Wig Wag
28th Mar 2004, 07:35
Sunday Telegraph 28/03/2004
These are difficult times for long-established carriers. But, says Edward Simpkins, niche airlines are being born at an astonishing rate.
The period since the terrorist attacks on New York and Washington on September 11 2001 has been one of the toughest in the history of the airline industry.
Carriers have been stuggling to cope with a sudden fall in passengers caused by the outrages and the burden of increased security. That, combined with an economic downturn and a rise in the price of fuel, has left many of the world's biggest airlines either bankrupt or on the verge of it.
So it would seem to be a strange time to launch a new airline. But that is exactly what is happening - and in spades.
Research published this month by Aviation Economics, the airline industry consultancy, identifies no fewer than 53 airlines that have been created since 9/11, while there are at least as many start-ups still seeking funding.
But how is that remarkable statistic compatible with continued bad news elsewhere? For example, United Airlines - the giant US carrier which lost $2.8bn last year - expects to miss its deadline for escaping from Chapter 11 bankruptcy protection. The Madrid bombing and the Israeli assassination of Sheikh Ahmed Yassin may also lead to a new downturn in air travel.
Immediately after news of the killing was disclosed, shares in British Airways plunged, ending the day down by 5.3 per cent. Even shares in easyJet, the low-cost airline, fell by 4.8 per cent the same day.
"I would say that we are just about scraping off the bottom of what has been the worst recession that the industry has ever faced," says Tim Coombs of Aviation Economics.
However, the more startling trend is the relative confidence of the new or young airlines. Thus Virgin Atlantic - the UK long-haul carrier controlled by Sir Richard Branson - is planning to recruit 1,400 staff, launch new routes and order more aircraft.
The expansion would reverse staff cuts made after the 2001 terrorist attacks and comes as Virgin is preparing to launch its own low-cost domestic carrier in the US.
A Virgin executive says: "Virgin Atlantic has been very successful during the recession. We got quickly back on to a growth curve and now we are capacity constrained. So it is absolutely the right time for us to expand."
It has just had a windfall from the successful flotation of Virgin Blue, its Australian low-cost start-up that was capitalised at A$2.3bn (£940m) when it came to the market in December. Virgin launched the venture in August 2000, sold a 50 per cent stake for A$500m in March 2002 and also profited from the flotation.
Chris Avery, the airlines analyst at JP Morgan, says that the prospect of building valuable businesses such as Virgin Blue is attractive to investors at a time when aircraft, pilots and landing slots are all relatively cheap. "There is no question that in a downturn all the industry assets become much cheaper and it does give people who like risk an opportunity to launch an airline."
He points out that capital for new airlines has remained available throughout the downturn and the growth of aircraft leasing means a fleet can be assembled with little capital outlay.
But he warns that attempts to compete with the big, established airlines, whether low-cost operations such as Ryanair or a flag carrier such as BA, will be unlikely to succeed.
"You have to have a niche," he says. "There are so many network carriers that are so big that a plain vanilla me-too start-up is not going to work."
One man who claims to have found such a niche is Kit Malthouse, the deputy leader of Westminster Council by night and by day the founder of Hop, a new low-cost domestic airline. Hop will launch flights between UK cities in June in a bid to beat congestion on the roads and sky-high train fares.
"Low-cost airlines can create routes where none existed before," he says. "Ryanair put in one rotation a day from Bournemouth to Prestwick and stimulated 100,000 passengers a year from nothing. From our point of view, routes like that are fantastic."
But Malthouse claims that for carriers with relatively large planes, such as Ryanair and easyJet, routes with fewer than 250,000 passengers a year are uneconomic. He says that his smaller ATR turboprop planes will be profitable with a third of the tickets priced at less than £10.
"Now is a good time to launch an airline," says Tony Camacho, the former chief commercial officer of Buzz, now part of Ryanair, who will be the chief executive of Hop. "September 11 turned the industry upside down. Before that, owning an airline was a vanity project like owning a football club - now it is a real business opportunity."
