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.

Start-ups and funding - a love-hate relationship

Nobody questions that start-ups, at some point or other, are always in need of funding. From a few dollars to millions of it. As a budding entrepreneur, this could very well seem overwhelming, especially when financial analysts and consultants start giving you advise.

This article is a good starting point to get at ease over the topic. Remember that it is you, as the entrepreneur, that gets to call the shots. Most investors and consultants want you to make believe otherwise  - it is my money and I do as I please - yet the entrepreneur has always the possibility to say no. Of course, he then might lose his funding but this could be better than to adapt a failing strategy for his company.

Point number 4 raised in the article seems to sum it up quite nicely.

The Non-Entrepreneur's Guide to Startup Funding

Getty Images
A few months ago, I wrote “The Non-Entrepreneur’s Guide to Starting in Startups” with the aim of helping those wanting to break into the entrepreneurial world. Now, let’s assume you’ve done your reading, attended events, have identified a solution to a specific problem, and are ready to start testing your hypothesis. What is the optimal path to gain the necessary resources?
Before we get into specifics, here are six factors to consider:
  1. Risk vs. Reward: The more equity you give up, the more you diversify your risk and decrease your potential reward.
  2. Control: Who holds the power to make decisions about leadership and company direction?
  3. Velocity: How much funding is ideal for you to reach your desired outcome? How fast do you need (not want) to grow? Too many resources can be as damaging as not having enough, allowing you to pursue poor directions for extended periods of time.
  4. Distraction: There’s a reason why good decisions aren’t made by committee. Those with a material interest will want to be informed, understand decision-making, and, in some cases, help make decisions. Hours dedicated to those activities are hours not spent building and selling.
  5. Mentorship: Wise and experienced mentors are anything but a distraction, providing knowledge that can bypass months of wrong turns and setting you on the path to success.
  6. Influence: Regardless of your business, deep relationships are practically priceless. Who can place a call to an old friend and open a golden door?
With those factors in mind, here’s a guide that covers the most-to-least autonomous options. As a reminder, the information below is intended for those new to the startup world, and is not intended to be an “end-all, be-all” of funding knowledge. If you’re looking for depth, jump to the end for a list of resources that dive into each area in detail.

Personal Assets (Bootstrapping)
Overview: Bootstrapping means not taking any outside investment and funding the startup 100 percent from the entrepreneur’s personal assets and business cash flow.
Consider: How many resources do you need now? What is your ability to fund the project now? What is your risk tolerance? Assuming the project fails, are you okay with the position you’ll be left in? Should the business generate enough cash to become self-sustaining within a reasonable timeframe?
Optimal for: Those with a high-risk tolerance, a high net worth, or who need low necessary startup funding (or a combination of all three).

Consulting (Bootstrapping)
Overview: Using your professional skills to launch a consulting business with the primary aim of supporting your startup.
Consider: Will consulting ultimately distract you from your primary purpose? Can you adequately juggle multiple projects at once? Are you disciplined enough to ignore “paying work” for your startup? Can your potential clients’ work provide the code base or intellectual property for your startup (ethically, of course)?
Optimal for: The risk-averse, the skilled (hirable), and the disciplined. As Chris Guillebeau, author of the “The $100 Startup,” says, “Bootstrapping is fair game for most startups other than manufacturing or medical research, which require more funding.”
Look to: Relationships with potential consulting clients and your psychological profile.

Overview: A crowd of people pre-buy your product, providing you with the cash to get the product built. No equity or debt is exchanged (to change shortly with new laws).
Consider: Do you have a consumer product? If so, do you have a way to make it stand out in the crowd? Will the time investment of promoting the microsite be worth it?
Optimal for: Sexy consumer products with mass appeal.
Look to: Indiegogo and Kickstarter.

Friends and Family
Overview: Use your family and close personal relationships to gain access to resources. Their primary motive for investing is you, and not necessarily a return on their investment. Typically, this is considered “early seed stage,” and it consists of funding between $10,000 and $50,000.
Consider: Will this harm personal relationships? Will this be an unnecessary distraction? How important is the money to the investors? What are the ramifications if the startup fails?
Optimal for: Those with wealthy friends or family who love them dearly, are supportive of their endeavors, are looking at it more as a gift than an investment, and are comfortable with the startup’s likely failure.
Look to: Personal relationships, the ability to have “difficult conversations” with friends and family, and comfort in likely celebrating an awkward Thanksgiving/Christmas.

