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