Wot's the latest with Gold Airways?
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The Facts
Dear Colleagues,
I have been watching with interest the dialogue surrounding the Gold Airways venture on pprune and would like to clarify some misconceptions that you may have. I do not think it is productive for you to continue to speculate on what might be happening.
A number of things we do have to be done under Non Disclosure Agreements (NDAs) For this reason, the facts are not always apparent and this can lead to misconceptions. Some NDAs strictly prohibit disclosure even of the NDA, so you cannot even suggest a relationship exists with that party.
The development of Gold Airways, whilst seeded on the passion of former Ansett staff to found a replacement for Ansett, was to set out to challenge the basic neo-classical micro-economic theory that the Australian aviation market was not contestable. Gold Airways needed to be modelled differently to ensure that it would survive in a ruthless and challenging market. That meant a solid business plan had to be developed with all the hallmarks of a low cost carrier but with a presence giving passengers a clear choice in the markets it would operate.
The business plan has taken nearly 3 years to complete although it is still very much a dynamic state of affairs. One of the big problems with doing something as huge as this is making sure you have guidance from your peers and, I am thrilled to be able to say that some of the best aviation strategy and marketing experts have had a major input to the Gold Airways proposal. Even so, we continually revise data and strategies based on the dynamics of the industry. I am very fortunate to have a select group of business associates who have put their support behind the venture to develop the necessary documentation and presentations for investors. It goes without saying that the venture consultants I have at my disposal are a top bunch of people, no doubt like yourselves.
Part of developing the business plan has been to present Gold Airways as a complete airline management package out of a box. To this end we have been developing a 5 year business plan with all the costings and revenue models, establishing the policies and procedures and establishing the labour and aircraft requirements. It's quite a challenge to do everything in a plan for the things most of us take for granted in the every day life of an airline. For example, the Gold airways business plan has a daily cashflow forecast for every day in that 5 year period, so you can make sure there is always cash in the bank to meet daily expenses and abnormals. We've even run competition scenarios to ensure the airline can sustain competition for a very long time. Of course, to do this sort of work you need to put in a lot of manhours.
One of the big problems you have with presenting an airline plan to any investor group is that you need to build credibility and confidence, not to mention you have to be able to identify the Who's Who of the airline investor population. Having listened to many of my peers on the subject, I find it more of an exercise in pessimism and cynicism, for even those who think the model is sound appear to have lost their confidence in the industry. It's hard to tell them that this is going to work when most new start ups in Australia have failed. It's important, therefore that we not only develop a good plan but also have the driver for it. It's a chicken and egg problem. I can confirm we are looking for a person of good repute and notoriety to lead the venture through this phase and although declining, have been honoured by a few who have encouraged us to go on and challenge the status quo.
I can confirm an airline and a venture capital partner have taken an interest in the business plan and due diligence preparation is underway but it is very much at an early stage and I would not like to speculate where it may lead. I will, however, say that a view has been expressed that the model may satisfy the Australian Government preference for a home grown carrier to meet new bilateral arrangements. It should be pointed out that increased competition is a stimulator for reduced inflation.
The Gold Airways model requires a solid investment of cash and although the ability to acquire aircraft remains fluid, we have chosen not to start the AOC process until the venture is fully funded since this would put us and our investors in the lowest risk position. Of course, it goes without saying that, without an investor, the process cannot start.
A lot of people are supportive of what we are doing; some say you cannot succeed in this world without money. Others say if you are not willing to have a go, nothing will happen and I think every entrepreneur has their own story to tell on that score. If money and planes are all that separate us from a fabulous opportunity, I think you do what you have to do. For me personally, I have found it a stimulating exercise of smashing the inner boundaries of risk and failure that invariably causes many of us to go from invincibility at the age of 19 to non-risk takers at age 55. I, like probably many of you am not a rich person, and yes there maybe many of you whom I know personally that may think I am eccentric or sometimes, from our associations in the past, not to your liking or a bit odd. But then that's me and my idiosyncratic nature may put me in a different category. I think challenging the status quo is the natural thing to do if you want to challenge the so called uncontestable market.
If you have any specific questions you want me to answer about Gold Airways I will be happy to do this provided they are sensible. I won't respond to personal attacks on me and may ask the moderator to delete such posts. In this way I hope to put some truth into this thread.
