OPINION: Alleged Emirates and Etihad merger

Another holy cow! Just when I thought I had learnt it all when the airline of Abu Dhabi Etihad was rumoured to buy into Germany's Lufthansa, Bloomberg steps up the game by announcing that Dubai's Emirates Airlines would merge with Abu Dhabi's Etihad Airways. So, after I recovered from this potential news - and it took me a long time to recover! -, I started thinking and present you herewith with my two cents' worth.

It seems that the GCC aviation industry – and the whole political and economic region, for that matter - is not coming to a rest. More than one year ago, under the leadership of Saudi Arabia, the neighbouring countries of Qatar, including the United Arab Emirates and Bahrain, imposed a political and economic blockade on the hydrocarbon-rich yet tiny island in the Persian Gulf – or the Arabian Gulf, depending on who you ask, of course. As a consequence, Qatar Airways recently reported heavy financial losses due to increased operational costs, certainly heavy blemishes on the now dented armour of the once sky-rocketing airline, in line to become the new Emirates by providing even better services throughout the whole process chain while spending just a bit less through the same chain than its rival across the narrow sea stretch. Further up north, Kuwait keeps seeing its air operations failing due to century old habits of ‘wasta’ and all subsequent consequences, Gulf Air of Bahrain is a mere shadow of its former glory, Oman Air… has there actually ever been something of importance to report about this small air operation other than it still operates? Emirates has downsized its personnel numbers, keeps aircraft parked, has entered into an alliance with arch rival Etihad on such matters as procurement. The new Dubai airport, once dubbed the largest in the world, still does not see air operations of any significance. Saudi and UAE airports get attacked by Houthi forces out of Yemen as retaliation for the proxy war fought by Saudi Arabia and its less important brethren – amongst them the UAE being the best of the rest – against Iran on Yemen’s soil. As a consequence of this turmoil in the region, and in combination with both fairly low oil prices on the spot market and the recent introduction of VAT in various GCC member states, Sheikh Ahmed of Dubai has seen to it that his two air operations - Emirates and Fly Dubai – started utilising common business grounds to take advantage of economies of scale; and now, the biggest step forward of them all - that is, when it actually evolves to a viable business model with politics taking a back seat: Bloomberg reports that Emirates of Dubai and Etihad of Abu Dhabi are in talks to fully merge after both airlines already explored and implemented strategic synergies over the last few months! Obviously, spokesmen for both airlines were quick to dismiss Bloomberg’s article but in all fairness, wouldn’t it make economic sense?

For those of you that have never lived in the region: this story is as big as a potential merger of McDonald’s and Burger King would be. Rubbish! The story is even bigger! We all remember when the tallest skyscraper in the world was renamed from Burj Dubai to Burj Khalifa after Abu Dhabi had bailed-out the more flamboyant Emirate of Dubai with an initial loan of USD 25 billion. Similarly, other projects, such as highways were renamed every time Abu Dhabi needed to gallop-in to the financial rescue of its northern neighbour again. In fact, the Emirate of Dubai was known to have one single sustainable economic success story only, and that was the one of its airline Emirates. Yes, I have predicted many times that, in the mid run, Emirates would face hefty headwinds when aircraft that are capable of flying direct from Europe to the Far East would start entering the passenger market and thus making a stop-over halfway through obsolete. The latter being the business model Emirates and its neighbouring airlines are heftily relying upon. And no doubt, we are slowly seeing these exciting times of technologic advances. Yet, Rome was not built in one day and similarly, Emirates would not be driven into insolvency within one year upon the entrance of such ULR capable aircraft. So, other economic – and political - forces must be at work.

