I was discussing the niceties required for starting an airline company and was discussing its prospective with my father. I wondered why an airline would go to such extent to make money by imposing money on the said services they provide. Thus, I spent quite some time researching and I wish to share the same.
So, do you guys know what it takes to start an airline?
Lots of money
Air Deccan, the first LCC of India would be the best said example. They had a marvellous means of marketing with the introduction of ₹.1 Fare; it also had the right slogan, “Simplifly”.
It took ₹10 crore (€1,833,840, US$2,168,257) in paid-up capital to start the airline with a single turboprop ATR aircraft before spreading its wings across the country.
To kick start the business
Today, an LCC with a pan-India presence would cost $40-45 million (₹180-202 crore). Spike up that bid to $65-70 million (₹270-315 crore), it would give you a safe spot to help you to tide over a crisis like an oil price spiral. For example, Jet Blue and Richard Branson owned Australian based LCC had spent $45 million before they could fly an aircraft.
Airline business is a cash burning business. You spend ₹2.5 lakh an hour to fly an Airbus A320. If you have six aircraft (airlines are required to bring in six aircraft within year of starting operations) you will burn ₹90 lakh a day or ₹27 crore in a month. To recover this, the airline will have to fly at say, 70 per cent load factor (occupancy). If it manages to just do 50 per cent load factor instead of the targeted 70 per cent — Sahara Airlines could just do 25 per cent initially when it was launched — it will have to incur losses. Typically, an airline has to incur a cash burn of ₹2-3 crore in the first few months every time it introduces an aircraft in a new sector.
Running Cost? Got it covered Right?
All the cost incurred for running the business is to be paid upfront or at the earliest. As an example, the air-fuel provided by the companies do so for a week over credit; if you fail to pay, there will be no more fuel for your planes to touch the skies. Furthermore all of the airport charges need to be paid every month. As I had stated, LOTS OF MONEY!
Lease an aircraft maybe that would reduce cost? What about the spare parts?
The start-up costs could be huge. A lease rental, which is 1 per cent of the cost of the aircraft, for a new Airbus A320, is $350,000/month. Airlines have to provide a month’s rental plus three months lease rentals as deposits to the lessors, or a lease rental for a month plus letters of credit for three months. The lease and deposits for six A320s will cost you $8.4 million (₹37.80 crore). Insuring an A320 costs ₹2 crore a year, and will have to be paid in four instalments. Insuring six planes will cost ₹12 crore. Airlines also need to make initial provisioning for each aircraft, which consist of consumables like blinkers on the wings. A set of tyres, for instance, lasts one-and-half months. For each aircraft, airlines have to carry initial provisioning and consumables worth $1 million and LRUs of $3.5 million for every three aircraft. For six Airbus A320s, the bill could be $13 million or ₹58.50 crore a year.
Say you have covered until this, now how can you fly a plane without a pilot?
To train a pilot for A320 it costs about ₹35-40 lakh; training an ATR pilot would cost half. The pilots have to be trained on simulators, given route checks where the aircraft is flown empty for 9 hours and on-the-job training, where they fly in as a co-pilot. The international norm is 11 pilots per aircraft. Training 66 pilots for six planes would cost you ₹23 crore.
As for Air Deccan, it got in 42-odd retired Air-force pilots and trained them at a cost of ₹4.5 crore. No such luck for later entrants who had to poach pilots and other core staff from other airlines. A pilot for an Airbus A320 costs ₹3 lakh a month, for an ATR ₹2.25 lakh a month; co-pilots cost half. Expatriates come at a premium and charge ₹.1 lakh more.
Assuming that the annual salaries are ₹36-40 lakh per pilot, the salary bill for six aircraft will be ₹18-20 crore a year. The salaries for engineers, who are certified by the Director General of Civil Aviation (DGCA) after tests, will be another ₹5-10 crore a year, salaries for cabin crew and ground staff will cost ₹3 crore a year; more for security.
Sounds pretty much done right? But what about ground handling needs?
Each aircraft needs ground handling equipment worth ₹75 lakh like push back unit, ground power unit, step ladders, conveyors and chocks. Unlike an automobile, the aircraft doesn't have a reverse gear and needs a push back tractor to move it back. This unit costs ₹45-50 lakh. Ground handling equipment for 6 Airbus A320 or Boeing 737-800 will cost ₹4.50 crore.
You need airports to land the aircraft right? Prepare yourself to pay another roll of cash to the airport!
When you start flying, you will also have to fork out deposits of ₹50 lakh per airport. So, if you plan to have operations across 20 airports, shell out deposits of ₹10 crore. Besides, you need to pay a deposit of ₹1 lakh per airport for check-in counters, ₹2-3 lakh per aircraft as parking fees. Every airport requires half a dozen computers; 100 -120 computers across airports and offices could cost you another ₹1 crore.
Finally a part which earns the money for the airline, and rightly this is where one needs to spend more; Reservation Systems
Implementation of a reservation system could set you back by ₹3 crore. SpiceJet, for instance, uses Navistar while Kingfisher uses Bird Group’s/Lufthansa’s reservation system. Both charge a recurring fee of 40 cents a ticket, which is ₹18-20 on every ticket. You can develop the reservation system indigenously to save costs — Deccan’s system was developed by Interglobe Technologies, an arm of Interglobe develops for IndiGo.
Will this mark the end for starting the business? You push in so much cash and you start the business, you sure have the right to charge for what you have done, right? That’s why they ask passengers to pay such high prices to fly. But for an airline to be in business with current models of working, Lower fares is what gets the thing right and this is where the concept of ancillary services comes in. The fare you pay might be low, but for each and every service you seek from the airline, be it priority check-in, baggage allowance, meal service, blankets, and even water, the airline can charge you. So the next time you say why the airlines charge you more, you have an answer.