airline industry

Singapore Airlines A380 Refueling

Fuel Hedging 101

Happy New Year! It’s been a while since my last post, as January was a busy month for me. I started this post in December, but wasn’t able to finish it until now. Given the rapid developments in oil prices, I’ve tried to update all the references to reflect current market conditions. Please let me know if you find any remaining inconsistencies!

Last semester, I took a statistics course called STAT435: Forecasting Methods for Management, which essentially covered the fundamentals of time series analysis. This was a good, challenging course that allowed me to apply statistical methods to many of the other quantitative and qualitative concepts from my finance/management education, such as looking at the effect of advertising on sales and analyzing corporate and DJIA returns. The class also allowed me to apply statistics to my passion for aviation. I’ve always held that two of the biggest forces affecting airline profitability are a) passenger capacity and b) fuel costs. To address the first point, I analyzed different forecasts of international airline passenger data, looking specifically for the calendar cycle within airline passenger volumes (i.e. identifying the trend for higher and lower-than-average passenger volumes in a given year). This is intrinsically linked to passenger demand for travel, which is in turn spurred by consumer demand (for holidaymakers) and the state of the global economy (for business travelers). The next logical area of study would look at how airlines forecast passenger volumes and use this data in their operations throughout the year – such as adding or removing certain destinations, and purchasing newer, higher-capacity and more fuel-efficient planes.

The second factor (fuel costs) piqued my interest a bit more, in part due to its relevance to recent events in the global markets. I analyzed the monthly average retail price of unleaded regular gasoline, averaged across U.S. cities, for the period January 1976 through February 2008. My overall conclusion was that unleaded regular gasoline prices lack strong seasonality when compared to other energy products such as natural gas, which is “strong cyclic in nature over a year due to seasonal variation in supply and demand.” A product such as natural gas, which is a main source of heating for homes, has a consumer demand that varies by season and thus “has a general upward price movement in the winter and downward movement in the summer.” Furthermore, the seasonality effects in natural gas prices “can be seen not only through historical spot prices, but also through futures and forward prices.” The product I looked at, unleaded regular gasoline, has a use that is not as greatly affected by seasonality than natural gas. Consumers will tend to drive more or less consistently throughout the year – although they might substitute driving in place of walking short distances in the winter – whereas they will significantly upsize their natural gas and heating demand in certain seasons. Combined with the knowledge that past gasoline prices influence future prices, I concluded that gasoline prices follow a stochastic or random process in the long run, as seen by classic “stochastic drift” in the upwards-trending average value of gasoline prices over the 32-year data range.

Too much statistical analysis for you? Don’t worry, I felt the same way last semester. The point I’m trying to get to is: my analysis of unleaded regular gasoline prices came at a very appropriate time – the day after I submitted (right before Thanksgiving 2014), OPEC announced that it would not cut its oil output, sending crude oil prices downwards (WTI trading near a 5-year low of $55.26 when I started writing this post in December) and generating a knock-on effect in the Russian Ruble currency. Ali al-Naimi, the Saudi oil minister and de-facto head of OPEC, has reaffirmed the cartel’s firm stance against cutting production, which “[spells] out a dramatic policy shift that will have far-reaching implications for the global energy industry.”

I am keenly following the oil markets and the repercussions for the global economy, and it certainly seems to have aligned perfectly with my classwork. The biggest question on my mind, however, is what impact the dramatic oil shifts will have on the airline industry. If I were to continue with my statistical analysis, the next step would be analyze the time series for aviation fuel (designated Jet A, Jet A-1, and Jet B), and pay attention to any stochastic trend in this data. It would be great to apply forecasting methods to aviation fuel prices, to gain a better understanding of how airlines hedge against these volatile indices in order to stay alive. It’s certainly a larger undertaking, one that I might consider doing in the future. For now, I want to look at the practice of so-called “fuel hedging” that many airlines use in their strategic and financial planning.

What is Fuel Hedging?

At its heart, fuel hedging is relatively simple and works pretty much like any standard financial option instrument. Airlines enter into contracts with their fuel suppliers to lock in a set price today for fuel bought in the future. For instance, if an airline enters into a hedging contract at a price of $X per gallon of aviation fuel, it will pay that price in the future regardless of what happens to the market price of the fuel. What this means is that if the market price rises above $X/gallon, let’s say to $Y/gallon, the airline will purchase its fuel at $X/gallon and save the difference between $Y/gallon and $X/gallon. And if the market price declines below $X/gallon, let’s say to $W/gallon, the airline will still purchase its fuel at $X/gallon and will be overpaying for its fuel by the difference between $X/gallon and $W/gallon. Furthermore, an airline may enter into a fuel hedge contract linked to the price of jet fuel or the price of crude oil (per barrel). Since jet fuel is a derivative of crude oil, the prices of the two commodities are fundamentally correlated, but can also diverge due to idiosyncratic factors in the refining and production process. Based on this knowledge, we can already see the implication that recent oil trends have had on airline profitability.

