Start-Up Airline

[ACMAir]

The difference would hopefully be in the passenger comfort and services arena. An IFE that rivals Virgin America. Personally, I do not understand why VX doesn't pull a profit. Their routes are high profile, prices are competitive, and their service is second to none. Might it be because they only have high profile flights to high profile airports which leads to high expenses at low ticket prices? My main objective is to create the American version of Porter Airlines, but I don't know if geography permits. What do you think?

[Manny4life]

Ok, so what is this perfect comfort that your airline has that others in the same market doesn't. Remember that you are operating hub, and one of your route is LAX to JFK, in other words this is a major route and have quite a number of competitors inlcuding SWA although it stops at LGA instead.

Another thing you would ask is that would customers prefer quality of comfort to price, vice versa or both?

As for Virgin America, you said it yourself, you said that they are competitive right not low cost. The fact they are competitive with the majors doesn't make them cheap either. The reason why they can't be profitable could be several other factors mostly would be their direct operational cost and their fixed overhead burden.

I would explain something an instructor explained to me, he said, there are two reasons a customer weights on before he decides what flight he uses

1. If it's low cost and reputable, that has a very significant factor, then he goes for it, otherwise if its expensive, the might as well stick to their well known airline they are used to. its more like they are more accustomed to particular thing (I have forgotten the word) and something has to change their taste or preference and in this case every customer wants to save every dollar (lost cost).

2. Then the time which deals with flexibility is very important in the aviation industry. Then other factors plays little or no significant role

Yes VX might have accomplished all of this, but did their service balance out their revenue, NO otherwise they would have been profitable. Competing with the majors is a very dangerous game, you just have to find a niche and focus on it. For instance, Southwest Airline knows this that is why they launched from nonstop LAX to LGA to avoid burden like landing fees at the hub, PFC to enplane them again from hub to final destination, avoid crew hrs, burn less fuel, eliminate hub facility crew and so many other burden. Wouldn't you think they do this if its gonna be low cost? Again VX doesn't have that much passenger base and if you lack passenger base, that can be dangerous for a hub/spoke system.

In your case you like to stop at STL for a flight from LAX to LGA, obviously the same people who boarded from LAX would board back from STL to LGA, the question is do you have committed passengers boarding from that STL to LAX to offset the landing and takeoff fees, ramp fees, PFC for all the passengers and others as you keep listing?

[ACMAir]

In terms of comfort I would like the staff to be friendly and helpful. But beyond staff, leather seats, an IFE second to none, Wi-Fi, as well as internet on the in-flight entertainment system in the seatback in front of each passenger. It would be like having an iphone, touch screen, but larger screen, attached to each seat, with networking within the aircraft from seat to seat. From your explanation however, the hub and spoke system seems rather faulty and non-efficient, contrary to my past belief. But wouldn't it be better to have a flight from LAX to STL on a larger aircraft that carries the passengers that want to go to BOS or LGA or any of our connecting cities, rather than having separate direct flights to the east on separate aircraft?

[Manny4life]

In my own opinion, it still doesn't matter. Let's look at it this way either direct or hub and spoke, the bottom line is that this are different cities. I mean what is the plan? Have people flown to STL and then they board their destination planes for instance use a 200 seater aircraft and fly people going to STL, and from STL passengers would board on their respective flights like those going to BOS would board and those going to LGA would board differently. Is that your plan?

The in-flight entertainment touch screen system is great but don't forget about weight and balance of the aircraft which some of those stuff would eventually compensate for some seats on the aircraft, then you eventually increase your fare to compensate for the cost, thus not making it again low -cost. The Wi-Fi is great so long it does cause interference with use of electronics on airplanes. Please visit the FAA website and see about their regulations on that, although people do but I'm not certain about how it is controlled and regulated.

The hub and spoke system isn't faulty, rather its used for rather long haul flights and irlines that have a substantial base of customers. For instance, I fly Southwest for short haul like to New York, but long haul flights, I use Delta, on my plane from Ronald Reagan, you will have like 20 different people with different destinations, when I deplane at ATL, I get on the next flight to my destination. What I'm saying here is that Delta uses their hub to bring in and then move them out to their different destination just like big airlines do. This is because a have a large customer base unlike a small carrier.

[ACMAir]

Yeah, exactly, the plan is to bring all the passengers to one location from which they can take their respective flights to their final destination. Is that a recipe for disaster?

I will definitely check the regulations and see. However, there are these new seats designs by Thompson Aero Seating, which are placed in a diagonal. If I am not mistaken it is awaiting certification, but the arrangement can add seats without compromising comfort. Thompson Aero Seating

IFE is one of the most important features for me, because at the end of the day, a passenger would be much more satisfied with the experience if he didn't have to check his watch multiple times during a 5 hour flight. The experience needs to be captivating. But in addition, I am hoping on trying to market the airline as one that is much cleaner and eco-friendly. The use of jatropha plant oil, instead of jet fuel, and using energy efficient airport technologies and computers. In addition, using electric GSE by Charlotte. In addition to being energy efficient, these would reduce expenses.

[Manny4life]

I guess you have all your detail all set and ready to go which is great. Well then, you don't plan on being a low cost airline then, do you? If you do, perform a price analysis between you and your competitors and then figure out what the margin difference is and what price makes you a low cost, calculate all fees associated with each flight, and the come up with your final figures.

