With the economy in meltdown, times are undoubtedly tough. But with crisis comes opportunity. Former easyJet and Go executive Michael Coltman, who is now a partner at consultancy firm Mango Aviation, flags up airlines which have capitalised on adversity
In the May Airline Business cover interview, Brett Godfrey of Virgin Blue says:"It's clearly the lousiest time ever to launch an airline. In airline history this is equal to picking 10 September 2001 as a launch date. The sweet spot has clearly gone pretty sour at the moment."While this may be true for long-haul and full-service models, for the low-cost airlines, history tells us a different story.The ability to secure a competitive cost base during a downturn, coupled with enough start-up capital to weather the storm and the selection of the right markets and management team, can spell success even during gloomy economic forecasts.
Over the past 40 years, the vast majority of successful low-cost airlines started during downturns.The early 1970s-marked by recession, a fuel crisis, and stifling regulation -spawned Southwest.The recessionary early 1990s led to Ryanair in its present form, easyJet and AirTran. The Asian financial crisis of 1997-99, followed by the post-11 September 2001 downturn, led to Cebu Pacific, AirAsia and Air Arabia.For Ryanair and easyJet, the 2001 crisis allowed massive aircraft orders at greatly discounted rates, ensuring competitive cost advantage for years to come.And for Virgin Blue the demise of Ansett, hastenedby 11 September, ensured a competitive landscape in which it could thrive.The market turmoil at this time also allowed it to place an aircraft order that helped it secure a lower cost base than would otherwise have been possible.
Opportunties
The broader market also recognises opportunity when it sees it.While the Dow Jones was in bear territory in 2002-03, JetBlue's public offeringin April 2002 surged 67% on its opening day.The dark days of 2002 also saw one of the most successful airline deals of all time, with easyJet acquiring Go from venture capital firm 3i for £374 million ($546million), only one year after 3i purchased Go from British Airways for £110 million ($160 milion).This secured easyJet's position at the time as the largest low-cost airline in Europe.It also won 3i accolades for completing such a profitable deal in a very depressed market.
Why are times of economic difficulty such a good time to start an airline? In a word - costs.Airlines are a machine- and people-intensive business.During downturns, both of these critical elements of success become much more affordable.Buying or leasing an aircraft in today's market can be done at near-historic lows.Pilots, engineers, operations and management staff are available in number -and at salary rates not seen for years. Suppliers are squeezed on all fronts and are willing to negotiate lower prices.
To start an airline usually takes 8-14 months. This timing aligns with current expectations of stability in the global market place and a return in demand. Even today, despite all the media gloom and doom,there are still market opportunities that many existing carriers are pursuing. For instance, over 200 new routes have started since the northern hemisphere's summer season began.The majority of these routes have been started by Ryanair, which in the past has shown itself to be the most strategic carrier in terms of spotting opportunity in a downturn.
Cost advantage
For the savvy investor who spots a gap in the market, be it untapped demand or inefficient carriers, now is the time to invest. This would allow the creation of a long-term cost advantage while targeting a market that will deliver meaningful revenue.
Nonetheless, investing now will require significant cash.A sufficient war chest would allow an investor to secure aircraft at a long-term cost advantage, while having enough cash to cope with weaker near-term demand, fend off any competitive challenge and hedge fuel at current prices.This, combined with the right route network, would make for a strong carrier during the next economic upturn.
As with any investment, spotting the opportunity is only half the battle.The execution of the business will ultimately decide success or failure. For each success, the number of failures is greater.Airlines such as Compass (Australia), Debonair (UK), and PeopleExpress (USA) all started in downturns, but poor management decisions in areas such as branding, aircraft and route choices, over-expansion and lack of capital, meant they were unable to capitalise on market timing.
While Mr Godfrey's sweet spot might be a bit rough around the edges at the moment, if an informed investor picks the right market, with the right cost base,capital investment structure and the right management team to execute it, then any near-term sourness will pay a sweet reward when the market recovers.
Click here to get inside the industry's financing issues see our special report
Source: Airline Business
