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The Skybus Business Plan:
Put simply, Skybus wants to be the Ryan Air of the US. As noted in the primer to the series on startups, there is a strong case to be made for new entrants in this country based on the fact that the lowest cost providers of air transport in the US have relatively high costs versus the low cost leaders in the rest of the world.
Skybus touts a number of factors that will drive their costs more than 25% lower than Southwest. The unimpressive list of Skybus’ cost “innovations” include that they plan to fly only point to point so there would be no baggage transfer or interlining. They also tout technology innovation including 100% internet distribution, 100% automated check-in and wireless flight ops. They expect to rely heavily on outsourcing including maintenance, the HR function, and all ground operations. They plan to have the highest block hour utilization and highest productivity. All of these items are well and good for a startup low-cost airline, but it only shows a mild understanding of why a low cost airline is a low cost airline. The only one that interests us is their claim of having the highest productivity. To this point in time, Skybus has done little to show us that they understand how to achieve that level of productivity. High aircraft block hour utilization does not drive employee productivity. High aircraft block hour utilization is a possible output (not an input) of making networking decisions that drive high productivity. Ryan Air’s secret to its success is not only its legendary tenacity to go after every cost in the system like some of the items listed by Skybus, but its:
-Ability to fly very low stage lengths which enable high levels of productivity of aircraft and people measured by the potential revenue generated per unit.
-Leveraging of the scalability of its network by either creating more revenue opportunities per airport per day than other carriers and/or arranging for near zero (or even positive) cost at outstation airports that they use sparsely.
To this point Skybus has not acknowledged those factors to our satisfaction, but some of their hiring decisions hint to us that they understand a little more than they let on.
Skybus plans to have their low costs be the enabler to their motto, which is “America’s Ultra Low Fare Airline”. Any of you who have had exposure to Michael O’Leary know that he is seemingly programmed to answer any question about the marketability of his product by saying that Ryanair has the lowest fare and that makes his product the best. He is also throws in that they have a great ontime performance and low baggage loss rate. Skybus is using the same marketing justification. What does that really mean for those who would fly Skybus? Well, the onboard product will probably be fairly painful, you won’t pay much for the ticket, and you will be nickled and dimed as Skybus tries to generate high levels of ancillary revenue. We often hear from airline marketers in the US who say that this country is not ready for a Ryan Air-type product. We disagree. Although we think an easyJet-like product would be more acceptable to Americans at this point in time, we do not feel that a Ryan Air-like product will be rejected. If average fares can stay in the $60-$80 range, then there will be a large market that will be willing to consider flying Skybus.
Because of its Ohio roots and the departure of America West from the airport, Skybus’ team has concentrated their efforts in Columbus, Ohio. As we mentioned above, they have strong political support that has led to local financial support. It seems as if they are tied to Columbus tightly and they have no other choice but to make Columbus their focus city. We fully expected Skybus to say that they would not be flying from Columbus’s main airport, Port Columbus (CMH), but instead from Rickenbacker where we assumed they could maximize their incentives and keep airport costs the lowest. Initial reports suggested that they will from CMH, but subsequent reports say they have not yet decided which Columbus airport they will fly from. Either way, we do not like the choice of Coloumbus as Skybus’ first focus city. There is far too much competition there and if any of the airlines decide to fight, then Skybus’ investors will likely be forced to wait an extended period for an IPO…if that ever comes. Last time we checked Columbus' flight schedule, it said that Delta flys non-stop to 13 destinations and Southwest flys non-stop to 8 destinations. In total, there are non-stop flights to 35 destinations. CMH is hardly an underserved airport. As weak as Delta may be, they are equally irrational. They could match Skybus’ fares to all of their destinations out of CMH or Rickenbacker, increase capacity, and/or start various SkyMiles promotions…all in less than 10 minutes time from the comfort of their headquarters in Atlanta. Will they do it or won’t they? Our opinion is that opinions on the answer to that question are irrelevant. If Skybus has to answer that question at all, then they are putting themselves in a perilous position. If I were an investor in Skybus I would want to minimize the reliance on the actions (or inaction) of an irrational competitor to determine the fate of my investment. They must seek airports where they can develop a sufficient passenger base whose first choice would be flying on Skybus, thus mitigating the impact of the worst case scenario response from irrational competitors. From what we can tell, Skybus is working on this very important aspect of their plan, but only with the objective of finding suitable focus cities after Columbus is fully developed.
They have hired Ryan Air employees on short-term contracts to gallivant around the country with Skybus executives in search of underused airports that would provide them a discrete passenger base and would give them large incentives. Among many other airports, they have been looking closely at Barnes Airport outside of Springfield, MA. Now…we like the concept of looking at underserved airports, but we do not like Barnes. The demographics are not strong and the first choice flying population would be dissected between Barnes and Bradley, which is closer to Springfield than it is to Hartford. It seems that the Ryan Air people who have been hired for this assignment believe that the fact that the fares will be so low will draw customers into relatively sparsely populated airports like Barnes. Other than the fact that the outlying airports generally have longer runways, we cannot figure out why they would take that chance. There are airports closer to stronger population bases without competition that could be tapped.
Perhaps even more important than what appears to be a spotty record of focus city airport selection is the approach that Skybus representatives have made to these airports. All that we hear indicates that they are turning off local governments up and down the eastern seaboard with their arrogant demands for incentives and airport improvements. We hear that many of these airports that happen to be desperate for new service very quickly came to a conclusion that they simply did not want to do business with such a smug set of people. That is a bad sign. We hope to hear of improvement in that area soon. There is no reason for that kind of approach and if they keep it up, it will come back to haunt them sooner rather than later. Just because Ryan Air is the king of Europe does not mean that Skybus automatically inherits the throne in the U.S.
Financing Status:
With Morgan Stanley onboard, Skybus has a good chance of putting together the $70+ million they need to operate. They have been hiring executives and putting people on contract from Ryan Air at a brisk pace. That spending spree was made possible by the investments from the local Columbus community and, from what we hear, a commitment of $5 million in capital from Declan Ryan of the Ryan family. Morgan Stanley has brought the plan before various private equity firms and we hear that they have been successful so far. We will let you know as soon as we hear confirmation of that report.