable - flaws and its potential. For an operation of this relatively minor scale, six months into operations should give the owners the final go / no-go call, and we all hope that the guys at the steering helm are able to call out a loud and proud ‘GO!”

Let’s begin our short evaluation:  

The ERJ 145 is a 50-seat regional jet airliner with 31 inch seat pitch (no-frills airline Air Arabia offers 31 inches or 32 inches on the A320) with rear-mounted Rolls-Royce turbofan engines. It is a stretched and modified version of the predecessor turbo-propeller aircraft EMB 120 Brasilia, and it made its first flight in 1995.

The aircraft’s maximum take-off weight is, depending on model and equipment used, around 22,000 kg. The maximum ceiling of the aircraft is Flight Level 370 (around 11 km depending on atmospheric conditions) and according to Embraer’s specifications, maximum endurance is achieved when flying at the maximum ceiling. With a full cabin, this endurance translates into roughly 1,550 NM (around 2,850 km). The ERJ 145 is known to be limited to a fairly high minimum temperature at altitude (and thus optimal flight economy) but with the prevailing climate in the UAE, this is probably not an issue for Rotana Jet. However, with the short routes the airline is operating, the optimum flight level of FL 370 seems hardly achievable. In its performance brochure, Embraer specifies 18 minutes of climb under ideal circumstances to reach FL 350 only; hardly a flight environment that the crowded UAE airspace is capable of delivering.
I have no inside information on Rotana Jet’s ERJ 145 operating budget. And to be honest, even if I did, I would not disclose it. I believe such numbers to be the property of the respective airline. Yet, in order to get a somewhat accurate picture over the financial feasibility of Rotana Jet’s operations, I use the numbers of a now defunct European carrier. Obviously, being European operations in the mid first decade of this century, personnel (higher) and especially fuel costs (much lower) are to some extent out of balance yet the overall ratio picture should look similar to this:

From experience, with the fairly short routes (I.e. higher specific fuel consumption) in-mind, and with current Jet A1 market prices, I would claim that fuel costs set the company back around 30% of the total bill.

On the route AUH – FJR (around 125 NM), Rotana Jet charges a minimum fare of AED 200 and a maximum fare of AED 400 one-way. There is no discount for return fares. The airline claims a block-time of 45 minutes but this time can be realistically reduced by a few minutes since neither AUH nor FJR know slot-times.

The fuel burn for this route should average 215 US Gallons. At a rate of US Dollar 3.50 per US Gallon uplifted, the fuel cost for this trip alone equals AED 2,750. Hence, as per the above break-up, the overall cost of the trip is around AED 9,200.

With an average fare bucket of AED 280 (including taxes), the maximum revenue achievable for this flight equals AED 14,000, leaving a maximum of AED 96 playing field per passenger for airport service charges and airline profit.

A similar picture stems from the airline’s Abu Dhabi to Al Ain route. Here, the airline charges a minimum one-way fare of AED 150 and a maximum of AED 320. The stated block-time is 30 minutes but again, this short flight should be operated in a few minutes less.

The fuel burn for this route should average 170 US Gallons. Again, at a rate of US Dollar 3.50 per US Gallon uplifted, the fuel cost for this trip alone equals AED 2,200 resulting in an overall trip cost of around AED 7,500.

With an average fare bucket of AED 220 (including taxes), the maximum revenue achievable for this flight equals AED 11,000, leaving an even smaller maximum of AED 70 playing field per passenger for airport service charges and airline profit.

Of course, it can be safely assumed that the TDIC will financially support in one way or another the airline’s operations to the islands. In a best case scenario, this so generated revenue could very well be used to counterbalance the loss making higher profile routes. Yet, with a highly marginal aircraft utilization – and fixed operating costs ticking – the business model used by Rotana Jet is probably rife for adaption.

I would assume that Rotana Jet’s business plan foresees a partnership of some sort with Abu Dhabi based Etihad Airwyas. Mitigating costs, incurred on less profitable short-haul routes, onto more profitable long-haul routes is a common practice in the airline industry all over the world. Rotana Jet’s Abu Dhabi arrival timings would certainly seem to indicate such an aspired partnership.

The flights from Fujairah arrive Abu Dhabi International Airport 12:15PM - although these flights are frequently cancelled – with possibilities to connect into the Subcontinent, Middle East and UK and 7:15PM - weekend flights operate into Abu Dhabi Bateen Airport – with possibilities to connect into the Subcontinent and Middle East. Flights from Al Ain arrive AUH 9:15PM connecting mainly into the Subcontinent.  

