Aerospace Entrepreneurship &
The Complexities of Starting a
New Regional Airline
“The lessons Learned in Starting A Regional Airline
in San Antonio, Texas”
MIT Engineering Systems Division Leadership Seminar
April 21,2005
Presented by:
Ben Jurewicz
April 21, 2005
Agenda
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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
2
Entrepreneurial Engineering
Customer
Architect
Engineer
Builder
User
3
Starting A New Company
Perception
Idea
Business Plan
Start Up
Growth
$$$$$
Reality
Business
Plan
Idea
4
Regional Airlines
• Fly Shorter Distances with Smaller Planes
 Typically Less Than 1000 Miles
 Less Than 100 Seat Airplanes
 Normally, Centered About A Destination City
• Highest Growth Segment in Airline Business
 7% Ave. Annual Passenger Growth
 113 Million Pass. In 2003
• Regional Airlines Are Profitable
 Legacy Airlines Losing Money
 Low Cost Nationals Are Profitable
 Regional Airlines are More Profitable
5
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
6
Seven “Seed” Investors
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Ex-VP American Airlines
America West Pilot
Mature Aerospace Executive
Mexican Businessman
Medical Doctor
IT Executive
CEO & Financial Background
7
Creating a Business Plan
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Define the Market
Select the Airplane
Define the Operations
Find the Key People
Run the Numbers
8
Initial Route Structure
9
Targeted Market
Current Air Travelers: 679,737 Pass./Year
U.S. Cities
City
New Orleans, LA
Albuquerque, NM
OK City, OK
Tulsa, OK
Little Rock, AR
Colorado Springs, CO
Lubbock
Amarillo
Birmingham, AL
Jackson, MI
Midland/Odessa
Sub Total
Mexican Cities
Miles Annual Trips
520
625
425
490
520
745
350
450
747
545
280
95,260
68,780
64,470
53,070
47,420
32,640
31,450
31,370
29,150
20,444
17,920
491,974
City
Acapulco
Cancun
Cozumel
Guadalajara
Leon
Los Cabos
Mexico City
Monterrey
Puerto Vallarta
Sub Total
Miles Low Est.
885
957
986
696
624
841
718
290
754
4,873
48,496
10,669
14,585
8,356
10,082
58,077
20,177
12,448
187,763
Note: On Average There are 1,862 Pass./Day or 93 Pass./Day/City
10
The Right Size Aircraft
(For Targeted Market Demand of 93 Pass./Day/City)
Utilization
Passengers in One Airplane
Hrs/Day
10
15
20
25
30
35
40
8
37
30
25
25
20
16
19
15
12
15
12
10
12
10
8
11
8
7
9
7
6
10
12
50
7
6
5
75
5
4
3
100
4
3
3
No. of Planes Needed
Seats In Plane
---- ---- ---- ---25-Seats 40% 60% 80% 100% ---- ------50-Seats 20% 30% 40% 50% 60% 70% 80% 100% ---100-Seats 10% 15% 20% 25% 30% 35% 40% 50% 75% 100%
Load Factor (% Seats Filled)
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.
11
Baseline Aircraft
Embraer 145 Regional Jet
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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.
12
Alternative Aircraft
Avcraft Dornier 328Jet
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
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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.
13
Business 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.
