Too many airlines have tried and failed and even today, the few that survive are just that, surviving at best, but why?

Transcription

1 Caribbean Air Transport: The Struggle for a local long term sustainable airline business model continuous. Since the 1950 s, a long term sustainable business model has been illusive like the search for the Holy Grail. Too many airlines have tried and failed and even today, the few that survive are just that, surviving at best, but why?

2 In Search of a Long Term Sustainable Airline Business Model in the Caribbean Caribbean Aviation Meetup June 14 16, 2006, Dominica Presented by Tomas Chlumecky

3 Some of the 60+ Caribbean Airlines out of business since 1981 Aero Wings Carib Aviation Caribbean Star RedJet Trans Island Air 2000 Air Monserrat Air Caribbean Air Calypso Air Aruba Air d Ayiti Air Jamaica EC Express Air ALM Nature Island Express Cardinal Airlines BWIA Tobago Express Helen Air Curacao Excel Dominair Dominica Nomad Air Dutch Caribbean Express Dorado Air Eagle Air V.I. Seaplane Shuttle Guyana Airways Air Jamaica Express Carib Express Air BVI British Caribbean Airways St. Lucia Airways Seagreen Air Transport Avia Air Fly Aruba Aruba Express Antilles Air Boats Aero Virgin Islands Carib Air Laker Airways Maya Airways Prinair

4 Global Airline Start-ups and Bankruptcies In 2015, there were 58 new start-up airlines and 55 airline failures. e.g. Canjet, Transaero, Estonian Air, Freedom Air In 2014 there were 83 start-ups and 44 failures. Average number of new start ups was 26 in the 1970 s, 40 in the 1980 s, and 81 in the 1990 s to 2004 saw 120+ new start-ups per year. Failures peaked at 123 in 2008.

5 Main reasons for regional airline failures my experience 1. Poor Management Wrong / inflexible business model Poor leadership Lack of vision Flawed strategy or No strategy Poor financial management Poor sales & marketing Low customer satisfaction Too operations oriented

6 Small airlines are stuck today with old 15 to 19 passenger turboprop airliners today that are on average +35 years old

7 The Production Numbers of current seat unpressurized turboprop airliners De Havilland Twin Otters = 939 (420+ in commercial use) Embraer EMB-110 Bandeirante = 501 (70 in commercial use) LET = +1,400 (+220 in commercial service) Shorts SC7 = 153 (7 in commercial service) AVIC Y-12 = 220+ (20+ in commercial service) Dornier 228 = 288 (83 in commercial service) GAF N24A = 39 (2 in commercial service), GA18 Airvan 18? CASA 212 = 580+ (40 in commercial serice), Indonesian Aerospace N219? IAI Arava = 103 (0 in commercial service) PZL M-28/AN28 = 176 (0 in commercial service)

8 Demand for small turboprop airliners is so strong today that current used prices for the DHC-6 Twin Otter are above the original factory prices

9 Only 4 small turboprops are in production today, all with hefty price tags. The Viking Air (Canada) Series 400 Twin Otter priced at $US 7.5 million. A great aircraft being kept in production at 18 units/year. The AVIC Y-12E (China) priced at $+/- 4.0 million, is an updated version with PT6A-135 engines. New Y-12F is 40% bigger, with PT6A65 engines and a 6,000 lbs payload. The Czech built Let-410 UVP-E is popular in Africa and South America, new one with GE H80 engines is around $5.0 million, with a new L-410NG coming in 2017 with H85 engines. The Dornier 228 is now produced by RUAG of Switzerland, only around 3-4 per year priced at $+8.0 million.

10 New 9 to 19 passenger turboprop airliners are coming to market in the next 4+ years. TECNAM passenger mogas 175 kts, $2.2 million Evektor EV-55 Outback, seat, 220 kts, STOL, $2.6 m Indonesian Aerospace N219, PT6 powered Mahindra Aerospace GA18 ex-gaf N24A, RR250 powered

11 Total Production of Seaters-Unpressurized 1966 to 2000 IAI LET GAF Dornier Shorts Beech DHC CASA EMB Units G1-20

12 Units Built per Year Production of 15 to 19 Seat Aircraft Year Built Total Production Pressurized Unpressurized G1-21

13 $US Price in Year Built 19 Seat Pressurized Aircraft - Equipped Price History $ $ $ $ $ J C 1900D Metroliners $ $ Year Built G2-05

14 Units Built per Year Seat Production Year Built Total production BAe J41 Dornier 328 EMB-120 SF340 SD330 G1-22

15 Units Built per Year Production of 15 to 30 Seat Aircraft Year Built Seat Seat Total 15 to 30 Seat G1-23

16 New 30 seat aircraft Dornier 328 Sierra Nevada (USA) bought Dornier 328 Support GmbH Will produce the aircraft in Turkey along with the Do328Jet 2019?