For Etihad, the picture is clear. The failure of its strategy to acquire voting-dominant minorities in (f)ailing airlines around the world by its now departed former CEO has been observed and commented upon many, many times (also by yours truly, I admit). The company faced losses of around USD 2 billion in 2016, USD 1.5 billion in 2017, has sold/returned a major proportion of its aircraft fleet early 2018, and is rumoured to negotiate with Boeing to cancel the airline’s order for 25 B777X, which pretty much sums-up the current state of the airline, I believe. Emirates, however, is another story altogether. True, major established airlines in Europe and the USA lobbied hard to have Emirates’ freedoms of the air restricted and first successes have become evident over the last few months, yet most of us always believed Emirates to fly above all economic laws with unlimited (financial) supplies available to the airline anywhere and at all times.

The economy feels brittle, as a good friend of mine told me a few days back on the state of the economy in the UAE. He should know, of course, having been a resident of the UAE for the last two decades or so. SMEs falter all around due to increased costs related to the recent introduction of taxes and workers’ benefits. Oil prices remain low (currently hovering around the USD 80 mark), alternative air routes to the Far East open up, the war in Yemen costs the UAE serious money, the tourism hype of the rich-and-famous-wannabees that imperatively needed to visit Dubai seems, if nothing else, to slow down (during my last visit to the ITB Berlin last spring the GCC hall was practically empty), the blockade on Qatar certainly does not inspire confidence in the political stability of the region, and President Trump’s expressed strategy – if one can call it a strategy - towards the region results in reluctance to invest in the region by large parts of the rest of the world.

Obviously, something needs to be happening to shield-off the downward spiral. A radical step such as a full merger with Etihad (and Fly Dubai) might very well be a strategy to explore. However, and I never thought I needed to raise this query ever in relation to the GCC: who is paying? Etihad is in tremendous financial woes, Emirates seems a bit better at best, so that would leave, as usual, the two respective governments as the owners of the two respective airlines. I doubt that the Emirate of Dubai is able to stem the financial burden and it would make little sense for the much smaller air operation to acquire the much larger - and healthier - one. However, I do believe a potential United Emirates Airlines has its rightful place in the aviation industry but can there be a way to be found that leaves both sheikhdoms in their respective prides?

From an operational point-of-view, the two hub operation would need to be scrapped surely. Not a major hurdle for Dubai since its Dubai International has been facing capacity restraints as long as I have been involved in the aviation industry in the Middle East and I am sure the sand the airport occupies can be sold at the usual inflated rates, considering its location in the heart of the old Dubai business district. But Abu Dhabi has shed major bucks to upgrade its infrastructure recently and would be far from happy to abandon its investment with little return, if any. If only there were an international airport somewhere in the middle between Dubai and Abu Dhabi. Oh, wait….

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!

Introduction:

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

Q&A

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?

Freelance instructors required

For an aviation management training start-up, I am looking for senior airport/airline personnel that would be interested in sharing their knowledge with aviation students. Time frame is a few hours per course over a time period of around two weeks so you could do it along your work. You would need to have extensive experience as a line manager and the company does not train students in post-holder functions. If potentially interested, please drop me a line on my personal e-mail and we'll take it from there. Please bear with me if you don't hear back from me immediately. Blue skies.

Presentation about challenges and opportunities of the aviation industry in the Middle East

A brief presentation I was asked to give for an aviation consultancy on a topic that has almost become second nature. Needless to say that I exceeded the time limit by an incredible amount! Serves them right for wanting me as their speaker, right?

The presentation is based on a basic SWOT analysis. The underlying data is mostly IATA, IMF and my own. As always, if you like to have the whole picture or just want ot share your opinion, please feel free to ask or share. Blue skies!

Frankfurter Allgemeine Article on Lufthansa Strike

With the 13th strike of the LH pilots in 18 months (or is it the other way round? I cannot seem to grasp the sheer numbers!), I wrote the following article for the daily newspaper Frankfurter Allgemeine Zeitung. I apologize that it is in German yet I am sure that Google will do a reasonable translation for you.