Overview: Typically, a 12-week program that combines light funding ($15,000 to $50,000) and mentorship to accelerate the startup’s progress. It usually culminates in “demo day,” where the class of startups give short (under 10-minute) presentations to a group of angel investors and VCs.
Consider: Does your startup have high growth potential? Outside of Y Combinator and TechStars (field leaders), how established, successful, and focused is the program? What has been the experience of founders in the portfolio? How specific are they about the programming, mentors, and expectations?
Optimal for: Startups with high growth potential looking to gain access to a network of mentors, capital, and influence.
Look to: TechStars and Y Combinator first. Read extensively on the accelerator’s philosophy, track record, and mentor bios.

Overview: Wealthy people with an interest in funding startups. They sometimes assemble into packs known as “angel networks” or “angel groups,” where they consume copious amounts of food and drink, review past investments, and listen to new pitches asking for $300,000 to $750,000 in seed funding.
Consider: How much are you looking to raise, and why? What expertise do the angels (especially the ones who might serve on your board) represent? What is the person’s or group’s track record on exits and past relationships?
Optimal for: High-growth startups that need early-stage capital to accelerate traction, and those looking to acquire money and perhaps a little expertise (in most situations).
Look to: Local groups of angels, AngelList (, Gust, or known independent angels in your area.

Venture Capital
Overview: Professional investors looking for significant returns, who represent large sums of institutional money (universities, municipalities, and larger funds).
Consider: They’re pros at investing, and you’re not — be careful. What else will they provide other than money (smart money)? Do you align philosophically? Are their expectations reasonable? Do they have a strong track record in your sector? Have you talked with CEOs in their portfolios? Have you spoken with multiple firms?
Optimal for: Startups with significant traction that are looking for massive growth and are fine with giving up quite a bit of control (in most cases).
Look to: Relationships that might have connections with VC firms. Google “venture capital” and start researching; then, contact specific firms that are actively looking for investments in your sector. *Note: Do not blanket the entire VC industry with a general introduction letter.

Banks, Incubators, and Co-Working Spaces
Three other sources could be banks, incubators, and co-working spaces, but I have intentionally chosen to leave them out. Banks are highly regulated and need both collateral and a clear repayment path in order to provide a loan. Although some claim to offer good advice, unless you’re starting a construction company or looking to get into real estate, I’d take it with a grain of salt. While some make claims that sound similar to accelerators, incubators and co-working spaces are rent-driven and usually don’t come with a tremendous amount of “value added.” They are fantastic for networking, but don’t count on them to offer nearly the same resources as an accelerator.

Further Research
As I said, the purpose of this article is to help give the newcomer a framework for exploring the world of startup resources. I highly encourage anyone thinking of starting a business to do a lot more research. Here are a few places to start:

Boeing - surely too big to fail?

An interesting article about the woes the Boeing Corporation has currently with its B787. I see the biggest financial impact yet to come, however, when the relevant airlines will have a reasonable overview over their B787 related incurred losses - and those range from extra provided accommodation to passengers to enormous replacement aircraft acquisition costs.

I do not believe that Boeing will get into serious trouble though. With only Airbus competing the market pie is too big for the US government to have its iconic aircraft manufacturer fail. Yet, I do not believe that Boeing will be in a position to offer discounted purchase prices on future aircraft orders. Airlines feel the pinch, nowadays, so every cent that they are able to squeeze out of any transaction is highly welcomed.

Analysis: As parked 787s multiply, Boeing cash drain worries grow

EVERETT, Wash./NORTH CHARLESTON, South Carolina | Tue Feb 19, 2013 7:43pm EST

(Reuters) - Paine Field Airport, next door to Boeing Co's (BA.N) widebody plant north of Seattle, is getting crowded as 10 new 787 Dreamliners flank the runway, sparkling with contrasting and colorful liveries, including Poland's LOT, Britain's Thomson Airways and China Southern Airlines (600029.SS).

It is a similar story several thousand miles away, outside the company's North Charleston, South Carolina final assembly building, where space is taken up by four 787s destined for Air India AIN.UL.

A month after the global fleet of the carbon-composite jets were grounded as U.S. and Japanese regulators carry out investigations into overheating batteries, the parked airliners are a stark symbol of deepening problems this is causing Boeing.

At Paine Field in Everett, Boeing plans to move some of its other planes around to make room for new 787s coming off its two production lines, and says it has room to store all the 787s it is making.
But Boeing is finding it increasingly difficult to convince Wall Street that its balance sheet is not going to be strained by the crisis. Until the Dreamliner is cleared to fly again, which could be several months, Boeing will be starved of delivery payments but still has to keep producing and maintaining the 787s it is making.

The world's largest planemaker is being hit on a number of financial fronts, as well as suffering potential damage to its brand image. It is unable to deliver the five Dreamliners being produced per month, missing out an about $200 million in final cash payments from customers every month the 787 is grounded, while it has to pay out millions of dollars to clean, maintain and insure the parked planes. The delay may also force Boeing to postpone plans to double production by the end of this year.

