Friday, October 27, 2017

Corporate aircraft (operation) acquisition process

A few years back, when I was heading a corporate jet charter and management company in the Middle East, I developed this ‘checklist’ for internal use within our sales department. At the time, I realized that most sales executives were excellent deal negotiators but often lacked in-depth knowledge of the actual operations they were trying to sell. Of course, in the days of the World Wide Web, one easily gets caught off guard by demanding customers that themselves know quite a bit about your product or service. Since I have always believed in expanding one’s own horizon as much as possible, I initiated trans-departmental training courses – or is it inter-departmental, I never seem to get those two correctly apart – where each department was charged with developing and presenting a basic course on its scope. I am still proud of the success these courses had and it certainly showed what fine team I was working with!

Anyway, without too many supporting words, here is the checklist. Remember, it was specifically tailored to our operations at the time but I believe it might still prove to be useful for operational laymen of today. Of course, I developed the checklist not all by myself, so, as always, praise should go to many excellent professionals while criticism would only reflect on my poor research!

Define the process as aircraft OPERATION acquisition. Being presented with the opportunity to buy an aircraft often seems to force people into making rash, biased decisions. However, the mind always should prevail over heart in these matters (especially, since large amounts of cash are required to buy/lease aircraft seats in any form)!

The process:
  1. Define the requirement:
    1. Internal and external meetings, on-site inspections, consulting
    2. Who is going to utilize the aircraft
  2. Incorporate corporate culture
    1. Aggressive marketing, cautious approach?
    2. Analyze the air transportation culture (have it done by unbiased professionals):
    3. Historical view of travel (at least 12 months)
      1. i.e. most popular destinations
      2. trip frequencies
      3. level and number of personnel, cost per seat-mile
    4. planned travel needs for the future
    5. City Pair analysis
  3. travel solutions based on the before; focus on alternatives to own aircraft since buying an aircraft is a matter often ruled by the heart
    1. evaluation of aircraft types
      1. ex: the time difference between a 500 knots and a 400 knots aircraft is - over a flight of 350NM (i.e. KWI – DXB) - 11 minutes; the difference in purchasing price USD 13Mio, however.
      2. Don’t forget to incorporate NEEDED amenities, such as an APU in a hot, remote environment
  4. However, the price difference between a Be90 (able to operate into smaller airports and has lower operating costs (ATC, crewing etc.) and a GLEX is approx. USD 30Mio!
  5. Choose the operation acquisition method based on service quality, crew quality, security, operating costs, liability etc. only (i.e. tangibles):
    1. In-house flight department
    2. Management company
    3. Joint ownership
    4. Charter
    5. Fractional ownership
    6. Combination of the above
Next steps (in case an own aircraft is the best solution):

  1. Determine the actual acquisition process, i.e. purchase or lease:
    1. In solid economic times, popular aircraft actually APPRECIATE in value over the first 10 years of ownership
    2. easing protects cash reserves
  2. Draft the aviation policy, including:
    1. Who can utilize the aircraft
    2. Special cases
    3. Operating restrictions
    4. Pricing structure (internal and external utilization)
  3. Establish the required personnel pool (legally and based on existing work schedules)
  4. Get insurance quotes (hull, liability for passengers and property, war risk)
  5. Get maintenance provider quotes, assuming that maintenance of the aircraft will be outsourced, which is almost always the way forward (always check with the aircraft OEM)
    1. Do the same for line maintenance that often can be done in-house, however.
  6. Who is to keep the aircraft records and how are these records going to be kept? Check with the authorities’ requirements, get external and internal (software) solutions quotes.
  7. Establish a realistic and firm budget
  8. Where is the aircraft going to be registered – tax issues (check local authorities’ restrictions). Is an AOC needed (commercial operations)?
  9. Get quotes from training providers for:
    1. crew (check legal requirements)
    2. ground personnel
  10. Where is the aircraft going to be parked (base) and what services is the local FBO capable of offering?

Aircraft management company:
  • Aircraft is ‘given’ to the management company to operate as a turnkey operation
  • The management company charges a monthly fee and provides personnel, training, a base of operations, passenger scheduling and aircraft maintenance services (i.e. not the aircraft and its potentially needed AOC)
  • Salaries, maintenance costs, operating costs (ex. fuel) are paid for by the management company and periodically invoiced to the aircraft’s owner.

Chartering the aircraft out (AOC needed, additional insurance requirements):
  • Broker needed that is also capable of:
    • Aircraft marketing
  • Strict budget control
  • Strategic planning

Or, as my old flight instructor used to say: Plan the flight – fly the plan


Wednesday, January 25, 2017

Published article on the alleged Lufthansa Etihad merger

The news hit me hard: an Italian newspaper reported that Etihad Airways has offered to buy 40% of Lufthansa’s shares with the intention to eventually merge the two carriers altogether. Or, as an industry colleague of mine put it: HOLY COW!

Holy cow, indeed. Such a merger would have more drastic consequences to the aviation world as we know it today than the bankruptcy of the American investment banks had in its day. Remember, a few months back even, when Lufthansa, amongst other German carriers, lobbied hard to restrict further access by the Gulf carriers to the German market? And now, it seems, and if we can believe the news article, Lufthansa turned around 180 degrees from its tactics and is in the process of adapting a more pragmatic approach of: if you cannot beat them, join them.