Thanks
Regards
Jens Buche
I have been watching with interest the dialogue surrounding the Gold Airways venture on pprune and would like to clarify some misconceptions that you may have. I do not think it is productive for you to continue to speculate on what might be happening.
A number of things we do have to be done under Non Disclosure Agreements (NDAs) For this reason, the facts are not always apparent and this can lead to misconceptions. Some NDAs strictly prohibit disclosure even of the NDA, so you cannot even suggest a relationship exists with that party.
The development of Gold Airways, whilst seeded on the passion of former Ansett staff to found a replacement for Ansett, was to set out to challenge the basic neo-classical micro-economic theory that the Australian aviation market was not contestable. Gold Airways needed to be modelled differently to ensure that it would survive in a ruthless and challenging market. That meant a solid business plan had to be developed with all the hallmarks of a low cost carrier but with a presence giving passengers a clear choice in the markets it would operate.
The business plan has taken nearly 3 years to complete although it is still very much a dynamic state of affairs. One of the big problems with doing something as huge as this is making sure you have guidance from your peers and, I am thrilled to be able to say that some of the best aviation strategy and marketing experts have had a major input to the Gold Airways proposal. Even so, we continually revise data and strategies based on the dynamics of the industry. I am very fortunate to have a select group of business associates who have put their support behind the venture to develop the necessary documentation and presentations for investors. It goes without saying that the venture consultants I have at my disposal are a top bunch of people, no doubt like yourselves.
Part of developing the business plan has been to present Gold Airways as a complete airline management package out of a box. To this end we have been developing a 5 year business plan with all the costings and revenue models, establishing the policies and procedures and establishing the labour and aircraft requirements. It's quite a challenge to do everything in a plan for the things most of us take for granted in the every day life of an airline. For example, the Gold airways business plan has a daily cashflow forecast for every day in that 5 year period, so you can make sure there is always cash in the bank to meet daily expenses and abnormals. We've even run competition scenarios to ensure the airline can sustain competition for a very long time. Of course, to do this sort of work you need to put in a lot of manhours.
One of the big problems you have with presenting an airline plan to any investor group is that you need to build credibility and confidence, not to mention you have to be able to identify the Who's Who of the airline investor population. Having listened to many of my peers on the subject, I find it more of an exercise in pessimism and cynicism, for even those who think the model is sound appear to have lost their confidence in the industry. It's hard to tell them that this is going to work when most new start ups in Australia have failed. It's important, therefore that we not only develop a good plan but also have the driver for it. It's a chicken and egg problem. I can confirm we are looking for a person of good repute and notoriety to lead the venture through this phase and although declining, have been honoured by a few who have encouraged us to go on and challenge the status quo.
I can confirm an airline and a venture capital partner have taken an interest in the business plan and due diligence preparation is underway but it is very much at an early stage and I would not like to speculate where it may lead. I will, however, say that a view has been expressed that the model may satisfy the Australian Government preference for a home grown carrier to meet new bilateral arrangements. It should be pointed out that increased competition is a stimulator for reduced inflation.
The Gold Airways model requires a solid investment of cash and although the ability to acquire aircraft remains fluid, we have chosen not to start the AOC process until the venture is fully funded since this would put us and our investors in the lowest risk position. Of course, it goes without saying that, without an investor, the process cannot start.
A lot of people are supportive of what we are doing; some say you cannot succeed in this world without money. Others say if you are not willing to have a go, nothing will happen and I think every entrepreneur has their own story to tell on that score. If money and planes are all that separate us from a fabulous opportunity, I think you do what you have to do. For me personally, I have found it a stimulating exercise of smashing the inner boundaries of risk and failure that invariably causes many of us to go from invincibility at the age of 19 to non-risk takers at age 55. I, like probably many of you am not a rich person, and yes there maybe many of you whom I know personally that may think I am eccentric or sometimes, from our associations in the past, not to your liking or a bit odd. But then that's me and my idiosyncratic nature may put me in a different category. I think challenging the status quo is the natural thing to do if you want to challenge the so called uncontestable market.
If you have any specific questions you want me to answer about Gold Airways I will be happy to do this provided they are sensible. I won't respond to personal attacks on me and may ask the moderator to delete such posts. In this way I hope to put some truth into this thread.
