Aerospace Entrepreneurship &Aerospace Entrepreneurship &The Complexities of Starting a The Complexities of Starting a

New Regional AirlineNew Regional Airline

Presented by:

Ben Jurewicz

April 21, 2005

““The lessons Learned in Starting A Regional Airline The lessons Learned in Starting A Regional Airline in San Antonio, Texas”in San Antonio, Texas”

MIT Engineering Systems Division Leadership Seminar April 21,2005

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AgendaAgenda

• Starting an Airline Company

• Organizing a Seed Investor Group

• Creating A Business Plan

• Building A Management Team

• The Great Plains Airline Saga

• Raising the Money

• Aerospace Entrepreneurship

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Architect

Engineer

Builder

Customer

User

Entrepreneurial Engineering

4

Starting A New CompanyStarting A New CompanyPerception

Idea Business Plan Start Up Growth

Reality

Idea

Business Plan

Start UpGrowth

$$$$$

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Regional AirlinesRegional Airlines

• Fly Shorter Distances with Smaller PlanesTypically Less Than 1000 MilesLess Than 100 Seat AirplanesNormally, Centered About A Destination City

• Highest Growth Segment in Airline Business7% Ave. Annual Passenger Growth113 Million Pass. In 2003

• Regional Airlines Are ProfitableLegacy Airlines Losing MoneyLow Cost Nationals Are ProfitableRegional Airlines are More Profitable

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San Antonio Market San Antonio Market

• A Major U. S. Destination City 20 Million Visitors/Yr & Growing at 6%/Yr 75% from TX and Neighboring States

• Automobile Travel Dominates Only 10% of Visitors by Air Limited Regional Non Stop Air Service

• Significant Potential With Mexican Cities Inconvenient Travel Through Dallas/Houston Limited Service to Mexican Cities

• San Antonio Not In Top 50 Regional Airports Note: Based on 5 Independent Current Marketing Studies

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Seven “Seed” InvestorsSeven “Seed” Investors

• Ex-VP American Airlines

• America West Pilot

• Mature Aerospace Executive

• Mexican Businessman

• Medical Doctor

• IT Executive

• CEO & Financial Background

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Creating a Business PlanCreating a Business Plan

• Define the Market

• Select the Airplane

• Define the Operations

• Find the Key People

• Run the Numbers

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Initial Route StructureInitial Route Structure

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Targeted MarketTargeted Market

City Miles Annual Trips

New Orleans, LA 520 95,260Albuquerque, NM 625 68,780OK City, OK 425 64,470Tulsa, OK 490 53,070Little Rock, AR 520 47,420Colorado Springs, CO 745 32,640Lubbock 350 31,450Amarillo 450 31,370Birmingham, AL 747 29,150Jackson, MI 545 20,444Midland/Odessa 280 17,920Sub Total 491,974

City Miles Low Est.

Acapulco 885 4,873Cancun 957 48,496Cozumel 986 10,669Guadalajara 696 14,585Leon 624 8,356Los Cabos 841 10,082Mexico City 718 58,077Monterrey 290 20,177Puerto Vallarta 754 12,448Sub Total 187,763

U.S. Cities Mexican Cities

Note: On Average There are 1,862 Pass./Day or 93 Pass./Day/City

Current Air Travelers: 679,737 Pass./Year

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The Right Size AircraftThe Right Size Aircraft(For Targeted Market Demand of 93 Pass./Day/City)(For Targeted Market Demand of 93 Pass./Day/City)

Hrs/Day 10 15 20 25 30 35 40 50 75 100

8 37 25 19 15 12 11 9 7 5 410 30 20 15 12 10 8 7 6 4 312 25 16 12 10 8 7 6 5 3 3

Passengers in One Airplane

50-Seats

100-Seats40% 50% 60% 70% 80% 100%20% 25% 30% 35% 40% 50% 75% 100%

---- ----

Utilization

25-Seats

15%10%20% 30%40% 60% 80% 100% ---- ---- --------

---- ----

No. of Planes Needed

Load Factor (% Seats Filled)

Seats In Plane

Conclusion: With 93 Pass./Day/City and Probably Less Than Half on Any One Trip (Say 30 Pass./Trip), a 25 Seat Plane is A little Too Small, A 100 Seat Plane Is a little Too Big, But A 50 Seat Plane Is Just About Right.

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Baseline AircraftBaseline Aircraft

A 50 Pass. Seat Jet ~ 98 Ft. Long ~ 66 Ft. Wingspan Max cruise Speed – or 450 kts Two Rolls-Royce AE 3007A1

Engines @ 7580 lbs Thrust Range > 1000Mi. Service Ceiling at 37,000 Ft.

