Can the Business Model of Airlines be better?

January 17, 2024

The #1 Newsletter for Private Equity

Many talk about the high CAPEX in this business.

But, does anyone talk about how to overcome it?

Today, we cover:

  • Business Model of Airlines

  • How Profitability Fits In

  • Consolidation

Business Model of Airlines

How do they earn revenues?

  1. Passenger tickets

  2. Cargo

  3. In-flight Purchases

  4. Excess Luggage/Upgrades

What is their cost structure?

  1. Aircraft (Purchase or lease?)

  2. Fuel, Rent, Maintenance

  3. Airport fees

  4. Salaries

Using the above, airlines can position as low-cost or premium.

What makes most of them unprofitable?

It’s one of the only industries where demand is not directly in their control.

To grow, they need more capital = more costs.

Fuel costs, regulations, and pilot shortages don't help.

All airlines have control over their costs, only a few choose to be effective and efficient.

Enter: Southwest Airlines.

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How Profitability Fits In

The key to win = keep costs low.

Utilization

Southwest Airlines has kept operations tight.

The turnaround times for flights to land and take off again have been 30 mins.

This means more flights are flying for longer and earning more revenue per day.

Paperless

One of the first airlines to be paperless. Reduces costs and keeps boarding/check-ins fast.

Lease vs. Buy

They chose to own instead of leasing to have new aircrafts to counteract the image of a low-cost airline.

Route Focus

Only flew the routes that were most demanded from airports that were the least crowded.

Demand is more predictable and lower airport rents.

So, they are one of the most profitable airlines in the industry.

How do they get bigger?

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Consolidation

Private equity is barely heard of in the industry because of:

  1. Unpredictable revenues

  2. High capex

Who’s going to buy it after 5 yrs?

It gets harder and harder to enter the industry with so many players.

How do airlines look to grow from 1 to 10? Acquisitions. They synergize costs, capital and offer more services.

A few notable deals in the space:

  1. Delta and Northwest merged in 2008 to overcome economic hardships

  2. Air france and KLM merger

  3. United and Continental merger

  4. US airways and American airlines merger

Together, these strategic M&A deals have created the most profitable airlines in American Airlines, United and Delta.

See you next week.