Thanks
Regards
Jens Buche
Last edited by Jens_Buche; 24th Jun 2006 at 11:47.
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Hello
Hello Jens Buche,
I don't think too many people would have had the strength of character to put their name on pprune. Good on you mate. I challenge the rest of you to do the same.
Can I ask, Jens, how does Gold Airways propose to tackle rising fuel costs?
I don't think too many people would have had the strength of character to put their name on pprune. Good on you mate. I challenge the rest of you to do the same.
Can I ask, Jens, how does Gold Airways propose to tackle rising fuel costs?
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Hedge
Hi Escape_Slide,
The problem with rising fuel costs for a start up operator is that the operator can either purchase fuel at the spot price, which is typically around AUD 1.30 for a litre of Jet A-1 kerosene at present, much as you and I do when we buy petrol for our cars, or buy a fuel contract in advance and get the benefit of a bulk discount from the day to day variation in the spot price for taking up an expected consumption. Almost invariably, the operator has not hedged the first batch of fuel needed to start up. Hedging doesn't work well if the price of the commodity is consistently at one level and doesn't work well if the price is falling. If a start up is to engage in hedging, it is best done as soon as it knows it will receive its AOC. The start up then has to actively trade in hedging contracts. This costs money to do.
We've looked at hedging in a variety of ways and settled on a dynamic hedge method that involves layering the crude and refined commodity of a short and long period using derivatives. What this enables us to to is to take a long and short position thereby minimising the impact of sustained rises. It largely works on the basis that we buy and sell the contracts very rapidly and are satisfied with only making small gains with each trade. We've been looking at a 95% hedge based on future risks. We are prepared to look at a high percentage when the market is very volatile.
When airlines make good profits, they will usually try to hedge their fuel position. If they do not hedge and the price of oil goes up, they will spend a high percentage of their income on paying for the volatility in the spot price.
Hedging fuel through derivative options doesn't solve the issue of how to stay competitive in a market that has rising fuel costs where the big players get better bulk discounts or have well established hedges. You can simply raise airfares, but who will be the first to do that and not dampen demand? You could even pool your fuel orders with a similar sized player or an industry partner to get better rates. In Gold Airways situation, the latter is a real possibility. VirginBlue and Qantas should do it because the economies of scale make for a very positive outlook for such a consortium.
The reality is you have to raise airfares to remain profitable. By how much is more to do with the level of hedging you have and to what degree your competition may follow your lead. It makes for an interesting challenge.
The problem with rising fuel costs for a start up operator is that the operator can either purchase fuel at the spot price, which is typically around AUD 1.30 for a litre of Jet A-1 kerosene at present, much as you and I do when we buy petrol for our cars, or buy a fuel contract in advance and get the benefit of a bulk discount from the day to day variation in the spot price for taking up an expected consumption. Almost invariably, the operator has not hedged the first batch of fuel needed to start up. Hedging doesn't work well if the price of the commodity is consistently at one level and doesn't work well if the price is falling. If a start up is to engage in hedging, it is best done as soon as it knows it will receive its AOC. The start up then has to actively trade in hedging contracts. This costs money to do.
We've looked at hedging in a variety of ways and settled on a dynamic hedge method that involves layering the crude and refined commodity of a short and long period using derivatives. What this enables us to to is to take a long and short position thereby minimising the impact of sustained rises. It largely works on the basis that we buy and sell the contracts very rapidly and are satisfied with only making small gains with each trade. We've been looking at a 95% hedge based on future risks. We are prepared to look at a high percentage when the market is very volatile.
When airlines make good profits, they will usually try to hedge their fuel position. If they do not hedge and the price of oil goes up, they will spend a high percentage of their income on paying for the volatility in the spot price.
Hedging fuel through derivative options doesn't solve the issue of how to stay competitive in a market that has rising fuel costs where the big players get better bulk discounts or have well established hedges. You can simply raise airfares, but who will be the first to do that and not dampen demand? You could even pool your fuel orders with a similar sized player or an industry partner to get better rates. In Gold Airways situation, the latter is a real possibility. VirginBlue and Qantas should do it because the economies of scale make for a very positive outlook for such a consortium.
The reality is you have to raise airfares to remain profitable. By how much is more to do with the level of hedging you have and to what degree your competition may follow your lead. It makes for an interesting challenge.
