The Challenges of Starting an Airline

The Challenges of Starting an Airline

            There is a phrase about the airline industry that goes, “How do you make a small fortune in aviation?  Start with a very large fortune.” The fact is, it is extremely hard to make a profit in the airline industry. Over the past 60 years the airlines have had an average profit margin of less than one percent. Since government deregulation of the airline industry took place in 1978, nearly 200 airlines have sought bankruptcy protection. Some airlines made it through, while others did not. Skybus, an airline that once had its headquarters in Columbus, Ohio, lasted only eleven months after the date of their first flight. When the company closed its doors, they were the third airline to do so that week. A large part of airlines failing has to do with timing and uncontrollable circumstances. For Skybus it was a time when the United States was entering a recession and oil had shot up to over $140 a barrel. For other airlines it amounts to mistakes made in an industry that has little room for error.

            Due to the exorbitant costs in the airline industry, there is very little room for mistakes. A poorly designed business plan can kill an airline before the first flight ever takes place. “Of the nearly 400 air carriers authorized to operate by the U.S. government since 1978, 264 flew then shut down and 62 were approved but never took off. Just 68 are currently flying” (Carey, para. 11, 2014). With little competition between aircraft manufactures, the price of aircraft is very high. According to Boeing’s website the average 737-700 in 2014 cost $78.3. That is one aircraft. The infrastructure that must be put around that aircraft in order to operate and maintain must be thought of as well. Airline pilots and mechanics are specialized jobs which results in many employees with high salaries. Until recently, the cost of fuel was “representing about a third of annual operating cost” (Frank, para. 11, 2015). The cost of fuel, salaries, and aircraft are just a few of the costs an airline must take into account while trying to establish themselves in a volatile market that is shaken on a daily basis by disease, terrorist attacks, and recessions. Proper timing, an extremely large amount of capital, a well-designed business plan, and a lot of luck are required in order to establish an airline startup.

            Despite all of the challenges modern startup airlines face there are some, such as JetBlue and Virgin Airlines, which are successfully able to establish and maintain their operations in the aviation industry. The key to their success has been exploiting niche markets of the aviation industry. JetBlue focuses on customer satisfaction while providing high quality service by offering luxurious amenities and creating a positive work culture among their employees. Virgin airlines also focuses on a higher quality of service while providing low fares. Another facet of the success of airlines has been the matter of timing. Today, “Entrepreneurs see opportunity in the service cuts—a side effect of years of restructuring and consolidation—that have helped the U.S. airline industry attain its highest profit margins since the late 1990s” (Carey, para. 4, 2014). Startup airline People Express for example, is charging a $25 fee for storing luggage in the overhead bins and $1 for a cup of coffee. Also helping startup airlines, as well as the aviation industry as a whole, is the severe drop-off in oil prices.  “Airline CEOs said in recent days that they are focused on reducing debt, upgrading airport facilities, paying dividends to shareholders and profit-sharing with employees” (Frank, para. 6, 2015).

            The airline industry can be unexpected and volatile, yet it always seems to lure entrepreneurs in who believe that their plan will be the one that gets the winning formula right. Some, such as Virgin Air, have the money to burn while waiting to turn a profit. It took losing $600 million dollars before Virgin earned its first profit. Other airlines are canned before ever having an inaugural flight. “"It's a high-profile, sexy business," says Henry Harteveldt of Atmosphere Research Group, a travel research firm. "And if you keep a lid on costs, have the right strategy, aircraft and managers, you can make money”” (Carey, para. 21, 2014).

References

Boeing. (2015). Commercial airlines. Retrieved from http://www.boeing.com/boeing/commercial/prices/

Carey, S. (2014, July 23). New startup airlines crowd the skies. Retrieved from http://www.wsj.com/articles/new-startup-airlines-crowd-the-skies-1406143697

Frank, T. (2015, January 27). Airline profits soar yet no relief for passengers. Retrieved from http://www.usatoday.com/story/news/2015/01/27/airline-profits-soar-passengers-fuel/22395509/

Freed, J & Mayerowitz, S. (2011, December 2). Why's it so hard to make money running an airline? Retrieved from http://cnsnews.com/news/article/whys-it-so-hard-make-money-running-airline

