Five Reasons New Airlines Form In A Crisis

Everyone knows how damaging the pandemic has been to certain parts of the economy. Airlines are high on that list, and the industry that loves controversy keeps creating it. Being one of the few industries to get direct government aid during the pandemic, many have counted on the industry to deliver more even today. During this time, airlines have retired planes, cut back schedules, offered early-outs to employees, and only recently returned to a small level of profitability.

Yet despite this the U.S. saw initial public offerings (IPOs) by two U.S. Airlines, Frontier and Sun Country. IPOs happen because investors are interested in buying the stock of a company that had previously been held privately. Even more aggressively, two new U.S. Airways started during the pandemic, Avelo and Breeze. This isn’t only a U.S. thing. Other airlines around the world have have started in this time, including India’s Akasa, Europe’s Norse Atlantic, and the Caribbean’s Arajet. Here are five reasons it makes sense to start when everyone other airline is struggling:

Aircraft Prices

When others are returning aircraft and cancelling orders, aircraft manufacturers and lessors get nervous. This often means it is a time that the airline’s primary physical asset — the airplane — can be acquired at a lower price than normal. This could give the new airline an advantage starting up that continues for quite a while. Having lower asset prices is good, but this doesn’t always mean there isn’t challenge.

Take Norse Atlantic, for example. The founders of that airline were able to lease Boeing 787s previously flown by Norwegian Air, an airline that failed a few years earlier. The airline was designed around this airplane, and that isn’t normally the right order of this. When I worked for Taca International in the 1990s, one day my boss came in and said “I just got a great deal on a fleet of Cessna Caravans. We have to start a domestic airline in Guatemala.” I was shocked by this, as I had learned you find the market opportunity first, then look for the planes to make that strategy best work. I’m not saying that Norse Atlantic will fail because of this. I’m saying that getting the airplanes before designing the market strategy or business model adds significant challenge.

Successful airlines take advantage of this market timing. Airlines like RyanAir and Southwest are fans in part for placing big orders for new aircraft when no one else is buying, locking in a long-term competitive advantage.

Airport Real Estate

There are many airports that have plenty of extra access, and are continually looking to attract new airlines. But in the largest U.S. cities, airport access to new entrants is not easy to find. Alaska Airlines’ purchase of Virgin America in 2016 was primarily about access in San Francisco and Los Angeles. Virgin had gates and facilities in those important west coast cities that Alaska could not get on their own. They never really integrated Virgin’s fleet, and recently announced getting rid of all the Airbus A320 planes acquired in that deal.

An industry crisis makes airlines reduce schedules and rethink defensive priorities. This sometimes makes normally unattainable airport facilities available, for at least a short time. This makes it possible for a new airline to swoop in when the existing airlines have stepped back. Like the airplanes, airport access on its own isn’t the unique basis for a new airline but can be a strong motivator in creating a marketable strategy.

Competitive Distraction

During the pandemic, airline management teams had to focus on the company’s cash flow, employees, change in operating procedures to make customers comfortable, and more. This can distract an airline from a new competitive threat. An airline that might react quickly to thwart a new start-up may have their eye off the ball for a while.

In 2011, American Airlines entered bankruptcy protection to address key issues. Spirit Airlines used this to make a quick strike and enter DFW, an important American Airlines hub. Spirit even offered $11 fares to remind people of American’s struggles. Spirit recognized that while dealing with the huge issues of their bankruptcy, American wasn’t likely to react aggressively to this new service.

Large airlines often have important strategic initiatives they are trying to enact. This could be their own economic struggles due to a macro event like a pandemic. They could also be at a point that the big airline doesn’t want to create an image that they are crushing competition.

People Availability

Airlines need a lot of people to run well. Pilots, flight attendants, airport workers, and call centers all interact with customers. Behind the scenes, airlines need accountants, IT pros, marketing skills, lawyers, and more. Not every job requires specific airline experience. But when other airlines are struggling, often people are available or can be attracted to leave to for a new opportunity. This may allow a new airline to attract talent that is willing to bet on the airline’s future.

Breeze Airways was founded by serial entrepreneur David Neelman. With a great a great track record that includes treating people well, he was able to build a management team well before the airline flew its first flight. This lowered Breeze’s startup risk greatly. When I was the CEO of Spirit, we decided to hire an investor relations lead as we started planning our IPO. We were able to attract a seasoned executive who was at Continental Airlines at the time, but was looking at a move to Chicago given their merger with United. Having to move anyway, she looked at other opportunities and Spirit gained from that.

Stable By The Rebound

Anyone who has been in business for decades knows that economic cycles move up and down. Today’s recession becomes tomorrow’s boom. When things are good, everyone is making money, and companies will aggressively defend their turf. Starting when things are tough allows these new airlines to get momentum, build out their team, integrate their fleet, and build positions of strength. When the boom ultimately comes, they are no longer fragile and can leverage their positions of strength.

Starting during a peak would mean higher asset costs, challenging talent acquisition, and competitive focus. This is not the time for new airlines to be figuring out their business model. The time spent when everyone else is not focused on them gives them a fighting chance when things get good.