Business Climate

Starting and operating an airline is a challenging business proposition. However, investors that make the right decisions have developed highly profitable airlines.

Airlines are capital- and labour-intensive, based around a perishable service that if not sold cannot be stored. Furthermore there is a need to match fixed capacity with demand that varies by day, week and season. In addition, it is a highly competitive, regulated business prone to political influence.

The multiple challenges of the airline business attract skilled leadership. New airline projects are more prevalent than ever, especially in the fast-growing markets of Asia, Latin America and Middle East.

start me up can guide entrepreneurs to markets and realistic targets.

The single most important driver of profitability is the choice of market segment. A market at an early stage of its life cycle allows new airlines to achieve a leading market position and will deliver the highest returns.

The return an investor can expect will depend on many factors, including fleet selection, start-up capital, management team, regulatory environment and competitive reactions.

There is no magic formula for profitability and no business model is guaranteed to deliver high return on investment. Success is dependant upon being in the right place at the right time with the right business model.

Airline profitability in different parts of the world and with different business models varies: while a few airlines achieved a 30 per cent net margin in 2006, IATA Airlines made a margin of less than 2 per cent on revenues of US$470 billion.

The entrepreneur entering the airline industry has more choice than ever for business models and markets. Three reasons explain the wide range of options.

Liberalisation
Appearing 30 years ago in North America, 15 years ago in Europe, Australia and Latin America, and now in Asia and the Middle East - liberalisation has enabled airlines to openly compete for passengers.

Most governments accept aviation’s role in driving socio-economic development. Many now allow foreign airline ownership and have open skies or reduced bi-lateral restrictions.

Segmentation
Thirty years ago, major airlines offered a full range of services, were vertically integrated and offered multiple passenger classes, cargo, in-house maintenance, ground-handling, catering and IT.

In today’s competitive environment, major airlines make strategic decisions about which markets to operate in and which services to provide in-house. Niche, fast developing and new market segments are open to competition.

New business models
New business models have been driven by liberalisation and segmentation. Top aviation leaders quickly realised they could design new business models and cost structures tailored to individuals markets. These new models typically maximised productivity, reduced distribution costs and lowered fixed costs in ways that the established airlines could not.

A profitable business is one that selects the right market at the right time and applies an appropriate business model, implemented by a good leadership team.  

A good time to enter a market is during a period of change, whether they be changes in the regulatory environment, the competitive environment or available technology.

Technological changes can be in any part of the business model, such as the rapid growth in consumer Internet usage and the need for more fuel efficient aircraft.