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19 2015 second hand turboprop airliner market activity 16 x ATR-42 transactions 60 x ATR-72 transactions 113 x DHC-8 transactions 9 x Fokker 50 transactions 47 x Saab 340/2000 transactions 308 x A320 s / 68 x A319 s / 238 x B737NG s

20 Driver of Growth GDP per Capita Barbados 5 trips, St. Lucia 4 trips, Bahamas 8 trips, Suriname 0.6 trips

21 Caribbean Air Traffic World Bank 2015 Study 3 distinct country groups in the region Small Island States > Antigua & Barbuda, Dominica, Grenada, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines Caribbean Hub Countries > The Bahamas, Barbados, Dominican Republic, Jamaica, Trinidad & Tobago Continental Caribbean Countries > Belize, Guyana, Haiti*, Suriname 3 route categories according to origins and destinations 1. Domestic Routes: a pair of O&D destinations in same country 2. Intra-Regional Routes: Caribbean origin and destination airports 3. Extra Regional Routes: connecting the Caribbean with outside destinations

22 Caribbean Air Traffic - 2 CARICOM has a multilateral air services agreement from 1996 Agreement s aim was liberalization of air services It is weak, allows for negotiations and permissions under reasonable circumstances, which is open to interpretation by each state Open Skies agreement based on allowing free market to determine levels of services between states Aim is for NO restrictions on int l route rights, number of designated airlines, capacity, frequency or type of aircraft. A liberal air fare regime only altered if both governments object.

23 Caribbean Air Traffic 3 Total Traffic (2013) Small Island States seats 2,450,188 (7.8% of total) Most was St. Lucia 829,738 (34% of Small Island States) Least was St. Vincent & the Grenadines 122,642 (5%) all Intra Regional Caribbean Hub Countries total seats million Most was Dominican Republic million (41%). Total for entire Caribbean 3 groups was million

24 Caribbean Air Traffic 4: Domestic (2013) Domestic Routes 3.03 million seats (10.4% of total) 3 countries have over 90% of domestic traffic 1. The Bahamas (1.50 million seats, 50%), 5 year growth of 9.6% > Operators: Southern Air Charters (57%), Bahamasair (26%), Sky Bahamas (17%) 2. Trinidad & Tobago (966,732 seats, 32%), 5 year growth of 5.4% 3. Belize (379,223 seats, 13%), 5 year growth of -3.3% > Operators: Maya Island Air, Tropical Air No data on St. Kitts to Nevis, Antigua to Barbuda, St. Vincent to Grenadines and Montserrat to Antigua. No domestic scheduled services in Dominican Republic, Guyana and Suriname.

25 Caribbean Air Traffic 5: Intra Regional (2013) Intra Regional Routes 2.65 million seats (8.4% of total) Small Island States 882,830 seats (33% of intra regional) Caribbean Hub Countries 1.34 million (51% of intra regional) 1. Antigua & Barbuda 209,261 (8% of total intra regional) 2. Dominica 78,481 (3%) 3. Grenada 174,226 (6.5%) 4. St. Kitts & Nevis 59,787 (2%) 5. St. Lucia 238,433 (9%) 6. St. Vincent and the Grenadines 122,642 (5%) 7. Barbados 409,279 (15%) 8. Trinidad & Tobago 788,723 (30%) In 2012 LIAT had 80% of the Small Island States seats and Caribbean Airlines 15%

26 Caribbean Air Traffic 6: Scheduled Service Airlines in the EC LIAT is majority owned by Barbados, Antigua & Barbuda, St. Lucia and Dominica, and operates 5 x ATR s (48 passenger) and 4 x ATR s (68 passenger) Caribbean Airlines is owned by the Government of Trinidad & Tobago and operates 5 x ATR s (68 passenger) and 12 x Boeing B s (154 passenger).