Yet, so far – and contrary to the agreement RAK Airways of Ras Al Khaimah International Airport had in place – such a partnership has not been announced yet. This might have a simple reason, however: Etihad needs to audit actual operations first before committing to a partnership. Yet whatever the reason, Rotana Jet seems under quite some pressure since its load factors clearly indicate the immediate need for tying-up with big brother.

It is probably safe to claim that the by Rotana Jet utilized equipment, 50 seater jets that have limited OEM and maintenance support in the region and a fairly low cargo potential, is far from ideal on very short routes with a highly limited audience. A turboprop in the Saab 340 class would have been, purely from a financial point-of-view, a more suitable bet. Of course, the prevailing position on turboprops in the region is very well known so the marketing guys would indeed have needed to work just a little bit harder in such a case.

At the same time, connecting into AUH’s network of Middle Eastern and Subcontinent flights make little sense as well. Passengers from Fujairah will hardly fly west for 45 minutes in order to connect into an east-bound – and thus longer – flight to India when they have the choice of three major airports with numerous direct flights – including no-frills airline options - 75 minutes driving time from home.

And lastly, I have recently heard a fair amount of industry professional enquiring after the operational status of Rotana Jet. True, the carrier seems to cancel regularly its mid-day flights to/from FJR. Yet, the airline is very much operational. However, only a few people actually seem to be aware of this! The marketing plan and/or effort by the carrier display major flaws - the most notable ones certainly the absence of any marketing strategy. It should be a fairly easy exercise for the airline to utilize its employees to spread the word. By employing guerilla marketing tactics that usually work best for limited markets, such as the airline faces, expenses can be kept fairly low and returns would dramatically increase.

In the end, if the domestic operations of Rotana Jet have proven one thing only, it is that there is certainly a feasible UAE domestic air routes market. With the exception of the carrier’s fleet, all issues in the airline’s business plan can easily be sorted-out. It is up to the carrier to prove that they are not only capable to rely on peer planning but that they have the actual in-house skills and expertise to make the concept work! I for one wish them well.

Wednesday, February 20, 2013

Innovation in the aviation industry!

Sometimes even I do get surprised. Here I was thinking of all those static flag carriers never being pro-active, merely always reacting to external market forces. And then, one sunny (well, that is actually not hard in the UAE) morning I read the industry news before setting-off to work and voila: probably the sturdiest of them all comes with a great idea to counter-balance the ever looming threat by no-frills airlines:

British Airways offers cheaper fares to flyers without checked bags

by Oliver Smith, The Daily Telegraph

British Airways is to offer cheaper fares on selected routes to passengers who travel without checked luggage.

The airline says the fares – which will initially be offered on flights from Gatwick to Amsterdam, Dubrovnik, Jersey, Tunis, and Turin – will give its passengers “more choice”, and is likely to be viewed as an attempt to compete with low-cost airlines such as Ryanair and Easyjet.

“The suprise is not so much that BA has made this move, but that it has taken so long to do so,” said Nick Trend, Telegraph Travel’s Consumer Editor. “It appears to be a reaction to commercial pressure from its no-frills rivals, which quote lower headline fares because they don’t include the cost of checked bags. This can make BA’s fares look expensive and so less attractive by contrast.

“BA says that the new fares are about giving it customers ‘more freedom to choose the kind of flying they want’, but they are also about giving British Airways the freedom to make its fares look cheaper.”

He added that those passengers who do check a bag into the hold could eventually end up paying more.

“Airfares are so variable that, within a few weeks, it will be impossible to know whether BA passengers without hold luggage are getting a better deal, or whether those who check in their bags are being charged extra,” he said.

But Peter Simpson, director of Gatwick for British Airways, claimed that passengers who check in a bag will not be expected to pay extra to make up for those who choose the cheaper fares.

“It is all about giving our customers more freedom to choose the kind of flying they want,” he said. “Many British Airways customers at Gatwick choose not to check in a bag as they’re already taking advantage of our generous two-bag hand luggage policy. Those who still want to check in a bag will simply pay the same price they do now.”

The new “hand baggage only fares” go on sale next Tuesday (February 26), with starting prices ranging from £39 (one-way to Amsterdam) to £69 (one-way to Turin). BA said that, depending on the route, the fares are between £9 and £15 cheaper than usual.

The announcement by BA – which axed free meals on some flights in 2009 in a bid to cut costs – follows KLM’s decision to begin charging customers who check in luggage on short-haul flights. KLM’s policy will be effective from April 22.