Since the 1950’s, a long term

sustainable business model has been

illusive like the search for the Holy Grail.

Too many airlines have tried and failed

and even today, the few that survive are

just that, surviving at best, but why ?

Caribbean Air Transport:The Struggle for a local long term

sustainable airline business model

continuous.

In Search of a Long Term Sustainable Airline Business Model

in the Caribbean

Caribbean Aviation Meetup

June 14 – 16, 2006, Dominica

Presented by Tomas Chlumeckywww.AviationDoctor.wordpress.com

Aero Wings

Carib Aviation

Caribbean Star

RedJet

Trans Island Air 2000

Air Monserrat

Air Caribbean

Air Calypso

Air Aruba

Air d’Ayiti

Air Jamaica

EC Express

Air ALM

Nature Island Express

Cardinal Airlines

BWIA

Tobago Express

Helen Air

Curacao Excel

Dominair

Dominica

Nomad Air

Dutch Caribbean Express

Dorado Air

Eagle Air

V.I. Seaplane Shuttle

Guyana Airways

Air Jamaica Express

Carib Express

Air BVI

British Caribbean Airways

St. Lucia Airways

Seagreen Air Transport

Avia Air

Fly Aruba

Aruba Express

Antilles Air Boats

Aero Virgin Islands

Carib Air

Laker Airways

Maya Airways

Prinair

Some of the 60+ Caribbean Airlines out of business since 1981

In 2015, there were 58 new start-up airlines and 55 airline failures.

e.g. Canjet, Transaero, Estonian Air, Freedom Air

In 2014 there were 83 start-ups and 44 failures.

Average number of new start ups was 26 in the 1970’s, 40 in the 1980’s, and 81 in the 1990’s.

2002 to 2004 saw 120+ new start-ups per year.

Failures peaked at 123 in 2008.

Global Airline Start-ups and Bankruptcies

1. Poor Management

Wrong / inflexible business model

Poor leadership

Lack of vision

Flawed strategy or No strategy

Poor financial management

Poor sales & marketing

Low customer satisfaction

Too operations oriented

Main reasons for regional airline failures –

my experience

Small airlines are stuck today with old 15 to 19 passenger turboprop

airliners today that are on average +35 years old

De Havilland Twin Otters 844 + 95 = 939 (420+ in commercial use)

Embraer EMB-110 Bandeirante = 501 (70 in commercial use)

LET - 410 = +1,400 (+220 in commercial service)

Shorts SC7 = 153 (7 in commercial service)

AVIC Y-12 = 220+ (20+ in commercial service)

Dornier 228 = 288 (83 in commercial service)

GAF N24A = 39 (2 in commercial service), GA18 Airvan 18 ?

CASA 212 = 580+ (40 in commercial serice), Indonesian Aerospace N219 ?

IAI Arava = 103 (0 in commercial service)

PZL M-28/AN28 = 176 (0 in commercial service)

The Production Numbers of current 15-19

seat unpressurized turboprop airliners

Demand for small turboprop airliners is so strong today that current used

prices for the DHC-6 Twin Otter are above the original factory prices

Only 4 small turboprops are in production today, all with hefty price tags.

The Viking Air (Canada) Series 400 Twin Otter priced at $US 7.5

million. A great aircraft being kept in production at 18 units/year.

The AVIC Y-12E (China) priced at $+/- 4.0 million, is an updated

version with PT6A-135 engines. New Y-12F is 40% bigger, with

PT6A65 engines and a 6,000 lbs payload.

The Czech built Let-410 UVP-E is popular in Africa and South

America, new one with GE H80 engines is around $5.0 million, with

a new L-410NG coming in 2017 with H85 engines.

The Dornier 228 is now produced by RUAG of Switzerland, only

around 3-4 per year priced at $+8.0 million.

New 9 to 19 passenger turboprop airliners are coming to market in the

next 4+ years.