MarketWatch. (2015, March 25). JetBlue named top 25 place to work in Forbes 'America's Best Employers 2015' list. Retrieved from http://www.marketwatch.com/story/jetblue-named-top-25-place-to-work-in-forbes-americas-best-employers-2015-list-2015-03-25-15173349

10tv. (2009, December 6). SkyBus CEO speaks on why airline failed. Retrieved from http://www.10tv.com/content/stories/2009/12/04/story-columbus-skybus-ceo-talks.html

Three Issues Regarding US Aviation and the Global Market

Three Issues Regarding US Aviation and the Global Market

1.      Certification of New Products

In order for a company to bring a new product to market it must first apply to the FAA for a certification of the product.  This helps to ensure that the product is safe to use and is a very important step in the implementation of a new product. However, due to an abundant lack of resources and properly trained personnel, it is taking the FAA anywhere from one to eighteen months to approve the certification of new products.

The Government Accountability Office released a report on the 21^st of January 2015 reviewing initiatives set forth to improve the certification process. The report, “highlighted the lack of specificity and flexibility in some of the FAA’s bilateral safety agreements, poor overall communications with foreign civil aviation authorities and the large fees required by those governments (Mark, para. 3, 2015).” In other words, the FAA certification process is hindering US manufacturers’ ability to compete in a global market. The negative outcomes involved with a slow FAA certification process are intensified by the less time-consuming processes used by the aviation regulatory bodies of other countries.

2.      The European Union Emissions Trading System (EU ETS)

The EU ETS is a plan which attempts to put a cap on the total amount of carbon-dioxide emitted within EU. Companies are able to trade and sell emissions allowances, and must have enough of the allowances by the end of the year to cover their emissions. In 2012 the EU ETS planned to apply these regulations on emissions to the aviation industry, which included flights originating outside of the EU. Prior to these regulations coming into effect, President Obama signed an anti-ETS bill which stated that US airlines could not participate in the trading scheme. China, Russia, and India soon after passed similar laws. Due to the international pressure the EU ETS laws regarding foreign carriers was put on hold until 2013. A year later the laws regarding international operators was postponed until 2017.

The international business aviation community has been against the EU ETS laws from the onset. The National Business Aviation Association (NBAA) referred to the EU ETS as an “onerous and unnecessary tax that severely harms the industry and limits the economic benefits it provides” (Klenske, para. 3, 2014). Further impeding the integration of the EU ETS into the international aviation community is the development of emissions standards by the International Civil Aviation Organization (ICAO) that were accepted by 185 member states.

3.      Persian Gulf Carriers Receive Illegal Government Subsidies Resulting in Unfair Competition

United Airlines, American Airlines, and Delta Airlines released a groundbreaking report recently claiming that, “Qatar Airways, Etihad Airways and Emirates have received $42 billion "in quantifiable subsidies and other unfair benefits from their respective governments since 2004"” (Karp, para. 2, 2015). This illegal funding has resulted in a distorted marketplace which has allowed the three Gulf airlines to expand their businesses under conditions that should be resulting in lost profits.

The actions of the governments of Qatar and the United Arab Emirates are an immediate and severe threat to the operations of US carriers. However, Emirates is the leading purchaser of American manufactured aircraft produced by Boeing. This puts the US government in an awkward situation of conflicting national and international interests. To Capt. Rick Dominguez, executive administrator of the Airline Pilots Association International the way forward is clear and something must be done to provide a fair competitive playing field for the airlines. In his words, "Nothing less than our careers are at stake" (Karp, para. 10, 2015).

Bibliography

Bunce, P. (2012, July 18). Hearing: The global competitiveness of the U.S. aviation industry: Addressing competition issues to maintain U.S. leadership in the aerospace market. Retrieved March 14, 2015, from http://www.gama.aero/node/11517

Karp, G. (2015, March 5). U.S. airlines to Gulf carriers: 'Compete fairly' Retrieved March 14, 2015, from http://www.chicagotribune.com/business/breaking/ct-airline-subsidies-0306-biz-20150305-story.html

Klenske, N. (2014, May 20). The latest on the EU ETS. Retrieved March 14, 2015, from https://www.ainonline.com/aviation-news/business-aviation/2014-05-20/latest-eu-ets

Mark, R. (2015, January 25). GAO reports on FAA certification and foreign approval of aviation products. Retrieved March 14, 2015, from https://www.ainonline.com/aviation-news/business-aviation/2015-01-25/gao-reports-faa-certification-and-foreign-approval-aviation-products

UAVs

UAVs in the United States and Abroad

The use of UAVs (unmanned aerial vehicles), also known as drones, has greatly increased in the United States and abroad. UAVs are used in a variety of ways by the United States military, a growing number of civilian operations, and by hobbyists across the country. In proportion to the rising popularity of UAVs, the regulation of UAVs in the United States has been a growing concern among legislators and those involved in the industry. While there are many advantages that come with the use of UAVs, there are also many potential problems such as privacy concerns and public safety that must be dealt with.

