Airline business plan – the basics

To say that any decent business needs to have its own, legitimate business plan is cliché. An airline is no different, although some techniques may not exactly follow the rules of a typical business layout. In this article I intend to go through some of the basic airline business plan contents and describe what will probably be the hardest points to define.

The main parts of an airline business plan (or any business plan, for that matter) would generally be those:

• Target market or niche market definition
• Fleet definition
• Marketing strategy
• Cost analysis
• Income prediction, predictive balance sheet and predictive cash flow

So, as you can see, although there are topics which are reserved solely for an airline business plan, the overall structure is not different to that of any other company. It’s what is included in all those sections which may cause the airline business plan to be quite tricky. I’ll take the liberty of going through each of those points to briefly describe what should be generally included.

Target market or niche market definition

This is probably the most important and the most difficult part to determine and write down. If you attempt to create an airline, whether in real life or just for academic purposes, you need to know what purpose the airline is supposed to serve. The rest of the airline business plan will be based solely on what you define in this point, so it really is better to do ones homework before going off with some interesting but economically unviable ideas.

For the rest of this article, I will assume that the airline we attempt to create will carry passengers. This is the understanding of the world “airline” in the general world anyway, so for now we will leave the cargo operators.

There are really many markets you can target when thinking about your airline business plan. Here are just a few options for you to consider:

• General, international traffic between domestic airports
• General, intercontinental traffic
• Traffic caused by a large company or factory near a specific regional airport
• Wealthy traffic between major airports or a specific major airport and luxurious holiday locations
• Regional, national traffic
• Specific immigration traffic from a particular foreign country or from your country to several others
• And many, many more.

As much as many (or perhaps even all) of the above propositions may seem a good idea at first, an airline business plan needs to be specific on why a particular niche has been chosen. This is getting difficult, as in order to properly define possible traffic, one needs to get into details of regional demographics of the countries and regions which are supposed to be involved in the given idea. Things such as population density, per capita income and willingness to travel really need to be considered before opening a seemingly gold-mine route. A route which is currently served only by a bus or train may seem like a great idea for connecting flights but only under the condition that the people will be able to afford your ticket prices. So do your homework – an airline business plan is nothing without it.

Fleet definition

Once you have established your market, you have most of the required data to determine the fleet you will be using for your airline. This is another very important factor of the airline business plan and the latter success of the airline as it will determine many of your cost factors, such as fuel, maintenance and leasing rates.

What you should be able to define from your market research (which should include the routes and timetable for your flights) are the following basic requirements for your fleet:

• Aircraft size (how many seats)
• Aircraft range (how far do you need to fly)
• Aircraft special requirements (such as the need for STOL – short take-off and landing – if you intend to be using airports which require such characteristics)
• Aircraft age and general look and feel for the passenger (are they demanding, will they require a brand new, slick looking aircraft or is that of no relevance at all)

Once you have answered the questions above (based on an analysis of your market) you can start searching the aircraft market for available options. This is a very important step – a bad decision during this process may, and will, cost you a lot in the near future, when you start your operations.

Things to consider when deciding on a given aircraft type:

• Availability on the market (if you decide on used aircraft – is anyone selling them? If you decide on new aircraft – what are the waiting times?)
• Cost
• Cost change tendency in the future (will the aircraft retain most of its value throughout the next few years or is it a vanishing model?)
• Availability of spare parts and their cost
• Availability of skilled personnel (pilots, mechanics, engineers)
• Availability of skilled third party contractors nearby (for instance maintenance facilities)

You may often find that optimizing each of those points is generally impossible. So you will need to reach a compromise between certain features of the given aircraft types (for instance low purchase price and good availability, but expensive spares). The analysis you just performed should be outlined in the airline business plan for future reference just in case something (like your market definition) changes slightly and you need to redo the entire process again.

Marketing strategy

The marketing strategy is part of any business plan, and there’s probably not too much difference between an airline business plan and other branches of international business. However, this point is very important, as you will see in just a minute.

Please note that many people make the mistake of associating a marketing strategy with a pure advertising strategy. This is a big mistake – advertising is, of course, part of it but by far not the most important one. What I generally tend to associate with a proper marketing strategy is:

• Full product definition (not just the transport of people, but also the product offered on board, prior to departure such as business lounges and during reservations like a loyalty program).
• Complete pricing strategy – this includes the fares, which can be subject of a separate book themselves, and any other costs which you may or may not ask the passengers to pay.
• Distribution channels – are your sales going only online or do you have a call center as well? Also, are you cooperating with tour operators or offering your tickets through sales agents?
• Customer service – will your airline be really customer oriented and make things as easy as possible while at the same increasing overall operating costs, or would you rather go with a low cost scenario?
• Advertising strategy – possible advertising campaigns and a budget for those.

So, as you can see, your marketing strategy is basically all you need to do to get people to buy your tickets. This is why it needs to be part of any airline business plan.

Cost analysis

You were waiting for this one, weren’t you? The cost analysis is something every investor will want to look at, and every business owner should make sure that it is clearly outlined in the airline business plan and then carefully monitored once the airline starts operating. A glitch in those predictions can cost you a fortune, as costs in the airline business go over the roof.

If you have properly performed all the steps described above, your airline business plan should be contain all the information you need to properly define your overall, estimated costs. You will need to do a lot of research, but at least you should know what to look for.

So here are the basic cost factors for your airline business plan:

• Fuel cost (based on the fuel consumption of the aircraft (and engine) type you have chosen and the routes which will be flown). This cost tends to be highly variable lately, so it’s a good idea to analyze the previous trends and take a good, well educated guess on how they will behave in the near future.
• Aircraft cost – this, again, depends on the aircraft type you have chosen and the financing which is available to you. This will look differently when you purchase an aircraft from when you take one in operating lease.
• Salaries – this is always a huge factor. Here, all the work you’ve done so far really comes in handy. How many pilots will you need to employ (based on the crew index, which is based on the number and type of routes), how many mechanics (will you be doing your maintenance in house or will it be outsourced), how many airworthiness and operations staff and how many general employees? The salary levels depend on your current economic state both locally and globally (many good pilots will not refrain from working abroad, so your salaries must be competitive).
• Maintenance costs – difficult to define unless you know someone who has been involved in operating the particular type of aircraft before.
• Handling fees, landing fees and the like – depending on airports you will visit
• General business costs for your offices, etc.
• Sales costs and advertising costs (in most plain terms – how much will it cost you to convince one person to buy one ticket?)

Again, I can’t stress too much that a proper cost analysis is probably the most important part of an airline business plan because you can actually get it right (if you do your work probably) contrary to income predictions which are just that – predictions.

Income predictions

Income predictions are best presented in three options – best case scenario, most probable scenario and worst case scenario. Be aware that the latter, despite its name, is often more probable that the “probable” scenario.

Investors and business owners what to have that in their airline business plan to know that there is a good chance of making money with the business model you have prepared. They know that these things are predictions only, but still – it shows the possibilities.

Of course, income predictions cannot be taken out of the top of one’s head. They need to be based upon proper analysis of the market and the market’s buying power as well as proper supply and demand analysis. But I’m assuming that by now all that is done, as you had to do it to finish all the previous parts of the airline business plan.

The predictions should be put into legible and correct (from an accounting perspective) tables showing the predicted balance sheet for the months and years to come as well as a cash flow analysis, which will ensure that you will not run out of cash despite the business going well.

So much for a brief overview of what an airline business plan may look like and what work is involved in actually creating one. I will eventually get to more detailed insights into each of the steps, as there’s a lot that needs to be said before we can get into creating something that will really work in real life.