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Is the Business Model of Private Aviation Broken?

by Allen Howell 28. April 2010 17:48
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“If you had to do it all over again, knowing what you know today, would you pursue the same path?”  It's a question most people ask themselves at some point and one that I was asked in a recent meeting with two customers, both of whom have been very successful in their respective business careers. My answer was: knowing what I know today, I could have pursued a different path and, most likely, made more money for the hours of time that I have put into the business.

However, I would never have met the people I have met or worked with the people I have been privileged to work with in this business. And for those reasons, I am glad to have done what I have done, even if it meant less money.

It is unfortunate to be in an industry that seems to be short on profit over the long haul.   

The economic environment of the past 24 months has severely wounded our industry and the casualty count has been high.  One of the revelations that has come to me during this period is that maybe we are working with a broken business model. In some ways from a financial (not service) perspective, it looks like the airline industry.

In the supply chain of private aviation what has become apparent is that the end of the chain – the companies that operate aircraft and deliver air transportation services to the consumer are, for the most part, unprofitable. From NetJets, who lost $700 million last year and has lost over $150 million in aggregate since Warren Buffett bought them 12 years ago, to the small businesses like the one I run, many more people have lost money in aviation than have made it. There are no industry wide statistics for commercial operators of private aircraft but I would bet that in aggregate our industry, just like the airline industry, has lost money over the past 10 years. 

If you ask me to name operators who have consistently made a profit over any time period, I can’t do it. The failure rate of air charter companies and fractional operators is dismal. Many companies never make a profit and ultimately go out of business and many more maintain the basic status quo, winning in some years and losing in others.  

The old adage of how to make a million dollars in aviation – start with 5 million - is sad, but true.

Our company has had its ups and downs over our 28 years in business; but, in the aggregate, we have made money. We haven't made a lot of money, but we have always made the payroll. Is that something to be proud of? You tell me.  

If you count the hours we have put into this business and the sacrifices we have made, you might scratch your head and ask, “Why do you do this?”  We would say, “What?! And get out of aviation?!”

Something has to change!

All along the private aviation supply chain, suppliers make money or try to make money with no direct connection to the profitability of those at the end of the chain. The aircraft manufacturers, fuel suppliers and ground services providers (FBO), insurance companies and their agents, financial institutions that capitalize the industry, maintenance facilities,  parts manufacturers and suppliers all have to make a profit.  It is a big chain!

By the time you get to the end of the chain, where the rubber meets the road, where the market of travelers meets the end product , there seems to be no profit for the operator of the jet with pilots up front and passengers in the back.

Sometimes, I think that the problem in our industry is much the same as the problem in the airline industry – too much capacity (supply) and irrational pricing! Why does that happen? Here are a few ideas based on my experience.  

Problem 1: Inexperienced Owners.  For some reason, otherwise smart and successful business people, who did not make their fortunes in aviation, see and experience private aviation, and want to jump into the business, thinking they can do it better.  Maybe it is the glamour, or the fringe benefits of owning an aviation business, where you can get a free ride if you own the company. Once they are in the business they price their service not understanding the costs or worse yet price in desperation to make cash flow, both being a recipe for failure. 

Problem 2: The level (or not so level) playing field. The consumer goes for the lowest price, assuming that our government (FAA) is making sure that all operators are safe and meet the standards to the same required level.  The customer never suspects that this does not happen. Our own government does not trust itself to keep the playing field level from a safety perspective; so, they have independent auditing groups for their own departments because they don’t trust the FAA to do their job.  

Those operators who choose to do it the right way see their ability to make a profit disappear until such time as the substandard competitor goes out of business. Then the cycle starts over, as it is right now, coming out of a tough recession when the weak have been weeded out, or at least severely wounded. 

Problem 3: Supply and Demand – too much supply not enough demand.  As long as there is more supply of private aviation than the market demands, we are potentially doomed to undercutting each other for that ever elusive customer. We are all going after the same shrinking market. Unlike the airline industry where the capacity is controlled by the major airlines, private aviation has over two thousand operators in the US and the market is fragmented.   

I have mentioned three problems. What other problem doom our industry to the “no profit zone”?

Are we stuck in a never-ending cycle of repeated ups and downs - make a dollar, lose two and then make one back?

If we keep doing the same thing over and over again then most likely yes.  

As an industry on the macro level and as an individual operator on the micro level, something has to change. We have to do things differently in the future if we want a better result.  

So, what is needed to fix the broken model and is it even possible?

So far I have been on the negative side, but I am not a negative person. In fact I am an eternal optimist like most entrepreneurs.  I look for the sunshine; so, where is it in this business? Where are the solutions?  A good friend tells me that he sees the light at the end of the tunnel and that it doesn’t look like a train. I hope he's right! Maybe, just maybe, it is the sunshine of innovation!  

I am a strong believer in a free market; however, I do know that regulation must exist to keep a level playing field when is comes to safety. It is not reasonable to expect the consumer to know the difference in safety between operators, since their knowledge of the inner workings of aviation is limited, at best. As bad as I hate to say it, we do need the FAA, but more importantly, we need the FAA to be effective in their task of keeping the industry safe and the playing field level.

We cannot operate in an unregulated free market, at least not at this point in the game. Left to our own devices as an industry, some of us will continue to operate at the highest level of safety employing the best practices and others will allow greed to take over and cut corners.   

If we are to have a level playing field, the government needs to get better at their job of regulating the safety of the industry by either forcing the bad actors out or forcing them to behave.

Knowledge is power and knowledge in the hands of the consumer goes a long way in leveling the playing field. It rewards those who do things right and punishes those who don’t. If you don’t believe this, then you haven’t been online to buy lately. Take a look at the eBay or Amazon Booksellers rating system and you realize that the market has changed. Those who do it right are rewarded. Those who don’t? They get thrown off the playing field by the consumer. When the Web 2.0 arrives to private aviation, the consumer will be more informed and will be able to make decisions based on more than just price.

Eventually the internet will become a more effective vetting mechanism than the FAA for safety and quality.   

So maybe one of the answers to fixing this broken industry is knowledge in the right hands. What kind of knowledge?

How about this for starters:

  • Knowledge of the safety practices and records of operators. Transparent and open for all to see.
  • Knowledge about the people behind the company web site and slick brochures.
  • Knowledge that would allow consumers to find the best solutions to travel outside of the supply-side controlled silos of present marketing methods of our industry.
  • Knowledge that really educates the market about the solutions that our industry offers in contrast to other methods of travel such as the airlines.
  • Knowledge that would allow travelers to place a value on their time and even place a value on their experience so when they compare travel solutions it is not just about the ticket price. Tools to value time and the experience of travel might highlight the experiential value of the private aviation alternative over a simple dollar for dollar price comparison.

How do we get knowledge in the hands of the market so that they can decide to use our services or not? I can tell you that today, most people do not know that an alternative exists to airline travel that they believe they can afford. Why?  Because we are an industry fragmented in our efforts to communicate our value and we have done a poor job at letting the world know what we are about!

We live in an economy where the availability of information is increasing at an exponential rate; however, information is not knowledge. So, if we want to fix this industry and make it profitable can we take all of this information we now have at the click of the mouse and turn it into market knowledge that will help better define the value proposition of what we offer as well? And can that market knowledge drive out the inefficiencies so that price can come down and make our service affordable and a better value to more travelers?  

These thoughts I present are obviously not the only solutions. I have not even scratched the surface of solving the problem. There is no way one person or company can fix this broken model.  

What solutions do you have?

Let’s fix this broken model together and we all win!

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