Start an airline!

Filed in archive Entrepreneurship on November 20, 2005

What is the best way to become a millionare? Start an airline as a billionaire. This old saying seems a little outdated if you believe the circumstantial evidence that The Economist presents:

"MENTION the airline industry in polite company and a few truisms invariably come trundling out: airlines are loss-making, inefficient, prone to extreme cycles and vulnerable to fickle consumers. Why, most of America's industry is currently bankrupt, flying on only thanks to that country's Chapter 11 cushion. Only an idiot would buy shares in British Airways (BA), which currently owes almost half its �3.5 billion ($6.1 billion) market value to its pension fund. And so on.

The trouble with truisms is that they can obscure big changes as they start to happen. In fact, the airline industry is poised for an almost unprecedented boom, as a new generation of planes is combining with better business models and huge volume growth in new markets. This year an industry with revenues of about $400 billion will end up paying $97 billion for its fuel. According to IATA (the International Air Transport Association), had the price of oil stayed where it was in 2003, at $30, instead of rising to the average $57 expected for the whole of this year, the world's airlines would have made more profit ($45.6 billion) than they have lost in the past five years. (This, says IATA, is also partly a result of a 34% improvement in labour productivity.)

But perhaps the most conclusive indication of brightening skies is the boom in aircraft orders that is stretching Boeing and Airbus production plants to the limit. Airbus is scouring Europe and farther afield for 1,000 engineers to push ahead with its new long-haul A350 250-300-seat plane and bring its super-jumbo A380 into service without adding to the six-month delay that has already pushed its first commercial flight for Singapore Airlines back to the end of next year. Boeing is booming even more, with about 650 orders under its belt already this year, compared with just over 400 for Airbus at the end of September. Some observers think Boeing could finish this year with almost 1,000 orders, while Airbus will net nearly 900. In a good year the two manufacturers usually share 800 orders between them. This year's numbers will be about a quarter higher than the record number of total orders set in 1989.

The airlines are constantly pressing the manufacturers to produce large and medium-sized aircraft that can fly anywhere in the world non-stop. Gradually they are getting what they want, particularly with the latest Boeing and Airbus 250-300 seaters on the way. A Boeing 777 took off from Hong Kong on November 9th to fly eastward to London, covering 20,300 kilometres and flying for 23 hours, to set a new record. If flights like that become common, Emirates, with its giant planes and global hub, would be flying in the face of conventional wisdom. If liberalisation were to come along quickly in the wake of a US-Europe deal, the odds would be on the point-to-point model emerging as the winner."

Most entrepreneurs I know had two models in stock in the last years they were pondering about - Netflix outside of US and a discount airline. Given the amount of discount airlines in Europe and soon in Asia its is not surprising many have feared - overcompetition. However an airline is a great thing to build. You can lease the aircraft - advertise a little and voila many travellers will come to you. Travel is like food - its a constant need and customers tend to like changes from to time opening the market to new entrants. So if you are looking for the next business model - think about long haul discount models or a way to consolidate existing traffic.

On another note (could not find the exact article anymore) the Economist notes that Emirates price per passenger mile flown is just a bit more than Jetblue's. Given its prime destination between Asia and Europe Emirates is due to "disrupt" many typical long haul carriers in Europe and Asia soon.

As Emirates is not IPO yet - I bought some BA shares. Let's see what happens.