Friday, June 13, 2008

Once there were 3 little business class-only airlines

Once upon a time there were three business class-only airlines. They were called MaxJet, Eos, and SilverJet. These airlines were heralded as a new, exciting, and innovative business model. They offered premium service at prices lower than those lethargic legacy carriers. However, this story doesn't have a fairytale ending. MaxJet ruined Christmas for a lot of people, Eos failed in spring 2008, along with a slew of other airlines. SilverJet, the late comer to the group, was soon alone, but they too ran into trouble. The airline soon was issuing profit warnings and press statements seemed like a trampoline: the airline's flying...the airline's grounded...the airline's flying. There were stories that investment would pour in from an investor in the Middle East, but that money never arrived. SilverJet was grounded in May 2008 but in early June 2008 there was news that an investment company was interested in acquiring the company, and that it would be flying within a few weeks. But alas, just two days after that announcement the news is now that that won't happen either and the staff is laid off. At the least the journalists have had a lot of work to do.
Premium class-only airlines are not a bad model, per se. However, all these carriers lacked economies of scale and an attractive underlying network. The presence of economies of scale among airlines is a hotly debated topic among economists. The broad acceptance is that there are limited economies of scale, especially because the airline is so labor-intensive. And labor is such a high expenditure. Airlines are not factories where you can just produce more widgets. Most airlines maximize the use of their assets and if they want to expand must acquire more planes. More planes means more staff...and staff is expensive. Some authors argue that economies of scale exist until airlines reach approximately 10 aircraft or so, then they begin to dwindle. Of course, the larger the airline the better bargaining power with suppliers (e.g. advertisers, manufacturers, etc.), however those high-priced crews push up the expenses when buying a new plane. Fuel though is now the biggest culprit. These airlines also lacked an attractive network. They were operating in one of the largest markets in the world, London to New York, and some of them were operating some other routes and planning to open even others. However, onward movement of passengers is important to many, and this may have helped the airline. This concept though would have added complexity, costs, and may have meant no airline at all. The success of Lufthansa's premium class-only and Air France/KLM's concept show that they are viable business models, but maybe only integrated with a large network carrier. Lufthansa can capture that passenger that lives in a small hamlet ending in -dorf, fly him through Düsseldorf to hop on that business-class flight to New York. Those other carriers lacked that option.
If the price of fuel ever drops to a more realistic level or society is able to happily absorb permanent increases (highly unlikely) then we may see similar ventures. In the meantime, it looks this type of carrier will be grounded for a while.

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