By: Bill Franke
Cabinets and hard drives are filled with the collective thoughts and analyses of many better-positioned chroniclers than me that cover the evolution of commercial aviation over the past quarter of a century. Those of you that know me know better than to expect me to take pen to paper to reminisce about this business. The past few decades have proven what we all know - it is a tough-as-nails business that requires disciplined, committed professionals to succeed.
The provocative question posed in this issue of Airline Business is what must change in the next 25 years? At Indigo Partners, where we manage active equity interests in six airlines on three continents, potential answers to that question appear daily on our doorstep in the form of the next "big deal", and generally include a business plan with hockey-stick-earnings forecasts.
If we believe in all of these next big deals, there is, indeed, a bright future in store for everyone, whether that next big deal is in take-privates, or low-cost (insert your favourite market), or long-haul premium service (or was it low-cost, long-haul?), or air taxi, or regional jet redeployment, or turboprops, or charter, or cargo conversions, or and so on.
Obviously, many of these ideas are just opportunities to turn big piles of money into much smaller piles. What the industry really needs is predictability in results and a business model that succeeds through economic cycles. Consistent positive returns on investment in this space are likely to continue to be made where they have been made - by the few, disciplined and well-managed airlines that provide services that are widely demanded (think Singapore Airlines or Southwest Airlines) and in the upstream, oversight and supply pipeline to the airlines.
That said, it has been and continues to be frustrating to me that the industry can be so managed and manipulated to allow so much of its economics to slip through the income statement into the hands of taxing regimes, suppliers and their non-cyclical escalation clauses, airports, fuellers, IT providers and unyielding unions.
How should this change? Instead of a business model considered goofy by observers from other business sectors, we need one that produces positive investment returns over time so that airlines will be viewed as rational businesses and can access capital markets on reasonable terms.
The historically poor investment return for the sector has caused an evolution in capitalisation. Unconventional financing sources are more and more evident in the deals being done. Equity and well-priced debt capital must better flow to and from the industry. For this reverse evolution to occur, a new era of rationality must prevail in the industry and its supply chain. Bad airlines need to fail and good airlines should be permitted to thrive without obstruction from governments, suppliers, and other constituencies that have special interests.
There are scores of examples of what we call dumb money propping up airlines that should not exist. And how many new airlines that were started over the past decade are already grounded? As an example, look around Europe and list the number of low-cost carriers that were started and parked in administration within a few years or make the case for me that Malev, Tarom, LOT, Czech, JAT and so on all need to be in business in eastern Europe.
Of course, I understand the score. This is a complicated, intertwined industry - investors have money to put to work, suppliers need airlines to buy aircraft, engines and parts, governments need airlines to tax and to wave their flag, unions need airlines to pluck in good times and municipal airports need a funding source for their next sky train.
But it is also clear that we need to restore competitive balance and produce more consistent profits. Successful airlines need to be better positioned to demand an efficient supply chain and acquire access to rational financing markets. If it requires industry consolidation and/or the repeal of outdated national agendas on foreign ownership to achieve these goals, bring it on. Something has to give if we are to avoid a boom-and-bust life cycle for the airline industry.
We need airlines that provide stable employment, rational investor returns and safe affordable travel to the public. In short, we need to have a business model that works and not agree to the continuation of the convoluted processes of the past 25 years.
Former America West chief executive Franke heads venture capital firm Indigo Partners. It has invested in a number of low-cost carriers, most recently in Mexico's Volaris