27 Caribbean Air Traffic 7: Other Regional Airlines 1. Inter Caribbean Airways (Turks & Caicos), 9 x Emb-120 s, 3 x B99 s 2. SVG Air (St. Vincent & the Grenadines), 6 x DHC-6, +6 x BN2 s, 1 x CE-402 s 3. Air Antilles Express (Guadeloupe) 4 x ATR-42, 2 x DHC-6 s, 2 x CE208 s 4. Winair (Saint Maarten) 5 x DHC-6 5. Sky Bahamas (Bahamas) 4 x SF 340 s 6. Bahamasair (Bahamas) 3 x ATR-42, 2 x ATR-72, 3 x B s

28 Multi Government Owned Airlines-EAA East African Airways 1946 to 1977 Kenya, Tanzania and Uganda By 1975 EAA had $120 m in debts Tanzania and Uganda not paying debts 1977 the airline collapses Each country formed its own airline Kenya Airways Uganda Airlines Air Tanzania

29 Multi Government Owned Airlines Air Afrique 1961 to 2002 Formed by 11 ex-french countries UAT and Air France took 34 % 1971 Cameroon formed Cameroon Airlines 1976 Gabon formed Air Gabon While Mali, Togo and Sierra Leone joined 1980 s africanisation started decline 1998 down to 11 aircraft 2001 debt at $431 million By 2002 only 6 aircraft left and 4,600 employees

30 Multi-Government Owned Airlines - MSA Malaysia-Singapore Airlines Different needs of each government caused a break-up Singapore wanted international route expansion Malaysia wanted domestic and regional expansion Singapore Airlines (SIA) Malaysia Airlines (MAS)

31 Multi Government Owned Airlines Gulf Air 1974 to present Bahrain, Qatar, Abu Dhabi and Dubai each with 25% 1985 Dubai leaves forms Emirates 2002 financial problems, Qatar leaves forms Qatar Airways 2005 Abu Dhabi leaves to form Etihad and takes CEO James Hogan 2007 Oman leaves to form Oman Air Bahrain 100% owner of Gulf Air, which struggles today

32 Multi Government Owned Airlines - SAS 1951 to Present Today, Sweden has 21.4%, Denmark 14.3% and Norway has 14.3% The airline is in the back in the black and has 137 aircraft and 119 destinations Norway is looking to leave the airline soon

33 Multi Government Airlines - LIAT Formed 1956 by Sir Frank Delisle 1971 Court Line buys 75% and introduces BAC One Eleven jets 1974 Court Line is bankrupt, 11 EC governments rescue it 1980 s saw big growth and operation of 3 aircraft types 9-44 passenger (HS748, DHC-6, BN2) buys Caribbean Star Today, main shareholder are Barbados, Antigua and Barbuda, Dominica and St. Vincent & the Grenadines. Losses continue after a ill timed and costly fleet change Future?

34 What is a Business Model? It is the DNA of your business Gives meaning to your employees and customers What value/benefit do we create for whom? How do we do it? How do we earn money? What values do we pursue?

35 Business Model Components

36 Business Model Southwest Airlines

37 Southwest Airlines Activities

38 Basics of an Airline Business Model

39 Business Strategy in a nut shell

40 Ryanair s Business Model

41 Airlines Fail and Other Airlines Move in

42 Business Model: THE Airline PROFIT formula RASK > CASK = Profit RASK (Yield x load factor) CASK = Profit 300 Km sector with 50 seater (15,000 ASK s) costing $4,500/sector CASK (4,500/50/300) = $0.30 Net Yield ($150/300 km) = $0.50/RPK Load Factor is 70% RASK = ($0.50 x 70%) = $0.35 Profit = $ $0.30 = $0.05 per ASK ($750/sector) = 14% margin Breakeven load factor (CASK/RASK) = $0.30/$0.50 = 60%

43 Lower Unit Costs: Higher Seating Density x Higher Aircraft Utilization (example) Air Canada A319 (14J + 106Y) = 120 seats Flies 9.0 flight hours per day ASM productivity per day = 120 x 9.0 x 450 = 486,000 ASM s per day Versus Air Canada s LCC Rouge A319 (12Y Y) = 136 seats (+13.3%) Flies 12.0 flight hours per day (+33.3%) ASM productivity per day = 136 x 12.0 x 450 = 734,400 ASM s day (+51.1%) + lower salaries for pilots, flight attendants and mechanics + lower overheads

44 Business Models Franchise Partnerships FlyBE is Europe s largest regional airline today (194 routes, 69 A/C) Flights are branded and marketed as FlyBE Tickets sold via all Flybe distribution channels Aircraft painted in Flybe livery Partners remain independent, locally owned and own AOC

45 With 3 regional ATR operating airline partners the whole Caribbean can be covered for intra regional traffic north to south and east to west.