The truth of the matter is that airlines engage in more complex hedging strategies to protect themselves against market volatility. Like a standard options contract, a fuel hedge will cover an airline’s fuel needs for a defined period, and the physical hedging contracts may specify various maturity dates that overlap. Thus, at any given time, the percentage of fuel needs that are covered by hedging contracts varies, with the airline attempting to maintain a target percentage over time. One statistic claims that from 2009 to 2010, the average hedging ratio in the airline industry was approximately 64%.

Regarding the decision to hedge versus not hedge, a 2008 report by Mercatus Energy states:

“A company that is not hedging its fuel costs is saying one of two things:

1. Our company has the ability to pass on any and all increases in fuel prices to our customers, without a negative impact on our profit margins.

2. Our company is confident that fuel prices are going to fall. We are comfortable paying a higher price to fuel if, in fact, our analysis proves to be incorrect.”

So there’s fuel hedging in a nutshell. The real question on everyone’s minds is: what’s the real impact of lowered oil prices on the airline industry? It certainly appears that there are two contrary forces affecting airlines in the current market. The positive (direct) impact: diminished oil prices lead to lower fuel costs, boosting quarterly profits. The negative (indirect) impact: airlines that hedged their fuel costs in the $100/barrel area get hit by volatility and post quarterly losses. To put it simply: much like traders of any other financial instrument, the airlines with the greatest return this year will be the ones that accurately predicted lower oil prices and imputed these expectations into their hedging strategies. Southwest Airlines (NYSE: LUV) – a pioneer in fuel hedging – is up 16.34% in the three months to February 6, 2015. Compare that to a 1.19% increase in the S&P500 (^GSPC) and an 8.34% increase in the NYSE Arca Airline Index (^XAL) over the same period. And Delta Airlines (NYSE: DAL) is up 6.08% even after announcing losses of $1.2 billion on its fuel hedges – because the portion of its fuel that remains unhedged will now be purchased at the significantly lower market price, giving the company a net $0.5 billion benefit from the fall in oil prices. Some more information from Reuters and The Economist on the fuel hedging strategies of various international airlines:

“In Europe, airlines such as Aer Lingus and Ryanair are aiming to take advantage of the low oil prices to lock in fuel costs into 2016 and beyond. Thai Airways plans to hedge 100 percent of its fuel purchases this year… U.S. airlines that hedged based on higher oil prices, such as United Airlines, have had to dump losing bets and are now reviewing their strategies for protecting themselves from oil market volatility… At least one Asian carrier, South Korea’s Asiana Airlines, has stopped hedging since November due to recent price volatility, while Germany’s Air Berlin has said it is considering reducing its hedging rate.”

The articles explain that American Airlines (NYSE: AAL) has “[benefited] disproportionately from the fall in prices,” having not signed a hedging contract since 2013. The same goes for Air India (AIN.UL) and whose finance director “projected it could shave as much as $375 million off its annual fuel costs of about $1.5 billion based on savings made since prices started to fall in June 2014.” Those airlines might certainly consider entering into various fuel hedging strategies this year, while prices remain low. At the same time, these airlines will hedge cautiously, knowing that the oil markets remain uncertain and thus taking a risk-averse outlook to their fuel needs.

The moral of the story is: hedge intelligently, or look for companies that do. An airline that hedges too much or too little of its fuel needs can be exposed to either the severe upsides or downsides that the oil market is increasingly prone to. The trick is to hedge just the right amount of fuel, and the airlines that do this will come out on top. One can look towards the practice of fuel hedging as an indicator of market sentiment, as well as a measure of price volatility. An airline’s hedging strategy is also indicative of its operational flexibility – its ability to foresee and react to the market environment – and this is one of the many factors that airline investors will look for in 2015.

