Opportunity in Crisis - II

Asian markets still have a rising middle class in the next decade to count on for some form of sustainable growth. European markets are expected to recover more slowly in comparison. Naveed Kapadia analyses startup airlines beyond the Americas.

“Some people say that to start an airline, first of all, you have to be crazy,” said Bjorn Tore Larsen, founder of Norse Atlantic Airways. “I’m not sure if that is quite true. But the airline business is very risky. It is very volatile. It’s capital intensive; there is strong competition, and there are a lot of unfortunate casualties in terms of financial disasters.”

The airline operation is capital intensive, risky and congested, with many players fighting for the business. That seems to be a consensus until we look at the number of new startup airlines emerging globally. New airlines are looking to carve out lucrative niches with their new founders while differentiating themselves from other carriers. New entrants hope to stand out with travellers for low prices and their approach to environmental, social and governance issues. Some new entrants like Norse Atlantic invest in biofuel and use electric aircraft for their pilot training.

With Norwegian bouncing back from the verge of bankruptcy, Wizz Air entering the Norway domestic market (and leaving only a month later), the launch of Flyr, a new LCC, highlights a complex emerging aviation landscape. Flyr is a low-cost carrier with its base at Oslo Airport. The airline plans to offer passengers a digital, flexible, and “honest” air travel experience, according to the airline’s CEO, Tonje Wikstrøm Frislid. And this is just Norway. This begs whether there is a silver lining amongst the doom and gloom of the pandemic era that has created a fortuitous environment for the new airlines to emerge and thrive.

Signs of Recovery

Boosted by progress in vaccination programmes, revenues and cash flow of some major European and Asia Pacific carriers improved. Furthermore, in an IATA survey (July 2021), the airline business confidence index highlighted a slight recovery as travel demands improved. 55% of the respondents still reported some workforce reduction and falling employment in Q2 due to continued restructuring and changes in business models. 52% showed confidence in recovery to be around 2023, consistent with IATA’s global passenger forecast, led by North America and followed by Europe and the Asia Pacific. The survey also highlighted the shift in carriers’ long-term strategies for in-flight services, flight frequencies and network reach.

Air Lease Corporation’s Executive Chairman Steven Udvar–Házy identified the raw ingredients for making a new airline: “Cheap money, capital, cheap aircraft, and pilots,” but remains unconvinced whether all new ventures are destined for success. (For example, in June 2021, Pasifika Air - originally named JetRaro - a proposed startup based in Christchurch, New Zealand, was cancelled, citing many obstacles.)

Young, modern, fuel-efficient aircraft are the main driving factors for the growth of the global aircraft leasing market, which is estimated to reach US$539.68 billion by 2028. Europe has been known to generate the highest revenue in the aeroplane rental industry in 2020, and investors are paying attention to the falling aircraft leasing rate.

On 23 August, Chorus Aviation Capital (CAC) agreed to lease six ATR 72-600 aircraft to Emerald Airlines, based out of Dublin, Ireland’s newest regional airline. “This transaction once again validates our belief in the resilience of the regional aviation sector,” commented Joe Randell, President and Chief Executive Officer, Chorus. “With this transaction, we have successfully remarketed 11 of the 13 aircraft repossessed by CAC since the onset of Covid-19.”

British Airways is reported to be considering a London Gatwick-based new short-haul subsidiary, while EU competition regulators gave the green light to a slimmed-down successor to Alitalia, Italia Trasporto Aereo (ITA).

Startup Airlines, Europe, Asia Pacific & Africa

Chart credit: Naveed Kapadia

Existing LCC, such as Ryanair, have outstanding orders of 205 aircraft and are already gearing up for rapid scalability and announcing the need for up to 2,000 new pilots to crew its operation over the next three years, while Wizz Air has 241 Airbus narrowbody on order.

In July 2021, Director Stanley Hui stated that Hong Kong-based startup carrier Greater Bay Airlines’ (GBA) first batch of services would be first and second-tier cities in China, such as Beijing, Shanghai, Wuhan and Chengdu. Hui headed the Airport Authority and Dragonair before joining the GBA. He said his company plans to start hiring in the next quarter, which he added is great news to the troubled sector. GBA plan to operate in Q4 2021 with Boeing 737-800 aircraft

Hans Airways, a UK startup offering routes between secondary city pairs in the UK and India, will enter a partnership with Resource Group to hire Captains and First Officers for its A330 fleet, allowing it to continue to progress towards gaining its Air Operator Certificate (AOC). “This recruitment agreement is a well-timed development as we prepare to launch our direct non-stop flights to India later in 2021,” said Nathan Burkitt, Director of Flight Operations and Crew Training at Hans. Among notable airline veterans, Barry Humphreys, who worked for the UK CAA and Virgin Atlantic, and Peter Malanik, ex-CEO of Austrian Airlines, have been recruited as Non-Executive Directors.