It seems that the whole of the aviation industry in Germany is heading towards desaster if the decision makers continue on their current path. I do hope they will see the light, however, and reflect on their niche strengths before it is too late. Comparing yourself all the time with Emirates and Ryanair does not add anything to one's business model. Each airline has - or should have - its own niche from where it can add value to the public. If that means flying with a very limited fleet and concentrating on medium haul routes then so be it. Aviation is a service industry, in which one per definition serves its customers. One does not impose one's strategy onto one's audience. Back to basics, please, I sure would hate seeing yet another European state crumble into aviation oblivion.

Es ist was faul im Luftfahrtstaate Deutschland. Der Konkurrenzdruck auf Regionalflughäfen ist so gewaltig hoch, dass regelmäßig Flugplätze Insolvenz anmelden, der neu zu bauende Flughafen der Hauptstadt wird - so hat es immerhin den Anschein – auf Jahre hin ein unfertiges Projekt bleiben, in der gleichen Stadt kann sich Deutschlands zweitgrößte Fluggesellschaft, nach Jahren von fehlender Strategie und Fehlinvestitionen, nur mit regelmäßigen Kapitalspritzen, getätigt in Petrodollars, in der Luft halten und jetzt wird auch noch das Aushängeschild der deutschen Luftfahrt seit Monaten von Streiks geplagt, die das letzte Vertrauen der bezahlenden Kunden in den ehemals stolzen Kranich verspielen.

“Die VC knüpft nicht annehmbare Bedingungen an ihre Vorschläge”, hören wir vom Vorstand der Lufthansa. “Wir gewähren gewaltige Konzessionen in unserem Angebot, die Lufthansa will sich einfach nicht mit uns einigen”, sagt darauf die Gewerkschaft der Piloten. Bei diesem ewigen hin und her, ähnliches darf ich übrigens auch jeden Tag auf dem Schulhof meines Sohnes in seiner Grundschule erleben, steuert diese Impasse deutlich auf ein Desaster zu, das am Ende im besten Falle eine Übernahme – und damit mehr als ein Identitätsverlust – durch einen ausländischen Betrieb à l’Air France – KLM bedeuten könnte. An den schlimmsten Fall mag ich an dieser Stelle gar nicht erst denken.

Unabhängig davon, wer nun eigentlich recht hat – wie immer in solchen Situation ist es mehr als wahrscheinlich, dass die Wahrheit irgendwo in der Mitte liegt – vergisst die gesamte Lufthansa Passage und Cargo, und damit sind sowohl der Vorstand als auch die Herren Piloten angesprochen, eines: der Konzern ist ein Dienstleistungsbetrieb, das, mit einigen Ausnahmen anderer Töchter, seit Monaten nur noch subpar Services im Angebot führt.

Es genügt nicht zu sagen, die Lufthansa müsse mit den EasyJets und Emirates Airlines dieser Welt konkurrieren können und deswegen müssen jetzt und sofort Kosten gespart werden. Wer das Aufkommen der no-frills Airlines erst jetzt, mehr als 40 Jahre nach ihrer Entstehung, erkennt, hat deutlich nicht aufgepasst und Torschusspanik sollte sowohl auf dem Spielfeld, wie auch in jedem Betrieb, von dem zahlreiche Existenzen abhängen, nicht vorkommen. Genauso gut muss die VC sich darauf besinnen, was ihre eigentliche Aufgabe im Konzern ist. Auch wenn das deutsche Betriebsverfassungsgesetz dem Betriebsrat umfängliche Mitbestimmung in strategischen Fragen gewährt, so steht dies doch immer unter dem Aspekt der Ethik, Vertretbarkeit und Mäßigkeit. Das scheinbar herrschende old-boys-Netzwerk gehört sicher nicht dazu.

Es ist an der Zeit, dass die Lufthansa Passage sich an ihr selbst formuliertes Strategieziel erinnert: “Das angestrebte Ziel der Lufthansa Group ist es, erste Wahl für Kunden, Mitarbeiter, Aktionäre und Partner zu sein.” Die erste Wahl für Kunden also. Da der Betrieb jedoch scheinbar in zwei Teile gebrochen ist, die sich partout nicht einigen wollen oder können, ist es sicherlich an der Zeit, dass die Black Rocks und Templetons dieser Welt kräftig auf den Tisch klopfen, bevor sie feindliche Übernahmen abwehren müssen.

