Start to invest in research and development. Only innovation and creativity will keep you ahead of others.
Attract best human resource from the market and retain it.
Focus more on the quality of product, customers needs and wants, the bottom line will take care of itself.
I will speak out of my experience as an Airport Manager as well as as a head of Consumer Protection responsible for implementation of Air Passenger Rights.
Majority of the passengers do not know that airlines are bound to compensate passengers for the loss, theft and damage to the checked-in baggage. This has been mandated by various jurisdictions in line with Private International Air Law such as Montreal Convention 1999 or WARSA Convention 1929. Some States have not signed Montreal Convention 1999 as yet, therefore they follow WARSA Convention 1929.
Airlines tend to exploit on the ignorance of passengers and play down the compensation part as much as they can. in a recent survey only 1/3rd of the European passengers actually knew about air passenger rights.
WARSA Convention 1929 as amended by Hague Convention 1955 entitles passengers to the compensation for loss, theft or damage to the baggage at the rate of US$ 20 per Kg upto 20 kgs maximum. It is not based on the value of the contents packed in the baggage.
Then there is Montreal Convention 1999, the States that have signed and ratified this Convention pay upto 1000 SDR (Special Drawing Rights) for the loss, damage or theft of checked baggage.
An SDR is artificial basket currency of IMF. It is roughly equal to US$1.35, but its value keeps varying as the Dollar itself. Compensation, in this case, is not based on the weight of the baggage but its value. However, the value must not increase the limit of 1000 SDRs. If it does then it must be declared at the time of check-in. The airline may accept it after charging additional amount for the insurance.
The report must be made to airlines within 7 days of the missing or damaged baggage, which ought to be returned to the passengers within 21 days. Thereafter even if the baggage has been found, the compensation shall have to be paid in full.
Some jurisdictions have mandated that the airlines must pay some amount to the passenger an interim relief. This may be upto US$ 200 or more.
Airlines actually do so in lean seasons, or when the time left is too short to fill all empty seats. On one occasion, I was actually perplexed to note that seat available for immediate flight, say after four hours, was cheaper than the seat available in the next flight.
Usually, the demand for last few seats is far more than the demand for first few seats. Businessmen who need to travel on a short notice are willing to pay the premium and airlines exploit this to make up for the losses as a result of selling seats below cost to fill the aircraft.
Ever since flexible pricing system has been introduced, ticket prices change from day to day, hour to hour, and even minute to minute. The system itself is a complex computer algorithm programme that takes into account the number of seats available and the time left to sell them, and, therefore, keeps varying the prices automatically. The prices would tend to be higher if available seats are fewer and there is more time available to sell them.
A 15 hours flight between Sydney to Los Angeles costs over $300,000. A return trip would cost twice as much i.e $600,000. To achieve breakeven at 80% seat factor (440 seats occupied including first class and business class), average ticket price should be about $700 one way and $ 1400 return.
How would a start up carrier fill 80% seats at the desired price of $1400 per ticket for the return trip. The markets are already saturated and supply is already more than demand in lucrative markets. And remember empty seats are perishable, therefore, operating an empty aircraft would cost almost as much as the passengers on board. This is because various operating cost categories are fixed.
To fill up your aircraft, you will have to sell seats well below operating cost to attract passengers from other airlines competing on the same route. A chain reaction of cut throat prices would soon drive out the start up from market as old ones have more financial staying power than the new ones, with limited finances.
It is very important for the entrepreneurs to understand the dynamics of airline business and its operating costs before they jump into this business. Please also read an answer to the similar question at the following link:
If you still insist to go ahead with your desired project then here is what you need to do:
- Arrange about a $ 300 million worth of working capital, minimum 02 A380s aircraft on lease, to operate daily flight between Sydney and Los Angles, for a period of at least one year.
- Start selling seats at half the seat-mile cost. your competitors will probably not react until they start to lose their market share significantly.
- When you hit a stable seat factor of 90% or above, then gradually start to increase the price of ticket, which remains at least 20% below the competitors, no matter how low they stoop to drive you out of market. Maintain this strategy until end of the year. With $300 million, you have enough working capital to operate daily flight for the whole year, even without any passenger on board.
At the end of an year, one of the two things would have happened. Either one of the two or three competitors in the would have left the market or reduced its capacity on the route, equal to the capacity floated by your start up airline. You can then start to operate at breakeven seat factor of around 80% and hope that no one else repeats what you have done to capture the market.
The big question is how will you arrange $300 million, unless you already have very deep pockets? Assuming that you have them then it would also require a very large heart to lose it all within a period of one year.
The degree and use of e-commerce determines an airline’s ability to compete in the market. Hence all airlines use it as an effective marketing tool, to cut the cost and increase efficiency. Some airlines may be ahead of others in the effective use of e-commerce. However most of the airlines are adept in its use in the following areas:
They all have websites, which allow customers to book a seat online from home or office. This also allows the customers to compare the prices being offered by various competitors, so that they are able to buy the cheapest ticket.
Airlines also offer online facility the facility to choose the desired seat: window , aisle or bulkhead in some cases.
The trend of mobile check-in is also picking up the pace among many airlines, saving passengers the hassle of standing in a line for check-in. Self check-in kiosks also cuts down passengers’ check-in time.
