Any airline won’t ever get off the ground without secure financial backing.
So far in this series, we have looked at business plans, and you will have now decided what you want your airline to look like, where it will fly, and what sort of aircraft you might choose. But none of that can happen without addressing the most crucial topic of all. The one key issue that will determine whether your airline ever gets airborne at all. That subject is finance.
Money, money, money
Starting an airline is an expensive business. If you contemplate such a proposition, you will need money – and lots of it. Everything you will think about, require and plan for will need financing, and the list of everything that requires such financing is never-ending.
When starting an airline, the one item that will determine whether your airline makes it to launch day, without doubt, will be how well-financed your business plan is. A suitable warning to all when it comes to starting and financing an airline is an old joke within aviation circles that may well give any budding airline entrepreneur something to think about –
- Question – “How do you become a millionaire who owns an airline?”
- Answer – “Become a billionaire first and then start one.”
However lighthearted this joke may appear, there is more truth behind its sentiment than you might first imagine. Treat this as your first warning regarding what you are getting into, as this scenario has repeatedly been seen to be accurate in the airline industry over many decades.
As soon as you begin working on planning your airline, you’ll be running up costs. Like a taxi cab, the meter will be running as soon as you open the door and hop inside. Before you even hail that taxi, you need to ensure that your project is well funded from the outset. If it isn’t, you will run out of cash before realizing that you are running short.
You will incur costs from the very start. Whether for paperclips or phone calls, the costs are immediate even before considering sourcing funding for aircraft acquisition, signing contracts for airport handling, or purchasing jet fuel. You will need ample capital reserves to cover your initial outlay costs before any ‘big ticket’ items come up on your shopping list.
The amount of startup capital is often underestimated when starting an airline. If you scratch beneath the surface of history, you’ll find hundreds of paper airlines that never saw the light of day; airline plans that sunk beneath the waves before even approaching the point where they might actually have something that will take to the air carrying passengers or freight.
When planning your airline’s startup, the adage of ‘planning for the worst and hoping for the best’ will serve you well. Accumulate as much cash as you can muster in the very early stages. History has shown that when it comes to starting an airline, however much money you have (or even plan to have), it probably won’t be enough.
You will most likely consider two main finance streams to raise funding for your airline venture. The first is to raise share capital, and the second is to seek investment from institutional investors. Without delving too deeply into academic financial theory, these options involve third parties providing you with money but expecting something back in return.
Firstly, you could consider selling shares in your airline company. This will involve a considerable amount of work on your part, pitching your business plan to anyone who’ll listen. This may be friends, family, or other acquaintances, but it could go all the way up to floating your airline company on the stock exchange of your chosen country.
Shareholders will buy shares in your company, that money providing funding for the costs of running your business. Stock exchanges worldwide allow smaller or startup companies to float their shares to those wishing to buy into the company. In London, for example, the Alternative Investment Market (AIM) is the vehicle that provides such a platform.
The new Icelandic airline, PLAY, listed its shares via what is known in the financial world as an ‘Initial Public Offering’ (IPO) on the NASDAQ First North Growth Market. Interestingly, the Reykjavik-based airline flew a special flight at 12,000ft over the glaciers and lava fields of the Icelandic Highlands to ring the famous New York stock market trading bell when the shares went on sale on July 9th, 2021. Given the interest that the airline and its directors had already generated up until that point, demand for PLAY’s initial offering of shares was oversubscribed eight times over.
Shareholders will hope that their shares rise in value (appreciate) as your airline becomes successful. That way, when they decide to sell their stakes in the future, they make an instant return on their initial investment.
Shareholders will also be hoping that the airline is profitable enough to reward its shareholders with an annual bonus called a ‘dividend’. Paying dividends keeps shareholders happy and more likely to retain their existing shareholding or perhaps even add to it.
The second method of funding is to approach institutional investors. These may be banks, investment houses, and other financial institutions that might be attracted to your business model. If they can be brought onboard, they might become investors in your airline business, providing much-needed startup capital in the initial stages.
You might even be fortunate to come across a serial entrepreneur who may like the concept of your airline and be willing to invest as part of their investment portfolio. However, such occurrences are rare, particularly within the airline industry, which is considered high risk.
In return, investors may require guarantees that they will get their investment back after a fixed period, a share of the profits made during that time, require a percentage of the business itself, or even may go so far as to insist on one of their senior members of staff to sit on the board of directors of your airline, retaining a degree of control from within. None of these are uncommon, and all will require you to provide something back.
The idea of someone else providing you with the financing you need to start your business may sound attractive, but it always comes at a cost. The chances of someone willing to invest in your airline without requiring some form of return are almost zero, if not actually so.
To attract investors of any kind, you will need your airline business plan to be as robust and watertight as possible. You must know it inside out so that when pitching it to potential investors, you know the contents of your plan inside and out and will be able to answer questions on it that even you might not have thought of. Being prepared is essential. No one will invest in your business if you or your plan are not 100% credible, attractive, and can offer something in return.