Boeing employees walk in front of a new 787 aircraft

Talent Retention and People Analytics at Boeing

I recently read an opinion piece called “Greatest Long-Term Threat To Boeing Is The Loss Of Talent,” written by Richard Aboulafia for the industry-leading magazine Aviation Week and Space Technology. Last month, aircraft manufacturer Boeing (NYSE: BA) moved many of its defense services and support functions out of Seattle, citing competitive and cost concerns. While the author agrees with the company’s line of reasoning, he says that “it’s also important to remember that when a company takes aggressive action to move jobs and reduce labor costs, it always creates risk. In particular, key skills and experienced workers can be lost, threatening execution and company capabilities.”

This article had me thinking about what it takes for a large company like Boeing to retain talent in an increasingly competitive business environment. As the author suggests, companies in a growth phase need to focus on attracting and retaining talent, but a company in a “retrenching” phase needs to focus on costs. The analogy given is Tesla versus General Motors, respectively. This in turn reminded me of a talk I attended a few weeks ago by Brian Welle, Director of People Analytics at Google. In his day-to-day role, Welle “conducts research and designs programs that strengthen Google’s Human Resources initiatives.” One of his primary areas of research is on the “unconscious bias,” a set of factors caused by our environments and experiences that influences our decision-making capabilities. Although Welle’s primary focus is to help Google employees become aware of and reduce their personal unconscious biases, during his talk he frequently mentioned the company’s overall drive to recruit and retain talent. The underlying assumption here is that Google remains in a growth phase – but I wonder what will happen when (or even if) Google reaches a point when it needs to shift focus to cost-based “retrenching” like that referred to in Aboulafia’s article. Obviously, this would require viewing Google as a mature corporation – hardly the case given the growth in the technology industry and Google’s new monetization initiatives.

Furthermore, I wonder why a company like Boeing doesn’t have a similar human resources structure to Google. This may seem like an outlandish idea, but I feel that many of the human resources functions at Google can be replicated in the wildly different industry that Boeing operates in. Welle’s People Analytics team focuses on organizational behavior (OB) issues as they pertain specifically to Google – so why doesn’t Boeing focus on the OB issues that affect the aerospace & defense industry? In my earlier posts “The Failure of Crew Resource Management (Part I, Part II, and Part III),” I focused on the failure of an OB system in the aviation sector (Crew Resource Management or CRM). I think it would be interesting to see Boeing expand its human resources functions to address industry-wide OB concerns like CRM. In my mind, Google is able to recruit and retain the best talent because its human resources professionals are focused on remedying OB issues that affect the broader industry, such as the lack of women in technology and the unconscious bias in most recruiting decisions.

At present, the cost issue remains crucial for Boeing’s short-run competitive strategy. But perhaps a shift towards the Google human resources model could help Boeing with its recruiting and retention issues in the long run. It’s definitely something I want to look into more. In Aboulafia’s words: “Boeing management needs to remember the greatest long-term threat to [Boeing Commercial Airplanes] isn’t the cost of labor; it’s the loss of talent and the erosion of core capabilities.”

Panoramic cabin view onboard an ANA 787-800 Dreamliner

Optimal Boarding Method for Airline Passengers (Jason H. Steffen)

Speaking of “Old Dog, New Tricks,” I’ve been thinking about other problems that airlines could very well tackle without physically changing anything about their aircraft or equipment. One of these is the classic boarding nightmare that we’ve all experienced – waiting for what seems like a lifetime just to get to your seat, because everyone needs to lift their hand luggage into the overhead bins. I read an article in the Washington Post by Jason H. Steffen, a professor of astrophysics at Northwestern University, who has spent some time studying this problem. Steffen argues that lengthy boarding queues are driven by two factors.

First, the practice by most commercial airlines of charging for checked baggage leads most passengers to maximize (and often times, exceed) their hand baggage allowance. I’m certainly guilty of this – on my most recent trip, I brought a rolling hand-luggage and a duffel bag that didn’t quite fit underneath the seat as per airline guidelines, so I had to spend the time storing both in the overhead space (after all, I need that space under the seat for my legs). Anyways, it’s simple: the more stuff people bring onboard, the more time it takes to store all that stuff and get everyone in their seats.

The second factor driving the problem is the boarding process itself. Most airlines board their passengers in the following way: first class, business class, membership club members (by rank order), and finally economy class. Within the standard boarding procedures for economy class, passengers will board from the back of the plane towards the front. As a result, the majority of passengers get stuck in the aisles, waiting for those who boarded ahead of them to store their luggage and sit down. This causes the painful boarding queues that frequently extend out of the aircraft and onto the jetway. According to Steffen, “the problem is that boarding from the back to the front is a serial process: only one action at a time is completed…The aisle in the airplane isn’t used effectively.” The only other boarding process currently in service is the “industry gold standard of open seating,” pioneered by Southwest Airlines and popularized by other low-cost carriers such as Ryanair. In this model, passengers don’t have assigned seats at all, and boarding time is significantly improved.