Interestingly, Hans is not the only airline to turn its attention to the UK-India travel corridor with its business plans. Flypop is also preparing to launch its first flights this year. In April, flypop entered a multiple aircraft A330-300 lease deal with Avolon. Speaking with CAT magazine, flypop CEO Navdip Singh Judge asserted, “With this lease deal, we have been able to submit our AOC licence application to the UK Civil Aviation Authority and expect our first flights to commence by October with recruitment of cabin crew likely very soon.” It is worth remembering that, in December, Virgin Atlantic confirmed it had withdrawn plans to launch flights from Manchester to Delhi and Mumbai, and while Indian carriers SpiceJet and Vistara both announced plans to fly to London last year, it never materialised due to Covid-induced restrictions.

Emerald Airlines, Ireland’s newest regional, entered into a franchise agreement with Aer Lingus, which will commence on 1 January 2023 for 10 years to operate Aer Lingus Regional flights. Although the contract is not due to begin for more than a year, Aer Lingus continues to work closely with Emerald Airlines to evaluate options concerning an earlier contract start date considering Stobart Air recently ceased operations. The operations are expected to have 14 aircraft and about 400 staff by the end of next year. Emerald Airlines will work with CPaT on the delivery of initial and recurrent training for the ATR-600 fleet.

July was the first operational month for Play, and, as such, the company claimed it to be a success with the highest on-time performance and 41.7% load factor, carrying 9,899 passengers despite the pandemic in full force and negatively impacting the demand. Ever-changing travel restrictions predictably influenced the operational statistics. Play plans to grow the company’s fleet to six to eight A321s in 2Q 2022 and to operate more than 10 aircraft by 2023. Play has applied for a permit and exemption authority with the US Department of Transportation to launch services to the United States in 2022.

Icelandic start-up Play has an initial fleet of three A321neos and will expand to six as it opens services in North America. Image credit: Play.

Low Cost Base is the Key

The recovery from the pandemic appears to be LCC led. For example, in Europe, Lufthansa Group is losing market share to airlines like Ryanair and Wizz Air. Market consolidation is inevitable, and some new starts may struggle to emerge from their planning phase. We have already seen some rebranding as some new entrants review their go-to-market strategy or simply delay their launch, e.g., Kite Air, Greater Bay Airlines, Fly Armenia Airways, Canarian Airways, Swiss Skies, and Pasifika Air.

One of the lessons learnt during the pandemic-induced hiatus is managing operational efficiency and excellence. Keeping the cost base as low as possible is the difference between thriving and surviving. Airlines will need to be quick with timely decisions and sense-making of the available data. This has never been even more critical with ever-changing travel restrictions and consumer behaviours. Dynamic pricing to facilitate agility, innovation and cost efficiencies is a luxury not all airlines have. Flexibility to allow the new entrant to remain nimble will be crucial to their success. This is where the new startup airlines will have a window of opportunity to make their mark.

And When the Pipeline Dries Up?

Many existing carriers have reduced headcount, deferred airframe orders, and renegotiated mid- to long-term supplier contracts to preserve cash liquidity. There is an opportunity for the startup airlines to embed a leaner operation that fits the current landscape with an option to grow as and when the industry picks up again. The startups are poised to secure favourable commercial terms from desperate suppliers and have a readily available stream of a highly qualified and competent workforce. However, access to such skilled personnel is not sustainable in the long term and may hamper the recovery and scalability when the demand returns.

The pipeline of aviation personnel is likely to dry out faster than it can be replenished. Therein lies the problem. With so many furloughed or unemployed qualified and experienced professionals, the attraction and desire to pursue a career in aviation is understandably low. Early retirements and the extra motivation to change jobs can further exacerbate the demand. The survivability of training providers also rests on a continuous market upstream and because this demand has dried up, some training providers may struggle to keep afloat, resulting in delayed training.

To continue to aspire to the new generations of aviation professionals, new and old airlines need to consider investing in creative training partnerships for aviation skills programmes, unique and efficient technology. The entire ecosystem needs careful assessment and nurturing; the survival of the startup airlines may depend on it.

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