Why I ask you to perform an analysis is this.

Assuming that all our varibles remains unchanged, you have a flight from LAX to STL with 120 seats (B737), and you need more than 70 percent of 120 to break even = 70/100 * 120 = 84 pax to break even for that flight. Then wen they get to STL, again if everything remains unchanged, each plane to BOS and LGA would both need 70% to break even. Assuming that the planes used are 75 seater planes, both equal 150, 70% of 150 = 70/100 *150 = 105 passenger, hey but you only have 84, obviously you are operating at a net loss.

[ACMAir]

I would like to be able to be a low-cost carrier, but possibly by increasing the number of passengers in order to break even. Although it does not sound like much business sense, but, for instance on a Q400, 49% at $65 with 30" pitch is break even. But if instead of charging $100, I still charge $65 but provide 34" pitch and services, i would need probably around 70-75% in order to break even.

[Manny4life]

Having more people isn't the issue, but having a net profit margin is what is the problem with airlines. Yes you can fill the seats quite alright, after everything you are operating at net loss reason why VX is suffering from losses.

Like the Q400, it approx. 75 people, if you break-even at 70%, that is 70/100*75 = 53 passengers paying $65 which is 53 passengers *$65 = $3,445. Now if you charge $100, that is $3,445 (break-even amount) / $100 = 34.45 or round up to whole number 35 passengers. Express the 35 passengers to break even amount of 75 seat = 35/75 *100 = 46.66 or 47% load factor.

To test, if you have a 46% load factor, that is 46/100 * 75 seats = 34.50, multiply that by $100 = $3,450 break even.

Given this scenerio, you are likely to fill a Q400 with 35 passenger at $100 with you IFE, compared to filling the airplane at 53 people which is easy but down the road, you will see what I mean. In other words, the higher the price, the less the load factor required to break-even at operational cost.

[ACMAir]

Your analysis does indicate a net loss. I never saw it that way.

But wouldn't filling a Q400 with 53 or so passengers still be relatively easy if the markets are underserved, or if they are high profile regional destinations? A flight from LAX to San Diego for example would be able to fill a Q400 for sure, with more than 53 passengers. I would have to research yield management, and see what price would reflect the greatest returns, but I would much prefer to have lower fares, and having nearly full aircraft, with higher break even numbers, and excellent services, than charging greater fares and having lower break even numbers and less passengers on board. My reasoning is, if I charge $100 and the break even is 45%, 35 passengers, I'll probably pass break even, but not by many passengers, probably 10 over break even. However, if I charge $65 and increase the break even to 70%, 53 passengers, I ensure I would have probably again 15 or so passengers over the break even mark, ensuring a full aircraft. Although I get only $65 per extra passenger, compared to the $100 from each additional passenger, I would rather fly full aircraft.

[Manny4life]

You are right about that which is why you can use a price mix-match, after you break-even then you can play with the price as you like. What I'm more concerned about is the cost per seat. The general rule of business is that you want to make at least 28% to 37% GM. At $65 wouldn't be a problem if the cost per seat is at $45 or less giving you a 30% GM or more.

[ACMAir]

Yeah, that's why I need to find the most beneficial aircraft for the route. What do you mean by 28% - 37% GM?

[Manny4life]

GM is Gross Margin. This is the number expressed as the revenue over the cost of sales by the revenue in percentage. It is a term used in business, accounting or finance or whichever.

Cost per seat $45

Revenue per seat is $65

Gross Profit (GP) is Revenue - Cost = $65 -$45 = $20

Gross Margin is Revenue - Cost (sales)/Revenue, express it in % or Gross Profit /Revenue expressed in %. In this case $20/$65 = 0.307 or 0.31, expressed in % is 31% Gross Margin over sales. Remember, this is different from mark-up.

[ACMAir]

Aha I see. Thanks for the analysis. But in that case, the cost per seat is assuming all seats are filled, right? Because that's how CASM is calculated, isn't it?

[Manny4life]

I'm sorry I was out through out the whole day and was very busy and came in late at 10.37pm. CASM is the term used in Airline economics , while GM, CPS, and NP are accounting and finance terms. My analysis was showing the accounting aspect after you have done your economics.

CASM is used to calculate the cost per seat. For instance, for us to calculate our ticket price, we have to know what the Cost Available Seat Mile (CASM) is. Don't forget CASM is the number per seat per mile, while ASM is the total number of seats per mile expressed by total number of miles. For examples, you have 200 seats on an airplane and will fly 150 miles, your ASM is 200 seats x 150 miles = 30,000 ASM.

There are several factors that contribute to calculating CASM, while many people use different variations, but the main one is the direct operational cost to that flight. Most airlines go as further to add the indirect cost and allocate some fixed overhead to that amount. That is why the airline industry does not use one standard format for calculating CASM.

[ACMAir]

Don't worry about it. I greatly appreciate your help though.

By indirect cost and fixed overhead would that be ramp agent salaries, costs to upkeep the gates, airline representative costs, gate payments, and basically all costs, regardless of the particular flight?

Key to success is keeping CASM lowest possible, so is there some sort of sheet that compares that average CASM on different airlines, either just the average of the fleet, or based on the specific aircraft they use? I'd assume it might be in Airline Business magazine, but those cost upwards of 1000 dollars a subscription. What would you consider great resources?