TECNAM 2012 9 passenger mogas 175 kts, $2.2 million

Indonesian Aerospace N219, PT6 powered

Mahindra Aerospace GA18 ex-GAF N24A, RR250 powered

Evektor EV-55 Outback, 10-14 seat, 220 kts, STOL, $2.6 m

Total Production of 15-19 Seaters-Unpressurized

1966 to 2000

GAF

EMB

CASA

DHC

Beech

Shorts

Dornier

LET

IAI

0 200 400 600 800 1000 1200

Units

G1-20

Production of 15 to 19 Seat Aircraft

0

50

100

150

200

250

300

350

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Year Built

Un

its

Bu

ilt

pe

r Y

ea

r

Total Production Pressurized Unpressurized G1-21

19 Seat Pressurized Aircraft - Equipped Price History

$0

$1 000 000

$2 000 000

$3 000 000

$4 000 000

$5 000 000

$6 000 000

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

Year Built

$U

S P

rice in

Year

Bu

ilt

J31

1900C

1900D

Metroliners

G2-05

20-30 Seat Production

0

20

40

60

80

100

120

140

19741976

19781980

19821984

19861988

19901992

19941996

19982000

Year Built

Un

its

Bu

ilt p

er Y

ear

Total production BAe J41 Dornier 328

EMB-120 SF340 SD330 G1-22

Production of 15 to 30 Seat Aircraft

0

50

100

150

200

250

300

350

19651967

19691971

19731975

19771979

19811983

19851987

19891991

19931995

19971999

20012003

2005

Year Built

Un

its

Bu

ilt p

er Y

ear

15-19 Seat 20-30 Seat Total 15 to 30 Seat G1-23

New 30 seat aircraft – Dornier 328

• Sierra Nevada (USA) bought Dornier 328

Support GmbH

• Will produce the aircraft in Turkey along

with the Do328Jet

• 2019 ?

16 x ATR-42 transactions

60 x ATR-72 transactions

113 x DHC-8 transactions

9 x Fokker 50 transactions

47 x Saab 340/2000 transactions

308 x A320’s / 68 x A319’s / 238 x B737NG’s

2015 second hand turboprop airliner

market activity

Driver of Growth – GDP per Capita

Barbados 5 trips, St. Lucia 4 trips, Bahamas 8 trips, Suriname 0.6 trips

3 distinct country groups in the region Small Island States

> Antigua & Barbuda, Dominica, Grenada, St. Kitts & Nevis, St. Lucia, St. Vincent & the Grenadines

Caribbean Hub Countries

> The Bahamas, Barbados, Dominican Republic, Jamaica, Trinidad & Tobago

Continental Caribbean Countries

> Belize, Guyana, Haiti*, Suriname

3 route categories according to origins and destinations1. Domestic Routes: a pair of O&D destinations in same country

2. Intra-Regional Routes: Caribbean origin and destination airports

3. Extra Regional Routes: connecting the Caribbean with outside destinations

Caribbean Air Traffic – World Bank 2015 Study

CARICOM has a multilateral air services agreement from 1996

Agreement’s aim was liberalization of air services

It is weak, allows for negotiations and permissions under “reasonable

circumstances”, which is open to interpretation by each state

Open Skies agreement based on allowing free market to determine

levels of services between states

Aim is for NO restrictions on int’l route rights, number of designated

airlines, capacity, frequency or type of aircraft.

A liberal air fare regime only altered if both governments object.

Caribbean Air Traffic - 2

Small Island States seats 2,450,188 (7.8% of total)

Most was St. Lucia 829,738 (34% of Small Island States)

Least was St. Vincent & the Grenadines 122,642 (5%) all Intra

Regional

Caribbean Hub Countries total seats 25.53 million

Most was Dominican Republic 10.52 million (41%).