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"a complete airline management out of a box" Now I've heard lots of yuck-speak in my time, but this really raises the bar. What does it mean? Tarts jumping out of cakes?
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Well the last two replieas just goes to show the intelect of the readership on this website.....Mr Buche has given us a fantastic insight in where Gold Airways might be at this stage...
A question was asked about the rising fuel prices as well...and that could not be understood by the intelectual giants that know nothing else but to denegrade anything they don't understand...or want to understand....its so typical...
Its obvious to me that the negative replies are from those that are in an airline and do not want any other competition, so their positions will not be threatened.....
A question was asked about the rising fuel prices as well...and that could not be understood by the intelectual giants that know nothing else but to denegrade anything they don't understand...or want to understand....its so typical...
Its obvious to me that the negative replies are from those that are in an airline and do not want any other competition, so their positions will not be threatened.....
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Au contraire, Fountain Pen, I no longer work for an airline and am semi retired, so could not feel threatened by anything Gold Airways did. But when I see all these fancy words about five year cash flow projections, hedging, derivatives etc I sense that Mr Buche is baffling us with a lot of theory. I wonder what Geoff Dixon or Richard Branson would make of all this.
My advice to investors is if you like high stakes and shiny new jet planes get you all hard, go for it. My advice to wannabe employees is don't give up a cent of your money or an hour of your time until they put the deposit into CASA for the AOC. Then maybe donate some time if you can afford it, but not money unless you too are a high roller. I am not saying it won't get up. I am just sceptical because I don't think Australian investors will come to the party and can't see that Asian investors would bother when they could pick up Skywest, Rex or Alliance with an AOC and a known market and re-equip them if they thought the growth was there. And I stand by the 'out of a box' comment -what a total tosser usage of the English language.
My advice to investors is if you like high stakes and shiny new jet planes get you all hard, go for it. My advice to wannabe employees is don't give up a cent of your money or an hour of your time until they put the deposit into CASA for the AOC. Then maybe donate some time if you can afford it, but not money unless you too are a high roller. I am not saying it won't get up. I am just sceptical because I don't think Australian investors will come to the party and can't see that Asian investors would bother when they could pick up Skywest, Rex or Alliance with an AOC and a known market and re-equip them if they thought the growth was there. And I stand by the 'out of a box' comment -what a total tosser usage of the English language.
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D & G General Aviation & Questions
If any one would like to ask more questions about Gold Airways, please do so.
Gas-Chamber, for your information, Gold Airways projections are based on generally accepted accounting principles. It is necessary to run the projections in order to establish the financial ratios, for instance, that indicate whether the business is likely to exhibit a good probabilitiy of survival. The projections are used to establish trends and when marked up against market (airline industry) behaviour, can establish benchmarks on which to make decisions. It's our duty of care to present an investor who is financially astute and savvy with an understanding of how the model will behave in certain market conditions. If we thought the model wouldn't stand up to scrutiny, I would be the first to say don't present it to investors. As an airline establishes itself, the accounting can become more complex, of course. Off Balance Sheet Defeasance is common in the industry, and the recent debacle in the press about VirginBlue and the GST on new aircraft, just highlights what can be done. What one hopes to achieve with this is to place the model into a strong competitive position and mitigating the risks. That is what lands you a good credit rating. On one hand you have your financial risks and on the other your business risks. We've addressed all these things and cash flow adequacy, hedging, derivatives and five year cashflow projections are part of that stream.
In respect of your further comments, Gas-Chamber, you do place too much emphasis on the AOC. It's far more important for CASA to issue an AOC to organisations that fully understand their responsibilities under an AOC. The fee to CASA for assessing an AOC application is a mere drop in the ocean compared to the investment required to fly. So it's not something I would dwell on. Having said that, it is true that if you purchase an airline with its AOC you do have a starting point. However, because the Gold Airways model is so vastly different from existing airlines, there is no real tangible benefit in acquiring someone else's AOC.
I will point out that your last comment is fairly true also but only in the sense that investors have had no confidence in this Australian market. Gold Airways is about to change that as a lot of work has gone into analysing the idiosyncratic behaviour of the Australian markets and the markets of Australia's Asia-Pacific neighbours. We think that our model is precisely what the new investor will want but then, we need a credible business plan to back that up and we do need to get them to look at it, of course.