Should you successfully obtain an injection of capital into your prospective airline, you can move on to the following stages of development. Without it, however, you may find yourself on a fast track to losing a lot of money extremely quickly. Getting this part right now may mean that your airline succeeds to its first flight. Conversely, you may run out of money even before setting eyes on your airline’s first aircraft.
You never stop incurring costs
As mentioned above, running an airline is extremely expensive. Before you witness your first flight being welcomed with by water cannot salute, or you are being presented with a cake for inaugurating your first route, there will be untold costs incurred – and these will be the ones you have planned for.
You will need staff to assist in activating your plan, and they will require wages. You are likely to need office space (which will need to be acquired through either lease or purchase) and administrative resources. You will need IT and telecommunications equipment and network connectivity – the list is endless. The business will incur other costs to get off its feet, too – travel costs when visiting prospective investors, entertaining costs as you hope to hook those investors to part with their money, etc.
No such thing as a free lunch
If your early planning is successful and you succeed to the point where you can start to consider the more exciting parts of your plan, the costs escalate in a similar trajectory. As a startup, you will be perceived to be a high-risk bet. Any of your suppliers or stakeholders will likely require additional security in any transaction they enter into with your airline.
If you intend to lease your first aircraft, lessors will likely charge a higher monthly lease rate to protect their assets and may also require a security deposit should you forfeit on lease payments. They will, of course, also retain the right to recover their aircraft should you fail to keep up with the payments under the terms of the lease agreement, potentially leaving you without an airplane to honor your passenger or freight bookings.
Suppose you are fortunate enough to have adequate capital where you can consider purchasing new aircraft outright. The airliner manufacturers will require hefty deposits to allocate production line slots to your airline. As a startup, you are also less likely to have the necessary bargaining clout to negotiate discounts with the leading manufacturers against their published list prices than other larger airlines with a proven track record.
Any of your other suppliers, whether this is fuel companies, airport handling agencies, airport authorities, or any other entity you will sign contracts with to supply your airline, may well expect deposits, very short repayment terms, and other guarantees before they sign any agreement with you. Remember, these are all costs that are being incurred and eroding your capital reserves even before you have flown your first revenue passenger or carried your first kilogram of freight.
The struggle with revenues versus costs
Even if (and that is a very big ‘if’) you are successful in starting to run your airline, you must never take your eye off the financial position of your company. You will presumably be running your airline to be profitable and make money. Any reserves of cash you can build up will help your airline survive if costs increase (such as fuel).
The key to running any business whose whole ethos is to be profitable will be to manage revenues (the money the business earns) while keeping costs (the money the airline pays out) as low as possible. The difference between these two amounts, in simple terms, will be your profit. But even out of your profit, you will need to pay tax, dividends to your shareholders and retain some in reserve for unexpected events.
You may wish to expand in the future, and that will be where your cash reserves come in. Although most airline costs are incurred in the startup and initial phases, adding additional aircraft, crew, bases, and all the other items required for expansion all come at a further cost to the business. And while your ability to borrow additional funding may become more accessible and less expensive as you grow, it is always worth remembering that the next major global event could be just around the next corner.
Unforeseen events can change everything
Such catastrophic events have been witnessed repeatedly in recent decades; events that have decimated the airline industry. Events such as the oil crises of the 1970s, September 11th, 2001, the COVID-19 pandemic, global recessions, and now the invasion of Ukraine were all largely unpredictable just a few months before they happened. Yet, they have all had profound impacts on the global airline industry. Having enough in the bank to weather such storms will help your airline survive and bounce back once the worst is over.
The growth of your airline will almost certainly become an obsession. Starting an airline can be an adrenalin-fuelled journey that can induce an insatiable demand for bigger and better things. Yet many airlines have fallen foul of attempting to be too big, too quickly, and have failed as a result. Again, peruse the list of airline failures over the past few decades, and time and time again, you’ll be able to pick out airlines that wanted too much, too quickly.
An example of this is Kingfisher Airlines which operated domestic and international services from India from 2005 until 2012. The airline expanded too quickly, swiftly ran out of money, and lost its acclaimed owner and Indian brewing magnate Vijay Mallya much of his personal fortune along the way (in line with the joke at the start of this article).
Financial security is everything
Without adequate financing even before your start, you are setting yourself and your airline up to fail. And while many will see watching the purse strings of your business like a hawk as a rather tedious and time-consuming affair, not doing so is likely to consign your airline to failure.
Everything and we do mean everything in the airline business costs money. From a simple air sickness bag to a drop of fuel, and from the smallest screw inside one of the engines to a whole new repaint of your aircraft, it all costs money and probably way more than expected.
Running an airline can be exciting and can bring you great rewards. Yet doing so is most certainly not for the faint-hearted. Don’t go into business and start your own airline expecting to get rich quickly. As almost anyone who has done so would attest to, even the most dedicated airline entrepreneur will invest far more time, energy, passion, and of course, money than they will ever take out.
In the next part of this series, we shall be taking a look at what you will need to start your new airline, from offices to cabin crew uniforms, and from key personnel to paperclips. Starting an airline involves writing possibly the most expensive shopping lists you can imagine. See you next time for ‘How To Start An Airline: Part 4 – Planning and Infrastructure’.
Source: Simple Flying