Boeing Business Plan Development Iterations

IDEA ANALYSIS BLOG 3: REVENUE GENERATION

On Friday, I had a call with a member of the StartupBoeing team. After briefly explaining my idea, we discussed how I might pursue my short-term research goals. The representative provided me with several documents to guide me with the venture development phase, including a roadmap detailing the various business plan iterations, which ultimately lead to the Enter into Service / Airline Launch phase (see diagram above). One key point that we discussed is the need to be very specific when choosing what segments to target. The global airline industry is very fragmented, and consumer travel demand varies from region to region. For this reason, I narrowed the target region for Helios Air to the 154.4km journey from Mumbai to Pune, India, as proposed in my first blog post.

Having previously looked at substitute products and fuel-related issues, this week I centered upon another major industry trend: consolidation. Over the last 10 years, many airlines have strengthened their market positions by combining operations with their competitors – major examples being the 2010 merger between Delta Airlines and Northwest Airlines, and the 2012 merger between United Airlines and Continental Airlines. This has ramped up the level of competition in the market, creating significant barriers to entry for startup airlines in virtually every geographic region. Given this, I believe that achieving market dominance in the airline industry revolves around two key factors: revenue generation and market penetration. I will focus on the first of these in this week’s blog post.

Revenue Generation

The low-cost business model has pervaded the airline industry, with well-known carriers such as Southwest Airlines and Ryanair earning revenues at a significant premium to the industry average. However, other airlines have also proven that their traditional models still work in this new low-cost context. A key example is that of the Santiago, Chile-based LAN Airlines, which reduced its ticket prices by 30%, captured a majority of the South American market, and has since brought in over half a million new customers each year. The key to LAN’s success was targeting a niche, underserved market – passengers who wanted to travel short distances but would usually choose alternative, cheaper modes of transportation. This example is important to my own venture because it provides a basis for selecting a target customer. When forming this idea, I had envisioned the target market as middle-class Indians who live in Pune but travel to Mumbai for work-family reasons. I still see this target market as ideal for the venture – just like LAN, these passengers usually choose to travel by train, because the price of flying does not justify the time saved (a 55-minute flight for $96 compared to a 2 hour train costing at most $11).

Using a helicopter is certainly faster than both the train and the scheduled flight, as one can see in this table:

Mode of Transportation Travel Speed (km/h) Approx. Travel Time from Mumbai-Pune
Intercity Express 12127 (Train) 60 3h 12min
Jet Airways 9W618 (Boeing 737-800 fixed-wing plane) 840 0h 50min (including time spent on the ground taxiing, parking, pushing back, etc.)
Boeing 234 Chinook 269 0h 34min

The ground procedures for a helicopter flight are also far less complex than for a fixed-wing aircraft (i.e. no physical movement on the tarmac is required) – passengers can simply get on and off once the rotors have stopped spinning.

But now comes the elephant in the room: price. Although a helicopter would certainly beat both a fixed-wing aircraft and a train in terms of time, would it be possible to operate one profitably while still being cheaper than the fixed-wing flight? This was the point that the Boeing representative was most skeptical about. He explained that it while it might be possible to run a profitable helicopter airline, the real problem arises when the term low cost is thrown into the business strategy. After several hours of looking around online, I managed to find another helicopter airline, HeliJet, which serves the short-haul distance between Vancouver and Victoria, Canada. The flight, which also takes about 35 minutes, costs $273.85. Of course, there are other factors affecting this, including higher aviation taxes and operating costs in North America. But what this says to me is: if HeliJet is one of the only other helicopter airlines out there, and the only reason they’ve survived for 30 years is with these prices, then is it even possible for Helios Air to be profitable? Certainly, customers in India would not pay $273 for a trip which would cost them anywhere between $11-$100 on an alternate mode of transportation. An idea would be to target a second customer segment – such as businesspeople – to offset the high operating cost of the helicopters with mid-range fares. Still, with all factors considered, the question remains: would a flight with Helios Air cost less than the scheduled Jet Airways flight?

I have to give this question some serious thought over the next week. Perhaps the target customer needs to be changed to one with a higher willingness to pay for the convenience of helicopter travel. This might even mean that the target region gets changed altogether, to a sector that truly justifies the fares charged. If I can’t come up with a creative solution, I fear that this pricing issue may sound the death knell for Helios Air.

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