You sound like you are starting to think about the issues fairly carefully Gas_Chamber, so if you want to put some sensible questions up to clear the air, I will be happy to answer them.
Regards
Jens
Gas-Chamber, for your information, Gold Airways projections are based on generally accepted accounting principles. It is necessary to run the projections in order to establish the financial ratios, for instance, that indicate whether the business is likely to exhibit a good probabilitiy of survival. The projections are used to establish trends and when marked up against market (airline industry) behaviour, can establish benchmarks on which to make decisions. It's our duty of care to present an investor who is financially astute and savvy with an understanding of how the model will behave in certain market conditions. If we thought the model wouldn't stand up to scrutiny, I would be the first to say don't present it to investors. As an airline establishes itself, the accounting can become more complex, of course. Off Balance Sheet Defeasance is common in the industry, and the recent debacle in the press about VirginBlue and the GST on new aircraft, just highlights what can be done. What one hopes to achieve with this is to place the model into a strong competitive position and mitigating the risks. That is what lands you a good credit rating. On one hand you have your financial risks and on the other your business risks. We've addressed all these things and cash flow adequacy, hedging, derivatives and five year cashflow projections are part of that stream.
In respect of your further comments, Gas-Chamber, you do place too much emphasis on the AOC. It's far more important for CASA to issue an AOC to organisations that fully understand their responsibilities under an AOC. The fee to CASA for assessing an AOC application is a mere drop in the ocean compared to the investment required to fly. So it's not something I would dwell on. Having said that, it is true that if you purchase an airline with its AOC you do have a starting point. However, because the Gold Airways model is so vastly different from existing airlines, there is no real tangible benefit in acquiring someone else's AOC.
I will point out that your last comment is fairly true also but only in the sense that investors have had no confidence in this Australian market. Gold Airways is about to change that as a lot of work has gone into analysing the idiosyncratic behaviour of the Australian markets and the markets of Australia's Asia-Pacific neighbours. We think that our model is precisely what the new investor will want but then, we need a credible business plan to back that up and we do need to get them to look at it, of course.
You sound like you are starting to think about the issues fairly carefully Gas_Chamber, so if you want to put some sensible questions up to clear the air, I will be happy to answer them.
Regards
Jens
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Down to the hard questions:
1. What minimum (non debt) share holder's equity do you consider is required as a pre operating necessity for Gold Airways?
2. Do you have, or have guaranteed access to the share holders equity Gold Airwways requires?
3. Considering your projected off balance sheet liabilities for the aircraft you proposed to operate, what is the maximum debt to equity ratio you consider viable for an Australian start up airline like Gold Airways?
1. What minimum (non debt) share holder's equity do you consider is required as a pre operating necessity for Gold Airways?
2. Do you have, or have guaranteed access to the share holders equity Gold Airwways requires?
3. Considering your projected off balance sheet liabilities for the aircraft you proposed to operate, what is the maximum debt to equity ratio you consider viable for an Australian start up airline like Gold Airways?
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Originally Posted by Richard Kranium
Ahhh Apophis, seen all your replies on this site and have come to the conclusion that if you had another brain it would be lonely 
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At least he's got off his ass and done something Apophis!
Better than what you have to "put up" or offer to make the world a better place...
When was the last time you flared your nostrels, breathed in deep the fresh air and kept the dream alive? Make things happen, help, or get out of the way, I believe the saying is.
(...and I've nothing to do with Ansett too.)
Sadly
, this Pprune site and especially the Downunder section, has denigrated into a pityfull mess of negativity, backstabbing and sniping.
"...out of a box" , as in "no further work required", product complete on purchase... a complete package.
On a better note. Jens: You're spot on with the fuel and hedging, as I helped sway my last company across to "piggyback" off a major players' fuel account ... saving AUD$200/hour operating cost.
Best of luck
Better than what you have to "put up" or offer to make the world a better place...
When was the last time you flared your nostrels, breathed in deep the fresh air and kept the dream alive? Make things happen, help, or get out of the way, I believe the saying is.
(...and I've nothing to do with Ansett too.)
Sadly
, this Pprune site and especially the Downunder section, has denigrated into a pityfull mess of negativity, backstabbing and sniping."...out of a box" , as in "no further work required", product complete on purchase... a complete package.