Embraer 145 Regional Jet

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Alternative AircraftAlternative Aircraft

A 32 Pass. Seat Jet ~ 70 Ft. Long ~ 69 Ft. Wingspan Max Cruise Speed @ 400 kts Two Pratt & Whitney

PW 306 B Engines @ 6050 lbs Thrust Range > 1000Mi. Service Ceiling at 31,000 Ft.

Avcraft Dornier 328Jet

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Business StrategyBusiness Strategy

• Provide Point-To-Point, Low Fare, Non-Stop, No-Frills Jet Service.

• Market “Destination San Antonio” to City, CVB And Local Businesses.

• Operate With A Single Airframe Type To Minimize Costs and Increase Productivity.

• Outsource Wherever Possible to Minimize Asset Acquisition Costs.

• Use Technology To Control Costs and Satisfy Customer Needs.

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CompetitionCompetition• No Regional Non-Stop Airline Servicing

San Antonio.• Major Airlines Provide Service With

Intermediate Stops.• Competitors Heavily Engaged in Cost

Reduction And Price Competition.• Southwest Air Fares Represent Upper

Limit on Prices.• Possible Support from Major Airlines.

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Operational ApproachOperational Approach

• Demand Driven Business Model Revenue Based With Costs To Support Competitive, Performance-Based Salaries Outsource Selected Functions

• Simple Operational Approach Single Aircraft Type Streamlined Fare Structure Reservations Via Web

• Win the Hearts of San Antonio Travelers Customer-Focused Marketing Low Fares All the time Conveniently Scheduled Service Amenities for a Trip Pleasant

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0

50

100

150

200

250

300

0 200 400 600 800 1000 1200

Trip Distance - Miles

Refundable Anytime Fares - $

Budget Fare $50+$0.10 X Miles

High End Fare$50+$0.15 X Miles

Pricing StructurePricing Structure(Compared to Southwest Airlines One-Way Fares To/From San (Compared to Southwest Airlines One-Way Fares To/From San

Antonio,TX, Indicated by the Symbols) Antonio,TX, Indicated by the Symbols)

SAX ProposedFare Structure

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Airline Operating CostsAirline Operating Costs

0

5

10

15

20

25

0 200 400 600 800 1000 1200 1400

Ave. Trip Length - Miles

CASM - Cents Per Avail. Seat Mile

GreatLakes

Atlantic Coast

SkywestMesa SA Airlines

AirTranSouthwest

FrontierJet Blue

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Financial ProjectionsFinancial Projections

0

10

20

30

40

50

60

70

80

90

Year 1 Year 2 year 3

$ M

illi

ons

Revenue

Costs

Pre-Tax Earnings

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Risk AreasRisk Areas

• During Start Up:– Timely Plane Availability– Airport Landing Constraints– Prolonged FAA Certification

• During Commercial Operation:– Competitive Response– Attracting Passengers– Escalating Fuel Costs– Airplane Out Of Service

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Building A Management TeamBuilding A Management Team

• The Right People Make the Difference

• Use an Extensive Search Network

• It Is an Ongoing Discovery Process

• Resumes Don’t Tell the Whole Story

• Always Keep Your Options Open

• Trade Equity for Salary, Carefully

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Key Management PersonnelKey Management Personnel• CEO - Acting Person and A Current Candidate, but Still

Looking for the Very Best.

• CFO - Acting Airline Experienced CPA plus Candidate with Extensive regional Airline Experience.

• Marketing - Extensive List of Interested/Available Candidates.

• Operations – Several Candidates, One in Lead.

• Human Resources –Selected and Available.

• Five Wisemen – Three of Five Available & Interested

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FAA Certification ProcessFAA Certification Process

• Phase 1: Applicant Preparation

• Phase 2: FSDO Preparation

• Phase 3: Formal Application

• Phase 4: System Safety Assessment

• Phase 5: Proving Tests

• Phase 6: Administrative Functions

Controlled by CSET – Certification, Standardization, Evaluation Team

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Great Plains Airlines Great Plains Airlines (GPA SAGA)(GPA SAGA)

GPA(CEO)

SAA

COSA EMG

DornierORJC

Key 5

State (OK)

City(Tulsa)

GPAInvestors

FAA (FSDO)

Court(Bankruptcy)

Lawyers

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Raising the MoneyRaising the Money

• Develop Solid Case for Amount Needed.

• Identify All Sources for Funding.

• Select Sources To Help.

• Develop Approach Strategy.

• Prepare Approach Material.

• Send Out Feelers to Get Feedback.

• Keep Going and Don’t Get Frustrated.

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Our NeedsOur Needs

Round A: $ 10M

Round B: $ 20M

$3M for Certification

$7M for Start Up

Expansion

Seed: $ 250K Plan & Raise Money

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ScheduleSchedule

Business Plan/ Development

Phase I-Certification And Start-Up

Phase II-Revenue to Breakeven

Phase III-Growth

2004 2005 2006 2007 2008

ACTIVITY

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Development PlanDevelopment Plan

• Raise Development Funding of $3Million.