Most of you that know me personally are aware that I am not a friend of market protectionism and that I have lobbied, and will continue to do so, against a strategy of he-has-currently-an-inherit-advantage-in-Porter’s-5-forces-model-so-he-should-be-banned-from-my-play-yard-because-of-unfair-competition. I am a great believer in finding one’s own niche and to continuously adapt one’s business model to continuously changing market conditions rather than focusing one’s already hard-worked resources onto a culture of blame. If and when any entity grows too large to quickly adapt, I would argue that the organization, in its current form, has outlived its useful benefits to society.

Having said this, and I am sure that many of you will not agree with, or even like, my opinion, let’s have an impartial closer look at the article and its potential consequences:

Lufthansa, the former German flag carrier, ranks in the top three of the largest European air carriers and in the top ten world-wide. LH is a member of Star Alliance. With its numerous daughters, such as Swiss, Austrian and Brussels Airlines, it dominates its hubs, such as Frankfurt, Munich, Vienna and Zurich. The company is currently in the process of establishing Eurowings, another daughter that is structured around a low cost business model. The group had a turnover in 2015 of around Euro 32 billion, transported around 107 million passengers, employed around 120,000 staff and operated more than 700 aircraft. In addition to the air transport operations (passenger and dedicated cargo), the group also consists of a number of aviation vendors, such as a large MRO, catering, ICT and training unit. Almost 90% of the group’s turnover stems from European, North-American and Asian-Pacific markets, leaving quite some potential in African, Australian and the Middle Eastern markets. A similar picture emerges when addressing pure cargo income.

Etihad Airways then is the flag carrier of the United Arab Emirates. It was founded 2003 by the emirate of Abu Dhabi in response to the success of Dubai’s Emirates Airlines. It operates 120+ aircraft, transported more than 17 million passengers, employs in excess of 26,000 staff and had an estimated turnover of USD 9 billion in 2015. Etihad’s growth strategy encompasses minority stakes in flailing European carriers, such as Air Berlin and Alitalia. Etihad is not a member of any major alliance and its cargo carried stood at a mere 592,000 tonnes in 2015, standing in stark contrast to Lufthansa’s figure of 1.6 million. Etihad’s only hub is Abu Dhabi International and the carrier serves in excess of 110 destinations.

So, digesting the above preamble, one would say David takes on Goliath once again, wouldn’t one? Well, maybe not. Due to a variety of underlying parameters – and I won’t go into the everlasting discussion of do-they-receive-subsidies-or-not? – certainly a less expensive salary structure, amongst others, the margin of Etihad is much healthier than the one of its European rival. Even without addressing the subsidies question, one does not need to be a rocket scientist to understand that a flag carrier originating an oil-rich home base has certain financial advantages over a competitor that is owned by widely held stock and operates from a diverse economical market.

The gains for both airlines are obvious. So would LH:

1)      improve its balance sheet resulting in serious possibilities to address and counteract rising competition, not only from no-frills airlines such as Ryanair but paradoxically also from direct competitors to Etihad, such as Emirates and Qatar Airways;

2)      gain greater access to mainly Australian and Middle Eastern destinations that currently provide not enough meat to operate as independent routes;

3)      secure yet another customer for its numerous daughters; and

4)      build further on the budding relationship with EY that started with incorporating parts of Air Berlin.

Likewise, Etihad would benefit from a merger by:

1)      participating in decades of solid operational experience;

2)      gaining access to political and slot restricted destinations, including Germany and thus the EU, and as such gain a serious advantage over its political rival up north;

3)      receiving greater influence in regulatory bodies, such as ICAO and IATA; and

4)      exercising an economy of scale approach when negotiating with suppliers, such as OEMs.

Win-win, you say? I would agree but there are always two sides to the coin. After a solid number of years with, call it spectacular for the lack of a better word, growth, recent months have seen the Gulf carriers in a pressure phase that they have encountered for the first time in their relatively short business lives. State households in the Gulf still rely almost exclusively on hydrocarbon revenue and with spot market prices being well below break-even points, many (state owned) projects end-up on the shelves, resulting in fewer business travelers to Gulf destinations, decreasing (state) hotel room occupancy levels and so on. Yes, I know, the Gulf carriers derive their success mostly from the fact that they can easily connect passengers from east to west and vice versa. But even so, modern aircraft are capable to fly further and further and there will be a point in the not too distant future when one can fly from everywhere in Europe and the US to destinations in the Far East, routes that still account for the majority of pax and cargo miles.

Serious and previously unheard of lay-offs of staff at Etihad and Emirates prove the difficult times the carriers face. From the outside, at least, it seems that Etihad’s strategy of buying minority stakes in distressed airlines in order to gain access to their markets does not work as well as planned. We all have heard the rumours that Etihad’s CEO was supposedly on his way out a few weeks back (Update: it seems official as of today. The CEO and CFO of the Etihad Group will leave the corporation mid 2017). And what about the employee turmoil Lufthansa continues to face? The works council of Lufthansa has made it quite clear for a number of years now that it does not accept deteriorating remuneration packages, while Etihad would certainly not accept triple salary levels of its sister.

Of course, both carriers would also need to find a way around the foreign investment regulations in both Germany and the United Arab Emirates. Both countries specify that no foreign entity in its whole may possess more than 49% of a national carrier, a rule that inherently would be broken with a merger between the two carriers. Although I do believe that both corporations employ both the necessary expertise and lobbyists to elegantly circumnavigate such a roadblock, it might be worthwhile remembering that 2017 is an election year in Germany and I do not see any high ranking German politician wanting to burn his or her fingers on such a high profile deal.

So back to square one? Probably, were it not that Etihad has categorically denied the article in the Italian newspaper. And we all have seen where denied rumours can lead to, haven’t we?