On a better note. Jens: You're spot on with the fuel and hedging, as I helped sway my last company across to "piggyback" off a major players' fuel account ... saving AUD$200/hour operating cost.
Best of luck
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Thanks for the heads up on the Fuel
I must confess it sounds complicated, but I've read on the web how all those airlines are doing something with hedging now realising they didn't do enough before, so I think this subject is pretty serious. I take my hat off to you, you seem to speak at a very advanced level and when I read stuff from the investment world and compare, you don't appear to show any lack of understanding - so I am with you mate, all the way.
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The Hard Questions (from Air Ace)
Thanks Air Ace,
Answering these candidly,
When we set out to do the business plan, we put in a number of constraints which were based on start up behaviour of the entrepreneurial airline ventures around the world. We examined very closely how they were doing business, how they were managing competion, and who had backed them, looking very closely at the backers' behaviours. Typically, the start up investment was in the order of USD80M-110M for a similar operation to ours.
This presented quite a problem for us as DOTARS (Australia) data only supported a long term average load factor of 65% and that in a LCC environment the break-even load factors were up around 80%-85% which basically meant that we had to look very closely at our start up and other future costs to pull down the break-even point since, on a point to point network in Australia, we had reached saturation level. We conducted a lot of research into the behaviour of competition, in particular we noted the some seat sales did not produce the load factors need to break even. Melbourne_Launceston is a very marginal market for instance. This port can barely support one airline let alone two or three running high frequencies with large jet aircraft.
We went over our figures quite a bit, looking at where we could trim costs, looking at how we could operate more efficiently. Fuel was a big headache and we put a team together to work on that issue alone.
We finally arrived at a figure of AUD70M, however, if we were to be able to engage in fuel hedging and protect our competitive position for a long time, we needed a financial hedge of about AUD30M.
I think this is to early to predict, we had one prospective investor who had indicated they needed to start by October 2006, but they have since reserved their position, because of the aeropolitical climate. This international operator was the reason we looked at the A350 and A380 maintenance in Melbourne and part of the plan was to purchase the Ansett Maintenance base. Those talks have been put on hold indefinitely.
So in a nutshell, no, we don't. There are a few more steps before we could make some sort of official announcement anyway and that is based on getting the investor mix right. I had communicated with the heads of some other prospective start ups and exsiting operators and although the talks were fruitful, the baggage they are carrying would not advance Gold Airways purpose. We are not banking on support from the State Governments as we believe we need to stand on our own two feet first but, without sounding naive, investors usually expect State Governments to kick in.
I can tell you that we are currently looking at a ring-spoke system which will connect Australia through Asia, China, Europe, USA and the Pacific with the prospective investor eager to expand globally with the Gold Airways domestic network at the core. It's very much an emerging market strategy. I can't be more specific but the investors have a vested interest in the hub and spoke partners which makes this possible. It would allow Gold Airways to fly internationally globally. Early days for that plan to fly though and may require extra cash to hatch.
Without pre-empting what Gold Airways may do in its accounts that it is allowed to do to legally minimise tax, and the business plan having been based on generally accepted account principles and Australian Tax Law/International Tax Law, as appropriate, its average debt to equity ratio is figured to be around 0.25 over the five year period. If you include the outstanding aircraft lease liabilities (i.e. the contract terminal value) you would get a higher figure. We would then be looking at between 0.5 and 1.5 as a typical range. We need to keep the debt to equity ratio low for competitiveness but not so low as not to take up new opportunities.
Accounting for debt is a complex subject. For instance, some airlines make provisions for their employee entitlements as just a book entry. Gold Airways banks its employee entitlements and holds the money in trust. Some might argue, the money should be used to help the airline grow and buy assets against which it can borrow to make entitlement payments. These complex decisions expose the airline and its directors to risks. We've tried to mitigate the risks in order to attract a strong credit rating to survive unexpected competition or catastrophic events like a price war, another start up or the bird flue pandemic.
We've looked very closely at the financial reports of many of start up carriers around the world, plotted their financial progress and trended their behaviour against the various markets. We've looked at their strengths and weaknesses and how decisions impacted their progress. We found a good deal of cognitive bias played a role in the failure for some.