Total for entire Caribbean 3 groups was 31.37 million

Caribbean Air Traffic – 3 Total Traffic (2013)

Domestic Routes 3.03 million seats (10.4% of total)

3 countries have over 90% of domestic traffic

1. The Bahamas (1.50 million seats, 50%), 5 year growth of 9.6%

> Operators: Southern Air Charters (57%), Bahamasair (26%), Sky Bahamas (17%)

2. Trinidad & Tobago (966,732 seats, 32%), 5 year growth of 5.4%

3. Belize (379,223 seats, 13%), 5 year growth of -3.3%

> Operators: Maya Island Air, Tropical Air

No data on St. Kitts to Nevis, Antigua to Barbuda, St. Vincent to Grenadines and Montserrat to Antigua.

No domestic scheduled services in Dominican Republic, Guyana and Suriname.

Caribbean Air Traffic – 4: Domestic (2013)

Intra Regional Routes 2.65 million seats (8.4% of total)

Small Island States 882,830 seats (33% of intra regional)

Caribbean Hub Countries 1.34 million (51% of intra regional)

1. Antigua & Barbuda 209,261 (8% of total intra regional)

2. Dominica 78,481 (3%)

3. Grenada 174,226 (6.5%)

4. St. Kitts & Nevis 59,787 (2%)

5. St. Lucia 238,433 (9%)

6. St. Vincent and the Grenadines 122,642 (5%)

7. Barbados 409,279 (15%)

8. Trinidad & Tobago 788,723 (30%)

In 2012 LIAT had 80% of the Small Island States seats and Caribbean Airlines 15%

Caribbean Air Traffic – 5: Intra Regional (2013)

Caribbean Air Traffic – 6: Scheduled Service Airlines in the EC

LIAT is majority owned by Barbados, Antigua & Barbuda, St. Lucia and Dominica,

and operates 5 x ATR-42-600’s (48 passenger) and 4 x ATR-72-600’s (68

passenger)

Caribbean Airlines is owned by the Government of Trinidad & Tobago and

operates 5 x ATR-72-600’s (68 passenger) and 12 x Boeing B737-800’s (154

passenger).

1. Inter Caribbean Airways (Turks & Caicos), 9 x Emb-120’s, 3 x B99’s

2. SVG Air (St. Vincent & the Grenadines), 6 x DHC-6, +6 x BN2’s, 1 x CE-402’s

3. Air Antilles Express (Guadeloupe) 4 x ATR-42, 2 x DHC-6’s, 2 x CE208’s

4. Winair (Saint Maarten) 5 x DHC-6

5. Sky Bahamas (Bahamas) 4 x SF 340’s

6. Bahamasair (Bahamas) 3 x ATR-42, 2 x ATR-72, 3 x B737-500’s

Caribbean Air Traffic – 7: Other Regional Airlines

Multi Government Owned Airlines-EAA

• East African Airways 1946 to 1977

• Kenya, Tanzania and Uganda

• By 1975 EAA had $120 m in debts

• Tanzania and Uganda not paying debts

• 1977 the airline collapses

• Each country formed its own airline

• Kenya Airways

• Uganda Airlines

• Air Tanzania

Multi Government Owned Airlines – Air Afrique

• 1961 to 2002

• Formed by 11 ex-French countries

• UAT and Air France took 34 %

• 1971 Cameroon formed Cameroon

Airlines

• 1976 Gabon formed Air Gabon

• While Mali, Togo and Sierra Leone joined

• 1980’s “africanisation” started decline

• 1998 down to 11 aircraft

• 2001 debt at $431 million

• By 2002 only 6 aircraft left and 4,600

employees

Multi-Government Owned Airlines - MSA

• Malaysia-Singapore Airlines

• 1966 – 1972

• Different needs of each government caused a break-up

• Singapore wanted international route expansion

• Malaysia wanted domestic and regional expansion

• Singapore Airlines (SIA)

• Malaysia Airlines (MAS)