 Machines that once seemed more fitting in a science fiction novel are becoming more of a reality every day. Currently there are 38 civil operations that employ the use of UAVs. After obtaining an exemption from the FAA, these 38 civil operations are now able to conduct daily tasks with the UAVs. Recently, Low Country Corp. was granted an exemption to use UAVs in order to, “take high definition images of towers and structures for inspection. These inspections previously required dangerous manual efforts that often required a helicopter to lift the inspector to the top of the focus structure” (AUVSI, para. 3). In another example, State Farm is, “using aerial imagery and analytics in underwriting, reunderwiting, catastrophe response, roof inspection and claim resolution settings” (AUVSI para. 4).

I believe it goes without saying that the average American has no problem with drones being used by companies in situations that are dangerous for humans. Likewise if drones can be beneficial to a company in a way that is non-intrusive to the public I believe most Americans would be fine with that. The issue that comes into play is regulation of UAVs, which deals with an array of issues such as protection of privacy and protection of airspace. Recently, the FAA released a new set of regulations regarding UAVs that benefited those in the UAV industry. However, the FAA implemented major limits as well such as, “no flying at night, or outside the operator’s line of sight, or above 500 feet” (Thompson, para. 1). The proposed regulations would not take affect for another two years. Currently, the regulations are going through a 60 day period in which the public may comment on the proposed regulations. Some companies are choosing to operate despite the lack of regulations, which have been slow in coming out, or are waiting for their special exemption from the FAA. Until the proposed regulations come in to affect, the commercial operation of UAVs remains illegal. For those interested in what a civilian UAV job may entail, follow this link, https://sjobs.brassring.com/TGWEbHost/jobdetails.aspx?jobId=356631&PartnerId=25539&SiteId=5313&codes=IIND ,  to see the duties of a sensor operator on a UAV team.

What is not illegal, but that which has come under strict scrutiny of late, is the use of UAVs by the military. UAVs have greatly altered the strategy and tactics that we use to fight terrorism. We are now capable of monitoring a target for days before deciding to initiate a drone strike to take them out with a precision that we have never before seen. The jury is still out on whether or not drone warfare is effective in countering terrorism, but they have proven to be very cost effective.

The cost of one MQ-9 Reaper drone is $6.4 million, according to an analysis by the American Security Project. The cost of one A-10 Thunderbolt, the plane with capabilities similar to the Reaper, is $18.2 million, adjusted for inflation. Maintenance costs for drones are also lower, as they require less mechanical expertise to fix (Francis, para.7).

With the increase in military and civil use, UAVs are slowly integrating into the national airspace. As more and more commercial operations receive exemptions from the FAA, it is plain to see. Don’t be surprised to see in increase in the coming years of UAVs in your immediate area. By that time they could be doing anything from bringing you groceries to taking your dog for a walk. As they say, the sky is the limit.

           

Bibliography

AUVSI. (2015, February 26). New commercial UAS exemptions include utility and tower Inspections. Retrieved March 2, 2015, from http://www.auvsi.org/blogs/auvsi-news/2015/02/26/exemptions37

FAA. (2015, February 9). Civil Operations (Non-Governmental). Retrieved March 2, 2015, from https://www.faa.gov/uas/civil_operations/

Francis. (2013, February 1). Death by drones: Are they worth the cost? Retrieved March 2, 2015, from http://www.thefiscaltimes.com/Articles/2013/02/07/Death-by-Drones-Are-They-Worth-the-Cost

Picchi, A. (2015, February 16). FAA drone rules: 5 ways they will transform business. Retrieved March 2, 2015, from http://www.cbsnews.com/news/6-ways-drones-will-transform-business/