By contrast, Avery says that the lack of data in the European market makes starting an airline a gamble. "Little planes to replace the train is a reasonable idea," he says. "But many people start up airlines on gut feeling. There just isn't enough data to validate a business model. How many Ipswich businessmen want to fly to Edinburgh? You don't know unless you try."
Another start-up currently raising money is Eujet, run by PJ McGoldrick, a former chief executive of Ryanair. The company is a leasing and charter outfit based in Ireland but has appointed NM Rothschild to raise an unspecified sum with which to launch a low-cost carrier to be based at Kent International Airport near Manston.
McGoldrick says: "We are looking at both business and holiday destinations and we expect to have 29 routes by the end of the year."
Eujet will fly Fokker 100s, regional airliners with a maximum flying time of about 3.5 hours, which brings much of Europe within range.
"Because we are only selling 100 seats, there will be no big long queues at check-in and boarding. The planes are spacious and comfortable and a small airport will be a pleasant experience after using London's other airports," he adds.
McGoldrick says he can compete on price with the low-cost carriers and is offering a more comfortable product to people who have difficulty accessing Heathrow, Gatwick or Stansted. "We only need 60 passengers per flight to break even. We have a conservative business plan that will work," he adds.
Most of the start-ups are in the short-haul market, but BlueFox is planning business class only flights between Stansted and the US.
The airline is the brainchild of Michael Lord-Castle and is chaired by Lord Tebbit, the former Tory party chairman. Lord-Castle says the service will offer a £950 return to New York, a significant discount to existing carriers' business class fares.
"Price is an incredibly important factor, otherwise we wouldn't see so many low-cost airlines doing so well," Lord-Castle says. "Being based at Stansted, all the low-cost airlines are there to provide a feeder network for us. It is something that has never been done before and is unique. We've just listened to what the market wants."
But investors remain sceptical and he admits that he has yet to raise the money needed to get the venture flying.
History may not be on his side. Aviation Economics points out that most start-ups come to a sticky end. "The grim reality is that most start-up projects either never get off the ground or fail in the early years of operation," the consultancy says.
"It has been estimated that the US failure rate for start-ups is about 97 per cent."
These are difficult times for long-established carriers. But, says Edward Simpkins, niche airlines are being born at an astonishing rate.
The period since the terrorist attacks on New York and Washington on September 11 2001 has been one of the toughest in the history of the airline industry.
Carriers have been stuggling to cope with a sudden fall in passengers caused by the outrages and the burden of increased security. That, combined with an economic downturn and a rise in the price of fuel, has left many of the world's biggest airlines either bankrupt or on the verge of it.
So it would seem to be a strange time to launch a new airline. But that is exactly what is happening - and in spades.
Research published this month by Aviation Economics, the airline industry consultancy, identifies no fewer than 53 airlines that have been created since 9/11, while there are at least as many start-ups still seeking funding.
But how is that remarkable statistic compatible with continued bad news elsewhere? For example, United Airlines - the giant US carrier which lost $2.8bn last year - expects to miss its deadline for escaping from Chapter 11 bankruptcy protection. The Madrid bombing and the Israeli assassination of Sheikh Ahmed Yassin may also lead to a new downturn in air travel.
Immediately after news of the killing was disclosed, shares in British Airways plunged, ending the day down by 5.3 per cent. Even shares in easyJet, the low-cost airline, fell by 4.8 per cent the same day.
"I would say that we are just about scraping off the bottom of what has been the worst recession that the industry has ever faced," says Tim Coombs of Aviation Economics.
However, the more startling trend is the relative confidence of the new or young airlines. Thus Virgin Atlantic - the UK long-haul carrier controlled by Sir Richard Branson - is planning to recruit 1,400 staff, launch new routes and order more aircraft.
The expansion would reverse staff cuts made after the 2001 terrorist attacks and comes as Virgin is preparing to launch its own low-cost domestic carrier in the US.
A Virgin executive says: "Virgin Atlantic has been very successful during the recession. We got quickly back on to a growth curve and now we are capacity constrained. So it is absolutely the right time for us to expand."