14
Competition
• 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 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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Pricing Structure
(Compared to Southwest Airlines One-Way Fares To/From San
Antonio,TX, Indicated by the Symbols)
Refundable Anytime Fares - $
300
SAX Proposed
Fare Structure
250
200
High End Fare
$50+$0.15 X Miles
150
100
Budget Fare
$50+$0.10 X Miles
50
0
0
200
400
600
800
1000
1200
Trip Distance - Miles
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Airline Operating Costs
CASM - Cents Per Avail. Seat Mile
25
Great
Lakes
20
15
Mesa
10
Atlantic Coast
Skywest
SA Airlines
AirTran
5
Frontier
Jet Blue
Southwest
0
0
200
400
600
800
1000
1200
1400
Ave. Trip Length - Miles
18
Financial Projections
90
Revenue
Costs
Pre-Tax
Earnings
80
$ Millions
70
60
50
40
30
20
10
0
Year 1
Year 2
year 3
19
Risk 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
20
Building A Management Team
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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
21
Key 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
22
FAA Certification Process
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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
(GPA SAGA)
State
(OK)
City
(Tulsa)
FAA
(FSDO)
Court
GPA
Investors
(Bankruptcy)
Lawyers
ORJC
Key 5
GPA
(CEO)
Dornier
SAA
COSA
EMG
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Raising the Money
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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 Needs
Seed:
Round A:
$ 250K
$ 10M
Plan & Raise Money
$3M for Certification
$7M for Start Up
Round B:
$ 20M
Expansion
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Schedule
2004
2005
2006
2007
2008
ACTIVITY
Business Plan/
Development
Phase I-Certification
And Start-Up
Phase II-Revenue to
Breakeven
Phase III-Growth
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Development Plan
MAJOR TASKS:
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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
Note: Detailed Cost Estimate Available Defining $3M Needed To Certify
28
Development Costs
(Projected Costs in $1000)
Task Areas
Salary
Consult.
Travel
Doc./Fees Fac./Equip.
$
$
$
$
$
$
$
$
90
100
10
25
50
75
75
50
$
$
$
$
$
$
$
$
25
25
25
25
25
$
$
$
$
$
$
$
$
5
10
5
15
5
5
5
$
$
$
$
$
$
$
$
25
20
5
5
20
50
50
50
$
$
$
$
$
$
$
$
12.0 Marketing
$
$
$
$
50
50
50
$
$
$
$
200
50
250
$
$
$
$
30
30
20
50
$
$
$
$
35
20
10
55
13.0 Finance Package
$
-
$
50
$
-
$
$
625
$
675
$
180
$
1.0 Business Plan
2.0 Management Team
3.0 HQ. Facility
4.0 Plane Selection/Acq.
5.0 Airports/Authorites
6.0 Operations Plan
7.0 Maintenance Plan
8.0 Personnel
9.0 Systems/Tech.
10.0 Service Providers
11.0 DoT/FAA Cert.
Total
-
Reserve
5
100
100
25
25
$
$
$
$
$
$
$
$
5
10
10
10
50
50
15
25
$
$
$
$
300
20
$
$
$
$
100
100
75
100
$
-
$
50
445
$
575
$
500
Task Total
$
$
$
$
$
$
$
$
$
$
$
$
$
125
170
125
145
160
205
195
180
515
250
230
500
200
$ 3,000
Total Estimated Cost
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Business Start-Up
MAJOR TASKS:
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•
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•
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
30
Investor’s World
• Must Be Interested in Specific Business Area
• Typically, Won’t Read A Business Plan
• Different Types at Different Levels
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–
–
–
–
–
–
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
31
New Airline Summary
• Unique Market Opportunity.
• Growth-Oriented Business Plan
• Timing Is Right To Exploit
• Experienced Management Team Ready
• Financing Arrangements In Process
32
Aerospace Entrepreneurship
• Emerging Aerospace Entrepreneurship
• Complex Process Requirements
• Specialized Technical Knowledge
• Significant Up-Front Investment
• Experienced Support Base Is Limited
33
Aerospace Center for
Entrepreneurship (ACE)
Government
Agencies
Entrepreneurs
ACE
Function Is to Do
Aerospace
Entrepreneurial
Engineering
New Aerospace
Businesses
Investors
Note: (1) Prefer to Be Associated with Academic Center
(2) Includes Virtual Meetings Based on Numedeon Technology
34
(3) Conceived As a Self-Sustaining, Non-Profit Organization
ACE Provided Functions
Customer Type
Service
Knowledge
Individuals Start-Ups
X
Consultation
Service
Research
Personnel
Financing
X
X
X
X
X
X
Corporations Financers
X
X
X
X
X
X
Agencies
X
35
Second 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
36