I am re-designing my blog to position it for my upcoming independent study in aviation entrepreneurship and finance, as well as for future posts on any of the millions of topics that interest me. The posts below are idea analyses and reflections from my Management 230: Entrepreneurship class in Spring 2014. The first post is a reflection on my team’s final venture project, Recover-All, which was effectively a healthy snack product. The venture didn’t come to fruition due to several reasons discussed in the post, but it was still a great experience in idea generation, identifying a target demographic, testing the waters, and implementation. The posts before that relate to an idea I had for building a flight service on the Pune-Bombay route in India called Helios Air (using helicopters, which I quickly discovered were ridiculously expensive to operate). The calculations were quite back-of-the-envelope but once again, it was a great first-round experience in idea generation and preliminary testing.
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:
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|
|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.
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.
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.
In the last few days, I have focused on making my idea network more diverse. I established contact with StartupBoeing, a division of Boeing that exists to help aviation entrepreneurs navigate and adapt to the various challenges in the industry. By talking to members of their team, I hope to develop a credible database of information about the competitive landscape surrounding my idea.
This week, I focused on getting an overview of industry trends and substitute products. I confirmed my initial suspicion about this venture: it is really difficult to start an airline in the current market. Although the global aviation industry is picking up, with passenger growth expected to average 5%/year for the next 20 years, airlines have begun devoting their entire efforts towards capacity utilization. In order to cope with a variety of dismal macroeconomic factors, especially unprecedented triple-digit oil prices, today’s airlines require incredibly efficient, low-cost planes in order to maintain and boost profits. Companies like Boeing and Airbus have met this demand by creating new fuel-efficient fixed-wing aircraft; however, this presents a problem in my business idea.
Up until now, I had assumed that there would be a low-cost, high-capacity helicopter that would be more efficient to operate than the closest substitute product (a fixed-wing aircraft). I now had to test my hypothesis – and I quickly found many articles online claiming helicopters to be far less fuel-efficient than fixed-wing planes. Most of these claims were unsubstantiated, so I did my own analysis, comparing several high-capacity helicopters to the substitute fixed-wing aircraft that are popular on short-haul routes:
|MODEL||Aircraft or Helicopter?||Passenger Capacity (1-class configuration)||Flight Range (nautical miles)||Fuel Cost ($ per nautical mile)||Average Aircraft List Price ($ millions)|
|Bell Boeing V-22 Osprey||Helicopter||24||879||13.75||68.0|
|Boeing 234 Chinook||Helicopter||34||540||22.22||38.55|
It is obvious that helicopters have less passenger capacity than their fixed-wing substitutes, and I expected lower flight range as well. However, there are several helicopters that have lower fuel costs per nautical mile than regular aircraft, such as the Sikorsky S-76C++. I did a back-of-the-envelope calculation and found the fuel cost per passenger to be similar between the 737 and the S-76C++. This posed a major question: given these numbers, how can I expect to compete on a cost basis with fixed-wing airlines?
The answer is simple, but presents yet another assumption in my idea. Traditional low-cost airlines don’t pass on 100% of fuel costs to passengers in the form of fare increases; instead, they find alternative revenue streams to make up this burden (e.g. charging for on-board services). I will need to hunt for these additional revenue streams if this idea is to be somewhat viable. Looking for niche cost savings is also a good idea – for instance, landing fees at helipads are much lower than those charged to regular airlines at major airports. There is a lot more research to be done, with several new hypotheses to be tested and calculations to be made.
Helios Air will be the world’s first low-cost civilian helicopter airline, serving short-haul travel routes that are currently unprofitable for regular fixed-wing airlines to operate.
The traditional “hub and spoke” model in the airline industry has proven itself to be the most cost-effective strategy for regular fixed-wing airlines, allowing them to reach and connect small towns worldwide. However, in recent years, these airlines have found many of the smaller “spokes” increasingly unprofitable, and have either raised ticket prices for the common passenger or ditched these routes altogether. Helios will regain these less-traveled routes by utilizing full-service helicopters, which have a lower capacity than fixed-wing aircraft. For the passenger who needs to fly on these routes, Helios Air will provide a service that costs less than a regular airline but is also faster than alternative modes of transportation, such as rail.
An example of a target route for Helios would be between two Indian cities, Pune and Mumbai. Only one airline, Jet Airways, operates flights on this sector, in order to connect passengers to westbound flights from Mumbai. The airline operates the 55-minute journey using a Boeing 737-800 with a passenger capacity of 189. The flight is usually under-capacity, except for a few businesspeople who need to connect to/from international flights. The majority of passengers – middle-class Indians who live in Pune but travel to Mumbai for work/family reasons – choose to travel by train, which takes 2 hours but costs substantially less than the Rs.6000/$96 charged by Jet Airways. Accordingly, even low-cost Indian airlines such as SpiceJet and IndiGo have refused to fly this sector. Helios would ideally be able to use helicopters at full capacity on this route, providing passengers with a service that is cheaper than Jet Airways but also faster than taking the train.
Based on the presumed demand for such a niche low-cost airline, along with the apparent lack of competition, it appears that Helios Air is a feasible idea. The business has a core revenue stream from individual passengers, with a further option to provide charter services for airlines by ferrying passengers to major hubs for connecting long-haul flights. On the surface, it seems that filling a helicopter with passengers should not be a serious problem for Helios, given that the largest helicopter in the world has a capacity of 63 people. However, this hypothesis will need to be tested by analyzing current passenger data, in order to ensure that Helios can be profitable even if its helicopters do not run at full capacity. Other costs must also be considered, including steadily increasing fuel prices and the substantial initial investments in both capital and labor.