Will there ever be a new Malev?

On 27-03-2012, in Airline corner, by steve

It is well known now that experts and enthusiasts alike started thinking about a new Hungarian airline almost the day after the sad collapse of the 66 years old icon, Malev. Not much has happened so far, obviously, investing in a new airline is not a high priority for anyone and investing in a new Hungarian airline, with the image of the current government anything but business friendly, is even more of a questionable proposition.

Of course it is not impossible to start a new airline, the Spanish have just done it with a low-fare company that will operate mainly out of Venice in Italy… New airline on the horizon, existing companies struggling… What are the chances for the Hungarians?

For starters, let me quote here the plea of Lufthansa Group member Brussels Airlines made recently to the Belgian government. Brussels Airlines claims that Ryanair has an unfair advantage since they are paying their social contributions according to the Irish rules… even while Ryanair is flying out of Charleroi which is of course on Belgian soil. The jury is still out on this but the situation shows clearly the kind of complications anyone wanting to start a profitable airline will have to face. Why should Ryanair pay the tower-high Belgian rates when they are only flying from here? If Brussels Airlines is unhappy about it, move the company to Ireland… As long as nobody goes against the European Union rules, it is competition, pure and simple.

So, how does one start a new airline in this cut-throat environment and is it worthwhile to try in the first place?

Let’s discuss the second question first.

Having an airline in a given country has advantages way beyond the traditional considerations of tax revenue and traveling convenience. A giant like KLM had spawned aviation related training at Dutch universities, aviation research at the National Aerospace Laboratory and to some extent was the driver for Fokker, the now defunct aircraft builder. It is not an exaggeration to say that there was a whole national aviation culture anchored firmly in the needs of KLM. Even to-day, with KLM owned by Air France, some of the culture remains. Of course not all airlines are like KLM but even a much smaller company can potentially jump-start the aviation culture of a country like Hungary. This culture thing is far more important in the long run than any short term tax revenue! This has to be kept in mind when we consider the how and where of setting up a new airline.

All right, so having an airline is a good thing. But is it financially feasible and sustainable?

Personally I think it is a long shot but not impossible, assuming a number of questions are answered and a number of misconceptions are dispelled.

Government participation

Government ownership in an airline, even if it is a minority one, is a bad thing. Why? We know that both governments and the airline industry work on a boom and bust cycle. Although airlines have learned to smooth their cycles somewhat, they are still subject to the influence of the economic cycles and there is little they can do about that. Governments come and go as dictated by the elections and their priorities are rarely aligned with those of the airline industry.

A good example is Air France which is still 17 % or so owned by the French government. AF is currently in desperate need to slim down and save money but the layoffs this requires are not politically acceptable while France is preparing for its presidential elections. Once that is over, AF will be free to act. In the meantime, Air France-KLM is bleeding red ink.

Government and politics should be kept from any new airline. The best role for government is to support a competitive environment that ensures a level playing field for all concerned.

Forget the word “national”

I do not think anyone really has a definition of a “national” airline. Malev, with its long traditions and ties to Hungary could be called national for sure but what does this term mean when we are trying to set up a new enterprise?

Creating a new airline is difficult to start with and we should avoid complicating things further with such terms which may end up being restrictions on what is acceptable and what is not.

Does “national” apply to the ownership structure or the financing arrangements? Does it restrict where the company will be registered and where it pays taxes? Does it indicate where the company will have its employees and in what regime they will be paid?

In all the above considerations, only one kind of choice can make sense: select the option that results in the lowest cost and the highest profit for the company. If any of these elements are influenced by “national” considerations, it is best to forget the whole project.

In the airline world’s competitive environment, there is simply no margin for giving up any opportunity for profit maximization. Obviously, where options of equal value exist, the national one must be chosen… but only then.

Think out of the box, be innovative

It is not sensible to plan for the new airline to compete with the established legacy carriers or the low-fare folks head-on. They know their business and also know how to protect their turf. The low-fare guys are awash in cash so they can afford to out-advertise and outbid on fares any newcomer.

At the same time we all know that the established airlines are operating on the principle of covering routes and services that have been opened up with a view to their profitability on a volume basis. This structure leaves potential opportunities for those who are willing, and flexible enough, to find and exploit the niches and who have a cost structure low enough to be profitable in the niche environment. This can be particularly attractive since for a time exploiting a niche opportunity is likely to happen without competition.

Go where the market is

Much as one might tend to think of Budapest as the centre of the new airline’s world, a successful enterprise must operate where the market is. It is not possible to dream ‘home’ the market… A realistic evaluation of the possibilities is inevitable and must be followed very seriously. Wishful thinking does not cut it.

At the same time opening up completely new markets or even creating a new market should be within the aims.

The trick is: match up the operation and the market, wherever this latter is.

Think new also in terms of how you serve the market

To-day most airlines will use either of two operating models: hub-and-spoke for the legacy guys, point-to-point for the low-fare folks. But there may be destinations that can be served by a variation on the point-to-point model, a kind of origin-to-point-to-point-to-origin circle which is flown in both directions at the same time. Where road or rail connections are difficult and demand is not that high, this kind of combined service may just provide the volume needed for a profitable operation which would also be attractive for the local population as it would still be faster than the ground connections. A low fare service par excellence.

One aircraft, different services

I have always liked Brussels Airline’s approach to service levels in their aircraft. If you want to have flexibility and full service, you can pay more and get it. If you prefer low prices and flexibility in ordering extra services, you can get that too, all in the space of the same aircraft. Obviously, the yield management in such an environment is a bit more complicated but I believe done well, it can be a winner and something that is feasible on all but the smallest aircraft.

Any chance of stealing some road cargo?

In spite of long and repeated efforts by the EU, road haulage has not diminished and if anything, there are more trucks on Europe’s roads then ever before. Where motorways and rail are available, trucks win. But what about areas where the infrastructure is less well developed? Carrying certain things by air (possibly overnight) may be competitive if the time saving is also factored in. An unorthodox thought but may be worth a look…

Serving others?

For those who dream about replacing Malev it may or may not be an attractive proposition to start the new life of an airline built primarily to collect and deliver passengers for the legacy or even the low-fare carriers. Although low-fare airlines have, in the past, largely ignored transfers and connections, this is changing now. Having a reliable collection and delivery service fanning out from their existing destinations may be just what the doctor ordered. Such services do not exist to-day on a large scale not because there is no demand for something like this but because so far nobody offered the service in a cost efficient manner. Think out of the box…

How big should it be?

Another sensitive area is the starting size for the new airline. Aim big, start small is probably the best advice here. Of course small is a relative term and its meaning will need to be adjusted to the market and the financial possibilities. For an airline to be profitable, a certain minimum size is essential but where exactly that sweet spot is, is difficult to say. Here certainly some margin for error will need to be provided…

Of course I am not claiming that there are no further, possibly even more important, considerations to mull over while planning the new airline. But at least these here must be seriously considered and some agreement forged before the formulation of a business plan can even begin.

Having a second incarnation of Malev fail would be a major catastrophe not only because of the financial loss it entails but even more because of the moral damage it would bring to the Hungarian aviation community. If nothing else, this latter must be avoided at all cost.

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