Scope for long-haul low-cost Irish airline - Bloxham

Long-haul low-cost airlines on Atlantic routes have seen many attempts, from Freddie Laker (Skytrain) and Donald Burr (People Express) in the 1970s to Eos, Zoom, Silverjet and MaxJet more recently. All have perished amid weak balance sheets, regulatory obstacles, aggressive actions by legacy carriers and flawed business models, Bloxham says. 

Keeping costs down
In a research note, the stockbroker outlines a sustainable business model for such an airline, called AerFair, which is said could exploit the opportunity created by the Open Skies liberalisation of the North Atlantic market and the clear consolidation of the existing market between three global

alliances - Skyteam, Oneworld and Star.

The hypothetical AerFair airline would offer simple point-to-point services between Europe and the US at the lowest fares.

Operating costs and turnaround times, Bloxham suggests, could be kept low by no connections and no cargo services.

It also points to the potential for acquiring a new fleet of airplanes at very competitive costs given the depressed global aviation market.

The airline could offer two cabins - with the premium seats featuring lie-flat beds. Economy seats would be pitched to offer the lowest fares across the market.

All meals, drinks etc would be sold to passengers to make ancillary revenue for the airline. Long flight times could also be exploited to offer a wide range of goods and services to passengers, such as board gambling and gaming options together with mobile telephony.

Bloxham suggests such an airline would initially target four airports on both sides of the Atlantic. These airports would have to be non-congested and in close proximity to targeted cities to provide fast boarding and unloading of passengers and to let the airline secure highly competitive landing charges.

Silver bullet
The silver bullet such an airline requires, Bloxham says, would be a strategic link to an existing mass-volume low-cost airline, which would allow AerFair access to its website and soft management services to establish and develop the carrier.

Incorporating the airline in Ireland would means it could avail of the 12.5pc corporate tax rate, a supportive regulatory and legal infrastructure and a broad aviation financing community.

Crunching the numbers of such a proposal, Bloxham suggests that the airline would target a 4pc share of the EU-US air travel market within five years, implying an annual revenue pool of at least $360m and passenger volume of 1.2 million.

This could be achieved through selling web-based tickets at fares up to 50pc below existing averages.

By building a highly competitive cost base, AerFair will target after tax margins of at least 6pc, implying annual net profits of at least US$22m, Bloxham said.

AerFair would need to target an initial equity investment of US$200m to fund its launch, fleet development and a full build-out of the model over five years.

Bloxham acknowledges that such a venture would face “formidable challenges” to success, including securing a strategic link with a mass-volume carrier, establishing a sustainable market presence, managing an aggressive competitive response, starting operations with sufficient capital, and selecting appropriate airports.