I think we've achieved some good financial ratios and they stack up fairly well against VirginBlue Airlines and JetBlue Airways, which are regarded as fairly successful. However, we have achieved a cost per available seat kilometre comparable with the LCCs and a Price to Earnings ratio on plan of half that of VirginBlue.
Regards
Jens
Answering these candidly,
1. What minimum (non debt) share holder's equity do you consider is required as a pre operating necessity for Gold Airways?
This presented quite a problem for us as DOTARS (Australia) data only supported a long term average load factor of 65% and that in a LCC environment the break-even load factors were up around 80%-85% which basically meant that we had to look very closely at our start up and other future costs to pull down the break-even point since, on a point to point network in Australia, we had reached saturation level. We conducted a lot of research into the behaviour of competition, in particular we noted the some seat sales did not produce the load factors need to break even. Melbourne_Launceston is a very marginal market for instance. This port can barely support one airline let alone two or three running high frequencies with large jet aircraft.
We went over our figures quite a bit, looking at where we could trim costs, looking at how we could operate more efficiently. Fuel was a big headache and we put a team together to work on that issue alone.
We finally arrived at a figure of AUD70M, however, if we were to be able to engage in fuel hedging and protect our competitive position for a long time, we needed a financial hedge of about AUD30M.
2. Do you have, or have guaranteed access to the share holders equity Gold Airwways requires?
So in a nutshell, no, we don't. There are a few more steps before we could make some sort of official announcement anyway and that is based on getting the investor mix right. I had communicated with the heads of some other prospective start ups and exsiting operators and although the talks were fruitful, the baggage they are carrying would not advance Gold Airways purpose. We are not banking on support from the State Governments as we believe we need to stand on our own two feet first but, without sounding naive, investors usually expect State Governments to kick in.
I can tell you that we are currently looking at a ring-spoke system which will connect Australia through Asia, China, Europe, USA and the Pacific with the prospective investor eager to expand globally with the Gold Airways domestic network at the core. It's very much an emerging market strategy. I can't be more specific but the investors have a vested interest in the hub and spoke partners which makes this possible. It would allow Gold Airways to fly internationally globally. Early days for that plan to fly though and may require extra cash to hatch.
3. Considering your projected off balance sheet liabilities for the aircraft you proposed to operate, what is the maximum debt to equity ratio you consider viable for an Australian start up airline like Gold Airways?
Accounting for debt is a complex subject. For instance, some airlines make provisions for their employee entitlements as just a book entry. Gold Airways banks its employee entitlements and holds the money in trust. Some might argue, the money should be used to help the airline grow and buy assets against which it can borrow to make entitlement payments. These complex decisions expose the airline and its directors to risks. We've tried to mitigate the risks in order to attract a strong credit rating to survive unexpected competition or catastrophic events like a price war, another start up or the bird flue pandemic.
We've looked very closely at the financial reports of many of start up carriers around the world, plotted their financial progress and trended their behaviour against the various markets. We've looked at their strengths and weaknesses and how decisions impacted their progress. We found a good deal of cognitive bias played a role in the failure for some.
I think we've achieved some good financial ratios and they stack up fairly well against VirginBlue Airlines and JetBlue Airways, which are regarded as fairly successful. However, we have achieved a cost per available seat kilometre comparable with the LCCs and a Price to Earnings ratio on plan of half that of VirginBlue.
Regards
Jens
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Interesting and candid response indeed. It's not for me to comment on your equity projections, suffice to say from memory Bryan Grey had similar equity and similar new aircraft when he started Compass so many years ago - when fuel was cheap.
When the inevitable price war commenced, Bryan told me his flights were over 90% load factor - but break even load factor was 114%!
I would think 80% to 85% break even average load factors would be fraught with danger in the Australian domestic market. Subject to route mix, one would think 70% average load factor would be a far safer bet.
In summary, you've done the home work and don't yet have the equity. Good luck - I think you'll need it.
When the inevitable price war commenced, Bryan told me his flights were over 90% load factor - but break even load factor was 114%!
I would think 80% to 85% break even average load factors would be fraught with danger in the Australian domestic market. Subject to route mix, one would think 70% average load factor would be a far safer bet.
In summary, you've done the home work and don't yet have the equity. Good luck - I think you'll need it.