Aircraft fleet planning and management - the dark, deep money pit

As we all have heard numerous times in our aviation career: 'How do you become a millionaire? Simple, start with a billion and open an airline.' Oversimplified as it may be, in essence there is some serious truth in this overly utilized speech opener at various trade seminars and congresses. And the one aspect of any operation that has the potential to break your operation even within a few weeks is not mismanagement, a wrong strategy, or even underfunding, it is the one of aircraft acquisition.

Think about it. One way or another 'soft' mistakes and errors, such as a falsely estimated budget, or the wrong skill set of key employees, can be altered in the short to mid term. True, it might not be easy, especially in cases where hard currency is involved, yet in these circumstances there is always light at the end of at least one particular tunnel. It is up to management to find and successfully enter that one tunnel with the light at the end. However, once you committed your investors' hard earned greenbacks on a piece of metal that the manufacturer claims is capable to take to the skies gracefully, safely, and economically, your balance sheet shows a large negative from day one. And with list prices in the high double millions nowadays - total investment in current dollars per aircraft seat has risen over the years - that large negative has the potential not only to become a haunting nightmare but more importantly to close your shop.

Proper fleet planning and subsequent management is therefore not a luxury or a piece of research that only is done with large air operations. It should also not be an exercise only to be done by a few employees. The topic is so important that potentially all divisions within an airline, however small or large, together with aircraft sellers and manufacturers should make serious efforts to come-up with the ideal solution together. After all, the worst case scenario of having the wrong fleet is for the airline to go bust fairly quickly thus threatening each employee's job. And don't think that once you have any aircraft in your fleet, you are able to wrap the airline's strategy around the aircraft type. Despite what regulators like to tell you, aviation still is one of the most ridiculously regulated industries in the world. Even if you are able to find a strategy that works for a particular aircraft within a short time span, no regulator will act fast enough to grant you the necessary permissions to change your business model around in a time frame short enough to defer serious financial implications.

But what exactly is fleet planning and management? And how do you go about it? This article tries to relate my personal experience as upper management with various air operations in a short and concise article. With the limited space I have here available, I do not claim that this article addresses all steps necessary in-depth. However, it should give a succinct overview that, if nothing else, provides you with a good starting point when a fleet change, or a start-up, becomes imminent. Please feel free to tell me if you feel that I missed a major aspect of fleet planning and management. Contrary to what my co-workers might tell you, I do not bite!

Fleet management, as used in this brief, comprises the following integral aspects:

• Fleet planning and acquisition;
• Fleet operations;
• Fleet maintenance; and
• Fleet disposal.

In order to have a successful fleet management strategy in-place, it is very important to address and implement the topic round-circle. You can have the best aircraft purchase strategy in-place, when you lose big bucks at the end of the aircraft's life-cycle, overall your operations will lose money and your shareholders will be less than happy with your performance. It is also important to remember that fleet management is a continuous process. General markets, and thus your audience, change continuously. Demographics change over-time. Purchasing power will rise or fall cyclically or after sudden spikes. Eve your airline strategy probably changes over-time. Hence your airline's optimal fleet changes continuously. Of course, it is virtually impossible to have the ideal fleet available to your audience at any moment in-time. After all, aircraft, despite its way of procurement, is always capital intensive and thus at least a mid-term investment. However, a suitable mix of owned, leased-back, dry- or wet-leased aircraft according to the airline's strategy will smooth-out, at least financially, most short-termed changes in demand.

