YOUR AIRLINE BUSINESS PLAN MAY BE IMPRESSIVE. IT MAY ALSO BE IMPOSSIBLE.

The biggest risk in launching an airline is not execution. It is discovering too late that the original concept was never viable.

Nearly ten years ago, 1BlueHorizon published a Blue Paper highlighting some of the fundamental mistakes we were already seeing in airline start-up projects. A decade later, the industry has changed considerably—but many of those mistakes have not.

We continue to review airline start-up concepts, executive summaries and business plans from different parts of the world. The presentations have become more sophisticated. The financial models have become more detailed. The aircraft, technology and distribution options have evolved. Yet the same fundamental questions are still too often addressed too late. New routes. Attractive aircraft. Ambitious passenger forecasts. Growing markets. Strong tourism potential. Five-year profitability projections. And sometimes, an airline that cannot actually exist in the form described in the business plan. That is the uncomfortable reality of airline start-ups.

BEFORE ASKING WHETHER THE AIRLINE WILL MAKE MONEY, ASK WHETHER IT CAN FLY.

One project we reviewed proposed an ambitious international network involving extensive fifth-freedom operations. On paper, it created an attractive global network.

There was just one problem. The traffic rights required to operate it had not been established. This is where aviation differs fundamentally from most other industries.

An entrepreneur opening a hotel, technology company or retail business can largely decide where to sell the product.

An airline cannot simply draw a line between two cities and turn it into a route.

International scheduled aviation operates within a complex framework of traffic rights, bilateral and multilateral air service arrangements, airline designation and national regulation. Governments negotiate those rights. Airlines operate within them. A route can therefore make perfect commercial sense and still be unavailable to the airline proposing to operate it. That distinction can destroy an entire business plan.

THE 1BHG VIEW

Never build the economics of an airline around traffic rights you do not have.

Validate the regulatory architecture before validating the revenue forecast.

THE INVESTOR MAY BRING THE MONEY — AND MAKE THE AIRLINE IMPOSSIBLE.

The second misconception we encounter regularly concerns ownership. A promoter develops an airline concept and then searches internationally for investors to finance it.

Commercially, that seems logical. In aviation, it may create another problem. Many jurisdictions impose nationality, ownership and effective-control requirements on licensed airlines, particularly where international traffic rights and airline designation are involved. The exact rules differ by country. But the strategic implication is universal:

The person willing to finance your airline may not necessarily be able to own or control it in the way your investment structure assumes.

That conversation needs to happen before—not after—the fundraising strategy has been developed.

STOP CHOOSING THE AIRCRAFT FIRST.

Aircraft generate excitement. They also generate one of the most common mistakes in airline start-ups.

• “We have identified three aircraft.”

• “We have been offered an excellent lease.”

• “This aircraft would be perfect for our airline.”

Perhaps.

A particularly interesting contemporary example is Global Airlines, the British start-up that placed the Airbus A380 at the center of its proposition. The company acquired an A380 and set out to differentiate itself on transatlantic markets through the world's largest passenger aircraft—at a time when operating such an aircraft presents an unusually demanding combination of capacity, maintenance, infrastructure and commercial requirements. The ambition itself is not the issue. In fact, challenging established airline models is healthy for the industry. The strategic question is the sequence: Does the market opportunity justify the aircraft — or is the business model being built to justify the aircraft?

That distinction matters enormously. An A380 can be a formidable commercial asset when deployed in the right market, with sufficient demand, the right network, appropriate infrastructure and an operating model capable of supporting it. But for a start-up, beginning with such a large and complex platform also illustrates how quickly an aircraft decision can shape—and constrain—the entire business model.

That is why we believe fleet selection should come later.

• First define the market.

• Then the network.

• Then frequencies.

• Then capacity requirements.

• Then operational constraints.

• Then the aircraft.

Not the other way around. A cheap aircraft flying the wrong mission is an expensive aircraft. An iconic aircraft flying the wrong business model can be even more expensive.

THE 1BHG VIEW

Do not build an airline around an aircraft opportunity. Build the fleet around the airline's economics.

AND NO, CALLING IT AN LCC DOES NOT MAKE IT LOW-COST.

Another recurring assumption is that a start-up should automatically become a low-cost carrier. Why? Because LCCs have been successful elsewhere.

But successful airline models cannot simply be copied from one market into another.

Customer behaviour, distribution, airport infrastructure, labor costs, geography, competition, ancillary-revenue potential and cultural expectations differ significantly between markets. In some markets, a traditional full-service proposition makes sense.

In others, an LCC model can be highly effective. And increasingly, hybrid models occupy the space between them. The question is not: “Should we launch an LCC?” It is:

“What airline model does this particular market support?”

THE SPREADSHEET SAYS THE AIRLINE IS PROFITABLE. CASH MAY SAY OTHERWISE.E SPREADSHEET SAYS THE AIRLINE IS PROFITABLE. CASH MAY SAY OTHERWISE.

This may be the most dangerous part of the start-up business plan. Revenue grows. Load factors improve. Unit costs decline. EBITDA eventually turns positive. The graphs look reassuring. Meanwhile, the airline is running out of cash.

Aircraft deposits, lease rentals, maintenance reserves, recruitment, crew training, certification, insurance, IT systems, distribution, airport arrangements and pre-operating costs consume substantial cash before the first passenger generates revenue.

Once operations start, passenger numbers and yields may take longer than expected to develop. The real question is therefore not whether the airline becomes profitable in Year 3. It is: Can it survive Year 1?

We frequently recommend stress-testing start-up airlines against scenarios substantially worse than the base case.

• What happens if certification is delayed?

• What happens if the first aircraft arrives late?

• What happens if the planned route cannot be launched?

• What happens if load factor is 15 points below forecast?

• What happens if yields are weaker?

• What happens if fuel rises sharply?

• What happens if working capital is consumed faster than expected?

If one adverse assumption makes the airline insolvent, the problem is not the adverse assumption. The problem is the business model.

AN AIRLINE IS NOT A START-UP WITH WINGS.

This is perhaps the most important point. The language surrounding new airlines increasingly resembles the language of conventional entrepreneurship: Idea. Funding. Product. Launch. Scale. Aviation does not work that way.

An airline sits at the intersection of safety regulation, licensing, international traffic rights, aircraft economics, infrastructure, skilled labour, geopolitics, capital intensity and extraordinarily complex operations. There is very little room for “we will figure that out after launch.” And that leads to the question we believe every airline promoter—and every potential investor—should answer before committing serious capital: Should this airline exist?

Not: Can we lease aircraft?

Not: Can we create a compelling brand?

Not: Can we produce a business plan showing profitability?

But: Is there a defensible market? Can the proposed network actually be operated? Can the airline obtain the required licences and traffic rights? Is the ownership and governance structure compliant? Is the operating model appropriate for the market? Does the fleet support the economics? Is the management team capable of delivering it? And is there enough capital to survive when the assumptions prove wrong?

If the answer to those questions is yes, then it is time to build an airline.

If not, the cheapest time to discover it is before the first aircraft is leased.

1BlueHorizon Group

We help airline promoters, investors and aviation stakeholders challenge airline concepts before capital is committed — from start-up feasibility and business-plan review to operating model, fleet and network strategy, regulatory considerations and aviation due diligence.