Meanwhile, it is spending as much as $1 billion a month to keep the production line running, according to Russell Solomon, an analyst at Moody's Investors Service, as the 787 program is still in the early, cost-heavy stage.

On top of that, it will have to pay the extra costs of putting engineers to work on the battery problem and the expense of reworking the 100 or so Dreamliners that have so far rolled off the production lines once it resolves the problem. Wall Street initially pegged those costs at $350 million to $625 million, but as investigations drag on with no clear indication of a fix, analysts have held back on updating those figures. The longer the delay, the more complex and expensive the fix is likely to be.
"They've got all that carbon fiber sitting on the ramp, when they'd like to have the cash," said Carter Leake, an analyst at BB&T Capital Markets. "This is going to be a slow slog for a long time."


The company's $13.5 billion in cash and short-term investments provide a cushion, as does the $3.7 billion in free cash flow generated in the fourth quarter of 2012, but both will be eaten away each month the plane is grounded.

So far, analysts and one source familiar with Boeing's thinking do not expect the cash squeeze will prompt Boeing to borrow more, even at current low interest rates. The company itself said only that it has not adjusted its cash management strategy.

Boeing's cash flow could be cut by as much as $1.5 billion over six months if the 787s are still unable to fly, analysts said.

"The longer the plane is grounded, the greater the risk of the company's 2013 cash flow meaningfully declining," said Solomon at Moody's.

So far, Boeing's stock has held up at around $75, higher than for most of last year, and customers are expressing faith in the plane and its maker. Airlines are being notified of late deliveries, but none has canceled any orders.

The shares have fallen 3 percent since the 787 grounding in mid-January, compared to an 11 percent gain for Airbus parent EADS (EAD.PA).

Boeing says it is still too early to quantify the financial impact of the grounding, and its 2013 financial forecasts excluded 787 costs.

Bob Crandall, former head of American Airlines and an industry figurehead, said Boeing will suffer, but most airlines would not be overly fazed by delivery delays, as they can lease replacement jets and bill Boeing for it, or factor those costs into discounts on future plane purchases.

"It's a shame, and will inconvenience airlines and passengers, and hurt Boeing financially. But progress and safety are the two games in play," he said.

"They (Boeing) will fix the problem and get the planes back in the air. It will cost them money, but nobody in the aviation community will fault them," he added. "Aviation progresses by constantly learning, and here the lesson is about the nature of lithium batteries."

Favorable market conditions are helping Boeing and its rival Airbus sell and produce record numbers of jets, worth about $88 billion last year, said Richard Aboulafia, a senior aerospace analyst at the Teal Group in Fairfax, Virginia.

High oil prices are prompting airlines to order new fuel-efficient planes, and low interest rates make the purchases easier to finance them and make the loans attractive to investors looking for yield. "You could not ask for those three variables to get any better for airplane output," he said. But, he added, it's unclear how long it will last.


The U.S. and Japanese investigations into burning lithium batteries are moving slowly, and there is no sign of a resolution.

The longer that goes on, the longer deliveries are pushed back. More importantly, it suggests that the work Boeing will have to do to rectify battery problems on the more than 100 Dreamliners it has already produced could be significant and will hamper its efforts to ramp up production.
Two weeks ago, Chief Executive Jim McNerney said Boeing was sticking with the ambitious plan - hatched long before the current battery problems came to light - to increase 787 production to seven a month by mid-year and 10 a month by the end of 2013.

Boeing spokesman Charles Bickers said that is still the plan, and it is too early to know what the financial impact of the 787 grounding will be.

The steep ramp-up is crucial to the profitability of the 787, as the lion's share of outlays happen early in a plane program. The quicker Boeing can refine the process and ramp up production, the quicker it will reach the target of 1,100 planes, the point where it calculates it will break even on the program. At planned production rates that is already a decade away.

"A slowdown would be crushing," said Leake at BB&T. "As long as the program accounting assumptions don't change, Boeing can keep booking the same margin in the current production block. But once production rates change or slow, their assumptions on both revenue and cost will have to change."

Revenue will likely go down as Boeing will have to offer aggrieved customers more concessions on future purchases to keep them happy, while it loses hundreds of millions of dollars in "progress" payments, which airlines pay as planes near completion. At the same time, costs will stay higher for longer than Boeing has been counting on.

Boeing's credit rating is not immediately under threat, but the trend is concerning analysts.
"If the grounding persists for many more months, planned increases in the monthly production rate look increasingly suspect - and expensive, possibly further eroding Boeing's otherwise strong credit profile," said Solomon at Moody's.

(Additional reporting by Alwyn Scott in Seattle; Editing by Edward Tobin and Richard Chang)