Is this the right time to establish an airline?


When everybody takes a step back, it does provide an opportunity to take a step forward.  As the recovery approaches the horizon, is this the right time to establish a new startup airline and use the opportunity to make strides in the industry, which has been notorious for being very unfriendly to newcomers?

After all, the conditions look very right: there are an abundance of crews, aircraft, slots – and when the supply outstrips demand, the price goes down. Perhaps more than ever, more than one condition is right to begin one’s journey in the aviation industry. If prior to the current pandemic passenger demand was through the roof, a clear shortage of aircraft and personnel to operate the aircraft, including the lack of slots, held back any potential new entrants.

Nevertheless, challenges remain. Despite the fact that the industry is seemingly about to turn a corner, getting the timing right could be essential.

New hope

While 2020 could be summed up as hibernation, 2021 began with a lot of hope that with the vaccination effort on the way, travel could begin its slow climb back up.

In the United States, several airline executives indicated a lot of positive signs that travelers were very keen to hop onto an aircraft. In terms of bookings, Delta Air Lines was “getting really close to 2019 numbers,” the chief executive officer of the carrier, Ed Bastian stated during J.P. Morgan Industrials Conference on March 15, 2021.

American Airlines CEO Doug Parker, who spoke at the same conference, noted that the “last three weeks have been the best since the beginning of the pandemic.” According to him, the feeling was that this was the “beginning of a very large uptick,” as there was a huge pent-up demand for domestic travel.

Chief executives at JetBlue (JBLU) and United Airlines, who also presented during the Industrials Conference, were more than hopeful that recovery was imminent. UAL’s CEO Scott Kirby expects to stop burning cash by late-March.

“We know that we can’t yet put COVID in the rearview mirror, and there’s still a lot of hard work to first return to actual profitability, then return to 2019 margins,” Kirby said.

Globally, the story is a very similar one. Scheduled capacity is set to be 12% lower by the end of Q2 2021 when compared to the same period in 2019, according to data by OAG. The number is clearly overstepping the disastrous quarter in 2020 when border closures across the globe largely grounded the aviation industry. While it still remains unclear how much of that capacity will actually result in yields, it feels like positivity is in the air.

However, the growth of capacity is unequal throughout different regions. “Much of the North American growth is based around the distribution of the vaccines, increased usage [of vaccines] and a real pent-up demand for people who want to travel domestically,” commented the chief analyst at OAG, John Grant, in a webinar on March 18, 2021. Yet, for example, in the United Kingdom, despite a high percentage of the population vaccinated, “we see no growth in demand whatsoever. Primarily, because the UK source markets are way behind and this is going to be a big issue as we move throughout the summer.”

 It is not going to be capacity or demand, it is going to be at what rate other countries have taken the vaccine.”

Staying on their feet

Despite all the doom and gloom, airline liquidations were few and far apart. At first glance, opportunities might be limited due to that fact, as once travel is green-lit to go, those that are still standing will be racing to capture as much revenue as is possible. At the same time, with a full recovery still a few years away, the industry is holding a time-ticking debt bomb.

While Chapter 11 or similar bankruptcy protections were not uncommon, as a fair share of airlines chose to go to court to protect their assets and operations against creditors, few chose to end their business. High-profile cases included International Airlines Group (IAG) (IAG)’s LEVEL Europe, NokScoot, a joint-venture between Thailand-based Nok Air and the low-cost subsidiary of Singapore Airlines Scoot, and a former Lufthansa (LHAB) (LHA) subsidiary German Airways (previously known as Luftfahrgesellschaft Walter (LGW)).

Perhaps various governments across the world understood the scale of destruction that the pandemic has caused to the travel industry. While not to an equal amount, lawmakers provided support to carriers in various forms, including government-backed loans. On one hand, it helped airlines to weather the storm that was 2020 and ensured their survival, on the other – it blew up a balloon of debt.

Already in May 2020, shortly after the pandemic had halted international travel, the International Air Transport Association (IATA) warned that by year-end, airline debt could increase as much as $120 billion compared to the start of 2020. In August 2020, the association indicated that airlines raised as much as $204 billion of new debt. Furthermore, as carriers’ credit ratings were downgraded, “airlines will exit the worst of the crisis not only with higher levels of debt but also with a higher cost of debt,” stated IATA.

Starting with a “blank sheet” and little-to-no debt can certainly be an advantage going forward. Not only new airlines will have no debt repayments breathing down their necks, but seemingly the public is very keen to invest in airlines. For example, Sun Country Airlines issued its shares in an Initial Public Offering (IPO) on March 17, 2021, selling just over 9 million shares at $24 apiece. The market responded very positively to the newcomer, as the share price jumped as high as $38.36, not falling below the $34.40 mark since its retail investors were able to trade the airline’s shares. Another US-based low-cost carrier Frontier Airlines has also indicated its plans to test the waters by attempting its own IPO, that is yet to hit the market.

On the other side of the Atlantic Ocean, investors were equally interested in new projects. A new startup airline, based in Norway under the name of Flyr, has a market valuation of $89.5 million (NOK769 million). When it first entered the Euronext Growth Oslo stock exchange, it sought to raise as much as $69.8 million (NOK600 million). There are a plethora of other startup airlines across the continent, from EGO Airways that aim to conquer the domestic Italian market to Heston Airlines, a Lithuanian Aircraft, Crew, Maintenance, and Insurance (ACMI) operator.

Plenty of options

Since many airlines have reduced the scale of their operations, there are plenty of aircraft and flight crews available in the market. Due to the simple relationship between supply and demand, as fewer airlines want aircraft, the lower their price is.

After all, lessors still have financial commitments to their assets. While aircraft that had no debt attached to them were released back into the market – yet nobody was willing to take some of them. As a result, second-hand aircraft prices plummeted. According to Ascend by Cirium data, commercial aviation started out 2020 with 25,450 in-service aircraft. A year later, the number dropped by 5,500, with a predicted surplus of 6,000 aircraft at the beginning of 2022.

$16 million – that was the estimated price of one 10-year-old Airbus A320 aircraft, as of December 2020, according to Ishka data. The aircraft lost around $5 million of its value. Meanwhile, a single 10-year-old Boeing 737-800 NextGeneration (NG), the direct competitor to the A320, saw its value drop from around $24 million to around $18 million. Meanwhile, operation leases for 10-year-old A320s and 737-800s dropped to around $150,000 and around $160,000, respectively.

Still, establishing an airline during a period of uncertainty comes with uncertainty. While there are many factors in favor of doing so, especially cheap aircraft and the ability to start afresh without debts, the timing still could be off. The industry is no less complex to operate in than it was before – perhaps contrary, the crisis has only made it more difficult for a new airline to put down the roots in.  Still, perhaps more than ever, the circumstances are favorable to establish a new carrier.

After all, this would not be the first crisis that a new entrant would use to gain a lot of ground and sow the seeds for the future.

 





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