46 Business Models EAS Carrier (USA) Essential Air Service $261 million in routes in lower 48 Generally 2 daily flights From 9 pax to 50 pax aircraft Service to hub airport Max. 1 intermediate stop In 1994 $33 million Great Lakes Airlines Silver Air

47 US Regional Airlines The top 9 US regional airlines are CPA (capacity purchase partners) to US major airlines, carrying 96.56% of total US regional traffic of million (2014). The next 57 airlines carry 3.44% of traffic or 5.44 million. The largest independent airline is Ravn Alaska with 813,042 pax. Which #2 is Air Cape with 760,496 #5 is Seaborne with 448,404 passengers

48 EU Public Service Obligation (PSO) air services EU transport law, a PSO is an arrangement in which a governing body or other authority offers an auction for subsidies. Thereby permitting the winning company a monopoly to operate a specified service of public transport for a specified period of time for the given subsidy. This is done in cases where there is not enough revenue for to be profitable in a free market, but where there is a socially desirable advantage in this transport being available.

49 Business Model Below the radar Australian regional airline, on the Australian Stock Exchange Largest Saab 340 operator in the world (52) all owned serving 54 destinations Merger of Hazelton and Kendell airlines and moving to 1 type fleet Flies regular charters for mining companies (fly in, fly out) through Air Link Flies air ambulance flights with biz jets through Pel-Air

50 Exchange Income Corporation (EIC) - Canada A Winnipeg, Canada based investment fund that has bought 5 Canadian regionals between 2004 and With revenues of $500+ million and EBITDA margins over 20% it has shown that regional airlines can be very profitable with the right management and financing in place. It has the 3 rd largest airline fleet in Canada with 110+ turboprops and jets (Metros, Beech 1900 s, ATR-42/72, DHC-8, Saab 340, and Dornier 328Jet

51 Exchange Income Corporation Valuations and Strategy In 2008 EIC buys Calm Air for $59 million, which is 3.78 x EBITDA or 0.7 x revenue. In 2011 EIC buys Bearskin Airlines for $32.5 million, which is 3.91 x EBITDA or 0.65 x revenue In 2014 EIC buys Provincial Aeropsace for $246 million, which is 5.3 x EBITDA and 1.33 x revenue. Strategy: right price and pay no more, niche markets, limited competition, markets lack big fluctuations, strong management, keeps old management in place, growth plan a must with competitive advantage

52 Economics of Smaller Turboprops vs ATR-42 (150 km sector)

53 Economics of Smaller Turboprops vs ATR-42 (333 km sector)

54 18 18 seater Cost $897 /Flt $50 per seat 46 ATR-42 Cost $1,480 / Flt $31 per seat 150 km 35 min 150 km 28 min B/E curve 0.33 CASK B/E curve 0.21 CASK pax yield pax yield LF % 1.65 $RASK $ 248 net ticket $ LF 9 20% 1.05 $RASK $ 158 net ticket $ % 1.10 $ % 0.70 $ % 0.83 $ % 0.53 $ % 0.66 $ % 0.42 $ % 0.55 $ % 0.35 $ % 0.47 $ % 0.30 $ % 0.41 $ % 0.26 $ % 0.37 $ % 0.23 $ % 0.33 $ seater 18 seater Cost $2, / Flt $55 per seat 333 km 71 min Cost $1,834 /Flt $103 per seat 333 km 49 min B/E curve 0.31 CASK B/E curve 0.16 CASK yield yield LF % 1.55 $RASK $ 516 net ticket $ LF 9 20% 0.80 $RASK $ 266 net ticket $ % 1.03 $ % 0.53 $ % 0.78 $ % 0.40 $ % 0.62 $ % 0.32 $ % 0.52 $ % 0.27 $ % 0.44 $ % 0.23 $ % 0.39 $ % 0.20 $ % 0.34 $ % 0.18 $ % 0.31 $ 103

55 Thank you Any Questions?