Frequent Flyer Programmes (FFPs) are being managed online by almost all airlines.
It is also helping airlines reach out to the customers in case the flight is delayed or advanced.
Introduction of new products or a new destinations and price discounts etc are also be advertised on company website and social media like twitter and facebook etc.
Online customer feedback and complaints are helping management better administrate the affairs of airlines.
Introduction of RFID system has substantially lowered the airlines losses on account of baggage loss.
Revenue management system is the most effective user of e-commerce. It changes prices from day to day, hour to hour and even minute to minute, all automatically taking into account the time left for the flight and number of seats available.
Very soon e-airway bills may be a reality.
Airlines are able to find out, soon after take off, whether or not a particular flight is profitable.
For further information kindly check link below, which is an excerpt from Michael’s upcoming book titled “Airline E-commerce: Log on.Take off” . He can be reached at. .
The jobs of Air Traffic Controllers and Airport Managers are financially rewarding.
The job itself may be extremely challenging, such as the job an Air Traffic Controller (ATC). It may be far more stressful and demanding than an Airline pilot’s job. A research paper published by university of Verona explains that. No wonder that Air Traffic Controllers all over the world make as much money as the airline pilots on the average.
Airport Managers’ job though not as stressful as an Air Traffic Controller’s is, but it can be as much financially rewarding an ATC. I say this because I have experience of both.
Air Navigation Services Providers and Airport Services Providers are usually financially stable organizations in comparison to Airlines and therefore these are in a good position to reward their employees handsomely. The reason for their financial stability is two folds:
- Airports and ‘Air Navigation Services’ are natural monopolies;
- Both services are absolutely necessary for safe and secure operations of airlines and passengers, who pay for the cost of operations of these two services, including cost of labour.
The fees and charges are not raised arbitrarily though by the service providers, exploiting their monopolist position. The point of comfort for the airlines and passengers is that the profit limits of Air Navigation Service Providers and Airport Service Providers are capped by the Economic Oversight Department of the State in line with International Civil Aviation Organization (ICAO) guidelines (Doc 9082). The formula usually applied by the regulators is WAAC (Weighted Average Cost of Capital). I have experience of this one too.
Mergers, acquisitions and Alliances of major airlines in USA and elsewhere in the world in the recent past has substantially reduced competition in certain markets. Airlines are, therefore, in a position to rationalize access capacity floated on these routes to improve average seat factor and reduce losses on account of perishable empty seats. Some airlines, however, may have gone a step further to increase prices at the same time squeezing economy seats more and more to accommodate more number of passengers.. This is the logical result of lack of competition. Anti Trust department may like to review the policy of allowing mergers, acquisitions, alliances and code share etc.
In the competitive markets, on the other hand, airlines are forced to operate around breakeven seat factor, which is around 80% on the average. The net profit, on sales, in such markets, is usually between 1%–2% on the average. Their rate of return is usually below Weighted Average Cost of Capital (WACC).
As per IATA research, Unit Cost of air transport, adjusted for inflation, has dropped by about 30% since 1970. IATA link below is a presentation and its slide # 14 depicts it in the form of a chart. you could also link it with slide # 15.
The price of air travel has in fact been reducing consistently since 1970s, when US airline industry was deregulated, followed by rest of the world. With the introduction of Revenue management system one can buy a ticket at almost half the price if booked well in advance. This was not the case when there was no competition and airlines were free to pass on the cost of inefficiencies to the passengers and also make desirable profits by fixing prices.
Moral considerations apart, the true purpose of all businesses is to maximize profits, which may not be stated in the mission statements of most of the firms.
In my opinion choosing profit margin is not a matter of choice, but function of competition in the market. In a monopolistic situation, however, one can leverage his position to maximize profits from captive clientele by increasing the price without value addition. This would generally be termed as immoral by the consumers and, therefore, consumer protection department of the government might come into action.
In a competitive market, on the other hand, the only way to enhance your profit margin is by adopting creative and innovative methods to cut the cost of production without compromising on quality of a product. Value addition without increasing price is yet another way of increasing sales, therefore, total profits. Additionally target clientele does pay the premium for value addition and differentiation.
But the question remains whether it would be morally correct to increase profit margins in case one has the choice to do so, or not? The answer is yes, but no more than the profit percentage originally calculated considering market risk factors specific to the type of business involved.
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If you can do business with other people’s money, that would save you cost of borrowing money from banks for short term use to pay your bills. In airline business you can keep the cash and inventory at bare minimum level as you have sufficient cash flow from advance booking of tickets including government taxes and airports charges. This cash remains with you for quite a few days and you can use it to meet your day to day requirements, instead of borrowing it from the bank. Current liabilities side is accordingly high because you are holding other people’s money.
Besides accounts payable in the form of interest on long term debt and cost of aircraft lease etc results in higher current liabilities. Hence with low current assets and higher current liabilities; current ratio ought to be less than 1.
In airline business ‘equity to assets’ ratio is also very low as airlines leverage assets upto 80% to 90% of their total assets because of very high cost of capital. Hence most of the airlines would have equity to assets ratio in the range of 0.1 to 0.2.