In Steffen’s view, “a more efficient way to board would have only as many passengers in the airplane as can put their luggage away without interfering with each other. Those passengers should also be ordered so as to eliminate the need to pass by anyone either in the aisle or in the rows. In other words, it is better to make passenger boarding a parallel process where multiple actions occur simultaneously, instead of a serial process.”

To satisfy my need for excruciating detail and evidence, I read through Steffen’s 2008 research article in the Journal of Air Transport Management. As per the abstract, “Using a Markov Chain Monte Carlo optimization algorithm and a computer simulation, the passenger ordering that minimizes the time required to board an airplane is found.” (I will admit, after reading the abstract, I almost gave up…but then I kept at it).

Here’s a PDF of the research paper: Jason H. Steffen – “Optimal boarding method for airline passengers” – Air Transport Management, 2008

In his research, which is best summarized by his Washington Post article, Steffen builds on the same optimization technique used to answer the famous “Traveling Salesman” problem: given a set of cities and the distances between them, what is the shortest possible route to visit each city exactly once and return to the original city? The resulting Steffen method features an airline boarding procedure whereby “adjacent passengers in line will be seated two rows apart from each other. The first wave of passengers would be, in order, 30A, 28A, 26A, 24A, and so on, starting from the back. (For a typical airplane there would be 12 such waves, one for each seat in a row and for odd and even rows.)”

Steffen conducted a field test of his proposed method versus others, using a mock Boeing 757 fuselage with one aisle, 12 rows of six seats, and 72 passengers. The experimental results show that the Steffen method outperforms current industry practices, with a 2x time advantage over back-to-front boarding, and a 20-30% improvement on random boarding order. Depending on the specific aircraft used, “the optimal boarding strategy may reduce the time required to board an airplane by a factor of four or more.”

Here’s a PDF of the experimental results: Jason H. Steffen – “Experimental test of airplane boarding methods” – Air Transport Management, 2011

The main problem to implementing the Steffen method is getting passengers to line up exactly as prescribed. In Steffen’s own view, the primary benefit of using his method is that “it allows an airline to measure how much room there is for improvement and identifies where that improvement is to be found.” I think that airlines would consider this proposed boarding process (or something similar) if it were framed in the context of the potential cost savings from its use. I recall watching a documentary on Emirates’ ground operations at Dubai International Airport (DXB), where the airline has placed digital clocks in front of every plane at the gate to ensure precision arrivals, turnarounds, and departures. For every second beyond its scheduled departure that a plane remains at the gate, an airline loses thousands of dollars caused by late fines and delays to other aircraft waiting to park. This is a business dominated by intense negotiations between airlines and airports over the use of parking gates and arrival/departure windows. I’m sure that airlines would react positively to the notion of speeding up the boarding and/or turnaround process, if the ultimate result were to allow them to handle several additional flights per day or save on airport gate costs. And passengers would be relieved from the presently aggravating experience of boarding a plane. Sounds like a win-win for all parties involved.

G-ZZZA, one of British Airways' oldest 777-200s.

Old Dog, New Tricks

Greetings from London! I’m back home for the next three weeks, spending the holidays with family and friends. I flew in this morning on BA0066, one of two daily flights that British Airways operates on the PHL-LHR sector (the other being BA0068). I prefer Flight 66 for time reasons – it leaves Philadelphia at 6:35pm EST and arrives in London at 6:40am GMT, narrowly missing the horrendous rush hour at Heathrow which frequently adds ~1hr of travel time. That being said, BA0068 has a terrific “Sleeper Service” if you’re lucky enough to be seated in Club World (BA’s business class product) or First Class. I tried this service a few years ago through a free upgrade, but decided that the price tag – anywhere between $7-10K oneway PHL-LHR – was not justified by the relatively short flight duration (6-8hrs).