Multi Government Owned Airlines – Gulf Air

• 1974 to present

• Bahrain, Qatar, Abu Dhabi and Dubai each with 25%

• 1985 Dubai leaves forms Emirates

• 2002 financial problems, Qatar leaves forms Qatar Airways

• 2005 Abu Dhabi leaves to form Etihad and takes CEO James

Hogan

• 2007 Oman leaves to form Oman Air

• Bahrain 100% owner of Gulf Air, which struggles today

Multi Government Owned Airlines - SAS

• 1951 to Present

• Today, Sweden has 21.4%, Denmark 14.3% and Norway has 14.3%

• The airline is in the back in the black and has 137 aircraft and 119

destinations

• Norway is looking to leave the airline soon

Multi Government Airlines - LIAT

• Formed 1956 by Sir Frank Delisle

• 1971 Court Line buys 75% and introduces BAC One Eleven jets

• 1974 Court Line is bankrupt, 11 EC governments rescue it

• 1980’s saw big growth and operation of 3 aircraft types 9 - 44

passenger (HS748, DHC-6, BN2).

• 2007 buys Caribbean Star

• Today, main shareholder are Barbados, Antigua and Barbuda,

Dominica and St. Vincent & the Grenadines.

• Losses continue after a ill timed and costly fleet change

• Future ?

It is the DNA of your business

Gives meaning to your employees and

customers

What value/benefit do we create for whom ?

How do we do it ?

How do we earn money ?

What values do we pursue ?

What is a Business Model ?

Business Model Components

Business Model – Southwest Airlines

Southwest Airlines – Activities

Basics of an Airline Business Model

Business Strategy in a “nut shell”

Ryanair’s Business Model

Airlines Fail and Other Airlines Move in

RASK > CASK = Profit

RASK (Yield x load factor) – CASK = Profit

300 Km sector with 50 seater (15,000 ASK’s) costing $4,500/sector

CASK (4,500/50/300) = $0.30

Net Yield ($150/300 km) = $0.50/RPK

Load Factor is 70%

RASK = ($0.50 x 70%) = $0.35

Profit = $0.35 - $0.30 = $0.05 per ASK ($750/sector) = 14% margin

Breakeven load factor (CASK/RASK) = $0.30/$0.50 = 60%

Business Model: THE Airline PROFIT formula

Air Canada A319 (14J + 106Y) = 120 seats

Flies 9.0 flight hours per day

ASM productivity per day = 120 x 9.0 x 450 = 486,000 ASM’s per day

Versus

Air Canada’s LCC Rouge A319 (12Y+ + 124Y) = 136 seats (+13.3%)

Flies 12.0 flight hours per day (+33.3%)

ASM productivity per day = 136 x 12.0 x 450 = 734,400 ASM’s day (+51.1%)

+ lower salaries for pilots, flight attendants and mechanics

+ lower overheads

Lower Unit Costs:Higher Seating Density x Higher Aircraft Utilization (example)

Business Models – Franchise Partnerships

• FlyBE is Europe’s largest regional airline today (194

routes, 69 A/C)

• Flights are branded and marketed as FlyBE

• Tickets sold via all Flybe distribution channels

• Aircraft painted in Flybe livery

• Partners remain independent , locally owned and

own AOC

With 3 regional ATR operating airline “partners” the whole Caribbean

can be covered for intra regional traffic north to south and east to west.

Essential Air Service

$261 million in 2014

113 routes in lower 48

Generally 2 daily flights

From 9 pax to 50 pax aircraft

Service to hub airport

Max. 1 intermediate stop

In 1994 $33 million

Great Lakes Airlines – Silver Air

Business Models – EAS Carrier (USA)

The top 9 US regional airlines are CPA (capacity purchase partners) to

US major airlines, carrying 96.56% of total US regional traffic of 158.3

million (2014).

The next 57 airlines carry 3.44% of traffic or 5.44 million.

The largest independent airline is Ravn Alaska with 813,042 pax. Which

#2 is Air Cape with 760,496

#5 is Seaborne with 448,404 passengers

US Regional Airlines

EU transport law, a PSO is an arrangement in which a

governing body or other authority offers

an auction for subsidies.