• Set Up Office (Corp. Structure Exists).

• Add 18 to 20 Key People to Certify Airline.

• Finalize Airplane Choice; Negotiate Schedule/Costs.

• Visit Airports/Local Authorities; Negotiate Costs.

• Create Operations/Maintenance Plans for DoT/FAA

• Redefine Business Plan With Newly Acquired Data

• Define Start-Up Financing Requirements.

• Seek & Secure StarT-Up Financing.

• Work with S.A. City/CVB/Others on Marketing.

• Prepare for Final Certification Proving Runs.

• Complete Proving Runs and Certification Documents

MAJOR TASKS:

Note: Detailed Cost Estimate Available Defining $3M Needed To Certify

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Development CostsDevelopment Costs((Projected Costs in $1000)

Task Areas Salary Consult. Travel Doc./Fees Fac./Equip. Reserve Task Total

1.0 Business Plan 90$ -$ 5$ 25$ -$ 5$ 125$ 2.0 Management Team 100$ 25$ 10$ 20$ 5$ 10$ 170$ 3.0 HQ. Facility 10$ -$ -$ 5$ 100$ 10$ 125$ 4.0 Plane Selection/Acq. 25$ -$ 5$ 5$ 100$ 10$ 145$ 5.0 Airports/Authorites 50$ 25$ 15$ 20$ -$ 50$ 160$ 6.0 Operations Plan 75$ 25$ 5$ 50$ -$ 50$ 205$ 7.0 Maintenance Plan 75$ 25$ 5$ 50$ 25$ 15$ 195$ 8.0 Personnel 50$ 25$ 5$ 50$ 25$ 25$ 180$ 9.0 Systems/Tech. 50$ -$ 30$ 35$ 300$ 100$ 515$ 10.0 Service Providers -$ 200$ 30$ 20$ -$ -$ 250$ 11.0 DoT/FAA Cert. 50$ 50$ 20$ 10$ -$ 100$ 230$ 12.0 Marketing 50$ 250$ 50$ 55$ 20$ 75$ 500$ 13.0 Finance Package -$ 50$ -$ 100$ -$ 50$ 200$

Total 625$ 675$ 180$ 445$ 575$ 500$ 3,000$

Total Estimated Cost

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Business Start-UpBusiness Start-Up

• Lease Deposit for Airplanes• Procure Initial Inventories• Set Up, & Checkout Airplane Functions• Set Up & Checkout Airport Operations • Implement Maintenance Plan• Provide Initial Airport Contract Fee Deposits• Recruit & Train Start Up Full Staff• Final Checkout of Operational Systems• Extensive Advertising & Promotion• Misc. Operational Start Up Fees (fuel, tools, etc.)• Misc. Admin. Start Up fees (computers, supplies, etc.)• Full Staff Start Up Salaries, Moving, &Training Costs• Negative Operational Cash flow for First 4-5 Months

Note: Cost to Cover Above Estimated at $7M

MAJOR TASKS:

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Investor’s WorldInvestor’s World

• Must Be Interested in Specific Business Area• Typically, Won’t Read A Business Plan• Different Types at Different Levels

– Friends & Family– Angels & Angel Groups– Very Wealthy Individuals– Professional Venture Capitalists– Corporate Venture Groups– Public Entity Investors– Public At Large

• Unique Perspectives on Risk & Reward

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New Airline SummaryNew Airline Summary

• Unique Market Opportunity.

• Growth-Oriented Business Plan

• Timing Is Right To Exploit

• Experienced Management Team Ready

• Financing Arrangements In Process

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Aerospace EntrepreneurshipAerospace Entrepreneurship

• Emerging Aerospace Entrepreneurship

• Complex Process Requirements

• Specialized Technical Knowledge

• Significant Up-Front Investment

• Experienced Support Base Is Limited

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Aerospace Center for

Entrepreneurship (ACE)CE)

Entrepreneurs

Government Agencies

Investors

New Aerospace Businesses

ACEFunction Is to Do Aerospace Entrepreneurial Engineering

Note: (1) Prefer to Be Associated with Academic Center (2) Includes Virtual Meetings Based on Numedeon Technology (3) Conceived As a Self-Sustaining, Non-Profit Organization

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Service Individuals Start-Ups Corporations Financers Agencies

Knowledge X X XConsultation X X XResearch X X X XPersonnel X XFinancing X

ACE Provided Functions

X

Customer Type

Service

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Second SummarySecond Summary

• ACE Concept Description & Plan Prepared

• Virtual Meetings - Numedeon Technology

• Under Evaluation at NASA Langley

• Discussions with Embry Riddle University

• NASA RFP for Space Exploration Academy