Last night’s flight reaffirmed that point: even with an hour delay at PHL, we caught strong tailwinds over the Atlantic and made the trip in 6 hours and 10 minutes, landing just after the scheduled arrival time. Having barely slept the night before due to a class assignment – which incidentally had to do with international airline passenger volumes – I was prepared to board the plane and pass out in my seat in World Traveler (WT, BA’s economy class product). As it would happen, I received a complimentary upgrade to World Traveler Plus (WTP), a step-up from regular economy class featuring wider seats, greater pitch, more legroom, and business class service (along with USB ports, which are for some reason not available at all seats). In my mind, WTP is the best class to fly on a shorter transatlantic route like PHL-LHR, since it offers the 75% of the comfort in business class at maybe 50% of the cost. As an example of the increased service quality in WTP, here’s the menu we were offered on the flight, a three-course meal with a selection of wines more extensive than the standard “red or white?” option given in regular economy (which, I should add, is still one of the luxuries of flying BA as opposed to its American peers).

World Traveler Plus menu on BA66 (December 17, 2014)

WTP Menu on BA66

At first, it appeared that the delay was caused by the inbound flight not arriving on time. However, even after the aircraft arrived at the gate and passengers deboarded, the expected departure time kept on getting pushed back. I wasn’t too bothered (a combination of being too tired to care, and having linked up with a friend who was on the same flight). Eventually, an announcement came in over the PA system at the gate, informing us that there was a problem with three out of seven onboard lavatories that couldn’t be fixed until the plane got back to home base in London. As a result, passengers were advised to use the restrooms in the airport prior to boarding. It also just so happened that the broken lavatories were all on the left side of the aircraft, where I was seated. Terrific.

The whole incident had me thinking: what could have possibly gone so wrong that they couldn’t fix it in Philadelphia? Without getting into the specifics of sewage systems, I decided to take another angle at the problem: by looking up the tail number of the aircraft scheduled for the flight, G-ZZZA (shown in the main photo above). I found a unique history to this specific Boeing 777-200 aircraft. When it was delivered to BA on May 20, 1996, G-ZZZA was only the sixth 777-type aircraft to roll off the Boeing production line. An 18-year veteran of the BA fleet, the aircraft was originally painted in BA’s iconic “Landor” livery, featuring the airline’s heraldic crest. Indeed, I found several photos of G-ZZZA with this livery in the late 1990s – shown below – before BA made a well-known public relations blunder that involved changing its tail logos to a series of artworks representing what management felt was a more cosmopolitan, international image. The airline has since switched back to a more traditional image with the British flag on the tail, and although I like the current livery, my personal opinion is that they should bring back the retro Landor look.

G-ZZZA: Then

G-ZZZA: Then



Why would I care so much to look into the detailed history of a single aircraft? I think the history tells us a lot about this mammoth of a plane. It strikes me as incredible that the plane I flew in last night has gone through so many iterations of re-branding over the course of its life. G-ZZZA and its two sister planes, all 777-200s delivered to BA in the mid-1990s, are referred to by aviation enthusiasts as the “ZZZs.” Prior to being fitted with BA’s modern interiors and luxurious cabins in 2013, the three planes were often scorned by frequent travelers and referred to as “old crates.” Speaking about G-ZZZA specifically, one traveler said: “[I] was on it [in 2012] in Club World and it was the worst BA plane I’ve been on, with shabby seats, ventilation panels falling off, and terrible loop In-Flight Entertainment.” After seeing the inside of the plane last night, I could have never imagined it in such a state – in fact, if I hadn’t looked up the tail number, I might have been inclined to think that the aircraft was a 2000s-era model. Although it might not be the best comparison, I found photos of the first class cabin on G-ZZZA in the old and new styles:

G-ZZZA: Old First Class

G-ZZZA: Old First Class

G-ZZZA: New First Class

G-ZZZA: New First Class

I suppose the point I’m trying to make here is this: you can teach an old dog new tricks, but some things are inevitable with age. Last night’s lavatory problem may serve as a good example of the toll that 18 years of daily long-haul service takes on a flying machine like G-ZZZA. No matter how much grooming you give it over the years – hundreds of coats of paint, plush new interiors and upholstery – eventually, time is going to catch up to it, and the stress of old age will show up in ways that you can’t hide. One day, G-ZZZA will be deemed unfit to fly, and will be sent to one of the famous “boneyards” in the deserts of Arizona to live out its final days. Such was the case with G-ZZZE, a non-BA 777-200 that was disassembled in 2006. That’s just the nature of the business – in an industry driven by fuel efficiency and passenger capacity, the ZZZs will eventually be replaced by bigger, faster, and more cost-effective planes. It’s a trend that has already begun with the Boeing 747, an icon of the Golden Age of jet aviation, now slowly being phased out of airline fleets around the world. Rapid development in aviation, exemplified through new planes such as the Boeing 787 and the Airbus A350, continues to accelerate the aircraft life cycle.