Unsurprisingly, and at the very basic level, the main objective of fleet planning is to have at least an efficient capacity equal to demand. Note the word efficient. An A380 easily provides capacity well beyond demand of a regional third-tier route. It does not require an MBA to establish that this solution does not make economic sense, however (although it might make sense to deploy an A380 on such a route for political reasons, for example). Efficient in this sense therefore refers to optimal payload-range, environment, operating and maintenance cost, insurance and legal capabilities. As stated, passenger appeal does sometimes spoil this hard fact research, as can be seen with the Emirates strategy of dispatching B777s and A380s on routes that would make more sense for smaller aircraft. JAL, on the other hand, switched its B744 fleet to B773ERs in order to lower emission output, operating, and maintenance costs.

Ideally, the aircraft evaluation research should be aligned with the following current and future aspects of your operations:

Network - not only own fleet - frequencies flown, which determines the fleet's payload requirements (don't forget to address belly cargo numbers and projections);
Routes flown, including alternates and meteorological assumptions, which determines the fleet's range requirements;
Airport data, such as runway length, obstacle clearance, meteorological conditions, taxiway and apron width and load-bearing factors, terminal capacity, which determines required fleet performance data;
Current fleet and support facilities (incl. logistics and inventory costs), which establishes training and maintenance requirements;
Passenger expectations, which establishes product and IF-service requirements.

This first step within the fleet management research immediately presents you with a problem: it is based on demand models, and as with any assumed model, such a demand model possesses many variables with only a limited accuracy. The market establishes the airline's market share and thus potentially its revenue. However, all these variables are assumed and forecasted and thus prone to - sometimes quite considerable - variations.

We all know that the current success of some of the GCC carriers is based on their central geographical position linked to a low-cost payroll. But what will happen to these airlines' current major fleet orders when (not if) aircraft range capabilities become so sophisticated that stop-overs in the GCC will be no longer necessary? After all, current orders only generate actual deliveries in a few years time by which time new technology will have experienced potentially huge leaps.

There are basically two different forecast models in use today. The top-down model that links forecasted RPM to at least ASM (which again leaves you with the problem that any fleet is a static asset in the mid-term while markets are much more volatile), and the bottom-up model that takes current market data (not only of one's own airline) and starts developing different forecasts based on variables, such as network developments, new market entrants etc. The problem with the latter model is that there is obviously no historic data available for new routes and that small carriers usually do not have the budget necessary to participate in a GDS that is able to provide this data. In order to balance-out the inadequacies of either model as much as possible, one should always strive to combine both models to the largest extent possible.

Cost analysis, i.e. fleet capital costs and operating costs, then is a "mere" accounting problem and can rely on much more reliable data. Not to over complicate matters, capital costs are usually (depending on the individual airline) divided into the following sub-categories:

Capital costs =

Aircraft list price
+ Aircraft options
- Negotiated discount

= Aircraft contract price
+ Agreed price escalation (something that airlines less and less accept)
- Costs of services rendered by OEM "for free"
+ Change orders

= Fly-away price
+ Product / service support (such as training, spare parts etc.)

= Total investment

And as already stated, total investment in current dollars per aircraft seat has risen over the years.

There are obviously a number of other important aspects to fleet management. Powerplant analysis is such a necessary and important research. Life-cycle costs of engines have the potential to contribute up to 50% of total life-cycle DOCs. And one should always have a clear picture on legislation and insurance issues when considering aftermarket parts. As a rule-of-thumb, maintenance cost of engines is the key driver on short-haul operations with take-offs producing the highest stress on the engine's hot section and turbine, and fuel burn is the key driver on long-haul aircraft.

Avionics analysis then has become somewhat less important with new aircraft over the years since the current trend is for OEMs to supply the complete avionics as an integrated package. The advantage with powerplants and avionics is that passengers usually do care to a lesser extent what goes on technically in an aircraft. They very much do like to see the latest cabin and IFE technology but leave the actual cockpit instrument package to the pilots to worry about.


I say it again, however, regulations do tend to get overlooked in any planning process and have the potential to seriously harm your future operations. For the ones that know me personally, the following piece of advice might therefore come as a bit of a surprise: keep a thorough and friendly relationship with your regulatory authority. If not for the sake of you personally, then for the sake of your shareholders and thus ultimately your job! And with that over to you...

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.

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.