Thereby permitting the winning company a monopoly to

operate a specified service of public transport for a

specified period of time for the given subsidy.

This is done in cases where there is not enough revenue

for to be profitable in a free market, but where there is a

socially desirable advantage in this transport being

available.

EU Public Service Obligation (PSO) air services

Business Model – Below the radar

• Australian regional airline, on the Australian Stock

Exchange

• Largest Saab 340 operator in the world (52) all owned

serving 54 destinations

• Merger of Hazelton and Kendell airlines and moving to 1

type fleet

• Flies regular charters for mining companies (fly in, fly

out) through Air Link

• Flies air ambulance flights with biz jets through Pel-Air

A Winnipeg, Canada based investment fund that has bought 5

Canadian regionals between 2004 and 2014.

With revenues of $500+ million and EBITDA margins over 20%

it has shown that regional airlines can be very profitable with

the right management and financing in place.

It has the 3rd largest airline fleet in Canada with 110+

turboprops and jets (Metros, Beech 1900’s, ATR-42/72, DHC-8,

Saab 340, and Dornier 328Jet

Exchange Income Corporation (EIC) - Canada

Exchange Income Corporation – Valuations and Strategy

In 2008 EIC buys Calm Air for $59 million, which is 3.78 x EBITDA or 0.7 x revenue.

In 2011 EIC buys Bearskin Airlines for $32.5 million, which is 3.91 x EBITDA or 0.65 x revenue

In 2014 EIC buys Provincial Aeropsace for $246 million, which is 5.3 x EBITDA and 1.33 x revenue.

Strategy: right price and pay no more, niche markets, limited competition, markets lack big fluctuations, strong management, keeps old management in place, growth plan a must with competitive advantage

Economics of Smaller Turboprops vs ATR-42 (150 km sector)

Economics of Smaller Turboprops vs ATR-42 (333 km sector)

1818 seater Cost $897 /Flt $50 per seat 46ATR-42 Cost $1,480 / Flt $31 per seat

150 km 35 min 150 km 28 min

B/E curve 0.33 CASK B/E curve 0.21 CASK

pax yield pax yield

LF 3.6 20% 1.65 $RASK $ 248 net ticket $ LF 9 20% 1.05 $RASK $ 158 net ticket $

5.4 30% 1.10 $ 165 14 30% 0.70 $ 105

7.2 40% 0.83 $ 124 18 40% 0.53 $ 79

9 50% 0.66 $ 99 23 50% 0.42 $ 63

11 60% 0.55 $ 83 27.6 60% 0.35 $ 53

13 70% 0.47 $ 71 32.2 70% 0.30 $ 45

14 80% 0.41 $ 62 36.8 80% 0.26 $ 39

16 90% 0.37 $ 55 41.4 90% 0.23 $ 35

18 100% 0.33 $ 50

18 seater 18 seater Cost $2,636.73 / Flt $55 per seat

333 km 71 min Cost $1,834 /Flt $103 per seat 333 km 49 min

B/E curve 0.31 CASK B/E curve 0.16 CASK

yield yield

LF 3.6 20% 1.55 $RASK $ 516 net ticket $ LF 9 20% 0.80 $RASK $ 266 net ticket $

5.4 30% 1.03 $ 344 14 30% 0.53 $ 178

7.2 40% 0.78 $ 258 18 40% 0.40 $ 133

9 50% 0.62 $ 206 23 50% 0.32 $ 107

11 60% 0.52 $ 172 27.6 60% 0.27 $ 89

13 70% 0.44 $ 147 32.2 70% 0.23 $ 76

14 80% 0.39 $ 129 36.8 80% 0.20 $ 67

16 90% 0.34 $ 115 41.4 90% 0.18 $ 59

18 100% 0.31 $ 103

Thank you

Any Questions ?