When you look at the sheer pace of development, there’s a lot to look forward to for commercial aviation in the upcoming years. At the same time, it’s easy to forget aircraft that truly revolutionized the industry. The Boeing 747 changed the way the world looked at long-distance travel. G-ZZZA and its sister planes featured high-tech glass cockpits unlike those ever used by pilots, as shown below. Their impact to modern aviation is undoubtable: every new plane that appears in today’s market is a product of the technological expectations set by the Boeing 777. This is the reason why BA remains one of the largest operators of both the 747 and 777 – the sheer reliability and track record of the plane justifies a small trip to the mechanic [veterinarian] every now and then.

As a result, when I fly a plane like G-ZZZA, I don’t see a rusty and outdated dinosaur.

I see an old dog with new tricks, slowly feeling the burdens of time, but just as loyal and reliable as in its glory days.

G-ZZZA: Cockpit

Qantas Ground Crew


Earlier this week, I read about a Cypriot low-cost airline that coincidentally went by the name of Helios Airways. The airline ceased operations in 2006 due to a tragic accident caused by an inadequately prepared flight crew – an event that ultimately led to the manslaughter convictions of five senior officials for their oversight in risk management and compliance. The story of this airline was a sobering reminder of just how risky this industry is. After reading the article “Startups Rarely Do Anything Well” by Eric Paley, I feel that my “boundless ambition” as an entrepreneur in the last few weeks has led me to overlook the one aspect that is ultimately paramount to success in this industry: customer safety. Unlike most other service-based firms, airlines have responsibility over their customers’ lives. This is a major part of the competitive landscape: airlines with the best customer safety procedures will thrive, and a single event caused by even the smallest oversight can serve to tarnish an airline’s reputation and send it into bankruptcy overnight.

Qantas Airlines has built one of the industry’s strongest brands around its accident-free record, by implementing one of the most complex and rigorous safety compliance systems in the world. From checking every bolt on every aircraft, to training flight crews in crisis management, Qantas has invested millions of dollars in ensuring that its passengers are safe. Here is the airline’s risk management model:

Qantas Airlines: Risk Management Model

Qantas Airlines: Risk Management Model

What this says to me is: at the end of the day, you can invest in the highest capacity, most fuel-efficient aircraft out there, but neglecting to invest in passenger safety and crew training is a recipe for failure. Managing the increasingly complex external risk environment is key to market dominance. Aviation entrepreneurs tend to avoid the subject of accidents – after all, no one ever wants to even imagine it happening to their airline. But this is something that needs to be discussed. I did a small analysis of the accident rates between helicopters and fixed-wing aircraft, using US data from the National Transportation Safety Board.

Type of Aircraft Accidents per 100,000 flight hours
Helicopter (rotorcraft) 9.47
Fixed-Wing (single or multi-engine) 8.38

Although the accident rates are very similar between aircraft type, the worldwide perception is that helicopters are far more dangerous than fixed-wing aircraft. A simple Google search will yield one of the largest passenger concerns: whether a “helicopter will drop like a rock if the engine dies,” although there is a significant body of evidence against this. Clearly, it would take a lot more than several compliance procedures to convince individuals that Helios Air will get them to their destination safely.

To be honest, I am fairly certain at this point that my idea for Helios Air will not come to fruition. Given the serious pricing issue I raised last week, along with other factors such as the immense amount of capital and operational risk involved, it is hard to think that a successful business plan could be crafted to offer profitability and market penetration within a reasonable industry framework. However, I am glad that I rationally considered the factors that ultimately falsified my various hypotheses. This meant that I didn’t remain “overly fascinated or over-committed to a product idea,” one of the key entrepreneurial pitfalls discussed in Chapter 8 of New Venture Creation.

In preparing for the ‘Venture-palooza’ on March 17, I intend to conduct some research on a specific substitute product for Helios Air: high-speed rail (HSR). This is a fast-growing mode of transportation in various regions such as Germany and Japan, and is currently being proposed in India. The StartupBoeing team doesn’t view HSR as a threat to commercial aviation, since the network of global aviation routes is approximately 4000% larger than that of trains. However, for short-haul routes where regular rail services already operate (such as Pune-Mumbai), HSR could be the service that beats even the fixed-wing airlines in this incredibly competitive travel market. More to come soon.

Boeing Business Plan Development Iterations


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.