It has just had a windfall from the successful flotation of Virgin Blue, its Australian low-cost start-up that was capitalised at A$2.3bn (£940m) when it came to the market in December. Virgin launched the venture in August 2000, sold a 50 per cent stake for A$500m in March 2002 and also profited from the flotation.
Chris Avery, the airlines analyst at JP Morgan, says that the prospect of building valuable businesses such as Virgin Blue is attractive to investors at a time when aircraft, pilots and landing slots are all relatively cheap. "There is no question that in a downturn all the industry assets become much cheaper and it does give people who like risk an opportunity to launch an airline."
He points out that capital for new airlines has remained available throughout the downturn and the growth of aircraft leasing means a fleet can be assembled with little capital outlay.
But he warns that attempts to compete with the big, established airlines, whether low-cost operations such as Ryanair or a flag carrier such as BA, will be unlikely to succeed.
"You have to have a niche," he says. "There are so many network carriers that are so big that a plain vanilla me-too start-up is not going to work."
One man who claims to have found such a niche is Kit Malthouse, the deputy leader of Westminster Council by night and by day the founder of Hop, a new low-cost domestic airline. Hop will launch flights between UK cities in June in a bid to beat congestion on the roads and sky-high train fares.
"Low-cost airlines can create routes where none existed before," he says. "Ryanair put in one rotation a day from Bournemouth to Prestwick and stimulated 100,000 passengers a year from nothing. From our point of view, routes like that are fantastic."
But Malthouse claims that for carriers with relatively large planes, such as Ryanair and easyJet, routes with fewer than 250,000 passengers a year are uneconomic. He says that his smaller ATR turboprop planes will be profitable with a third of the tickets priced at less than £10.
"Now is a good time to launch an airline," says Tony Camacho, the former chief commercial officer of Buzz, now part of Ryanair, who will be the chief executive of Hop. "September 11 turned the industry upside down. Before that, owning an airline was a vanity project like owning a football club - now it is a real business opportunity."
By contrast, Avery says that the lack of data in the European market makes starting an airline a gamble. "Little planes to replace the train is a reasonable idea," he says. "But many people start up airlines on gut feeling. There just isn't enough data to validate a business model. How many Ipswich businessmen want to fly to Edinburgh? You don't know unless you try."
Another start-up currently raising money is Eujet, run by PJ McGoldrick, a former chief executive of Ryanair. The company is a leasing and charter outfit based in Ireland but has appointed NM Rothschild to raise an unspecified sum with which to launch a low-cost carrier to be based at Kent International Airport near Manston.
McGoldrick says: "We are looking at both business and holiday destinations and we expect to have 29 routes by the end of the year."
Eujet will fly Fokker 100s, regional airliners with a maximum flying time of about 3.5 hours, which brings much of Europe within range.
"Because we are only selling 100 seats, there will be no big long queues at check-in and boarding. The planes are spacious and comfortable and a small airport will be a pleasant experience after using London's other airports," he adds.
McGoldrick says he can compete on price with the low-cost carriers and is offering a more comfortable product to people who have difficulty accessing Heathrow, Gatwick or Stansted. "We only need 60 passengers per flight to break even. We have a conservative business plan that will work," he adds.
Most of the start-ups are in the short-haul market, but BlueFox is planning business class only flights between Stansted and the US.
The airline is the brainchild of Michael Lord-Castle and is chaired by Lord Tebbit, the former Tory party chairman. Lord-Castle says the service will offer a £950 return to New York, a significant discount to existing carriers' business class fares.
"Price is an incredibly important factor, otherwise we wouldn't see so many low-cost airlines doing so well," Lord-Castle says. "Being based at Stansted, all the low-cost airlines are there to provide a feeder network for us. It is something that has never been done before and is unique. We've just listened to what the market wants."
But investors remain sceptical and he admits that he has yet to raise the money needed to get the venture flying.
History may not be on his side. Aviation Economics points out that most start-ups come to a sticky end. "The grim reality is that most start-up projects either never get off the ground or fail in the early years of operation," the consultancy says.
"It has been estimated that the US failure rate for start-ups is about 97 per cent."