How to start an airline
By Massoud A. Derhally
We ask Air Arabia CEO Adel Ali how we can launch a low-cost airline.
You were previously at British Airways, do you need a background in aviation to start an airline or can you just have an MBA from business school?
In any business you do, if you don’t know the business, the golden rule is don’t do it. Therefore if you don’t have the background, it will just cost you more, and you may get it wrong. Starting a business with corrupting mistakes is not the best way to progressing your business.
There have been lots of examples where people thought ‘we have money, we travel a lot with airlines, let’s set up an airline’. A lot of people’s impressions about running an airline are about having aircraft, having seats and how much they’re going to charge for the tickets. That’s only about 5 percent of starting an airline. The other 95 percent of it is all to do with technical and operational areas.
There are several hundred things that you need to do. It’s a complex industry and being a complex industry you get involved in the aero political side between countries and governments. You need to ask yourself: can I set up an airline? If I do, can I travel to anywhere and can people travel and will people accept me? And then it leads you to ‘how can I make this commercially affordable, do I have the right infrastructure on the ground and in the air and the capability of bringing in the right people to do this for me?’ Then of course it comes to what’s different about which aircraft you want to use and why? And then it moves to how do you insure it, at what level and what is acceptable and what’s not.
It has a lot to do with the technical side and hence you need an aviation person. When you start operations, a lot of things will hit you that you don’t know. A lot of airlines tend to say we will start operating in three months or six months and then in six months time, they say they will delay it for another six months.
How long did it take you from inception of idea to actually starting?
June 1 to 28 of October. Exactly five months and 28 days. The norm is about eighteen months. We did it in record time. A lot of people thought this was an impossible target to achieve. We went for it and it happened.
How much money do you need to start an airline (low cost)?
It’s a finger in the air, really. It depends on your business plan. You have got to really set up a business plan and you have to make sure you don’t run out of cash in the first couple of years. It depends on the size, where you’re operating, and which airport. It can be anything between $50m to $200m.
What are the biggest challenges?
Your number-one challenge is to gain credibility in the marketplace from the customers because there are a lot of airlines and you’re coming in new, so why should people travel with you or trust you? That’s always going to be the biggest challenge. Second is traffic rights. Traffic rights are already allocated to all the airlines, people on the slot and everyone else, so why should you be getting a share of that cake when you don’t have it now? Another challenge is the ability to bring in so many different components of this business under one roof. One other challenge is finding the right talent to help you run the business. You need a very strong team to take this forward.
Would you say that the bulk of what you were expecting in terms of difficulties and challenges proved to be true or more than what you anticipated?
I think the challenges which I put across to you are just a few of the key challenges and I think I put it very mildly. It was much more difficult. What I told you is probably about 30 percent of what happened because this is a business where you have to deal with weather, politics and currency exchange. You’re beaten down by the competition because they have been longer in the business than you and therefore the public has confidence in them and you are the new company on the block.
If you were to start again how different would you do it and would you do it differently?
I would repeat exactly what I have done again. Obviously I have the hindsight of experience of setting up. I would probably drop some of the mistakes. I’ve actually set up three airlines, we set up Air Arabia here, another Air Arabia in Morocco, another in Egypt and we set up one that didn’t work in Nepal. With every one one of them, we’ve learned something and improved on something else.
We have a very clear process that we know about setting up an airline, what it takes and we do it very systematically. It’s much more simple for us today. If I do it again I have enough people in the team. For someone who is not in the industry, or has not done such things, it’s going to be quite a challenge. We are nine years old so whatever we did, add the complexity by nine years and present it to them.
In those nine years what has return on equity averaged?
We started with $15m and today our capital is $1.2bn. We have given 37 percent of $1.2bn as a dividend in the last three years.
If you wanted to give advice to anyone who wanted to start an airline, in a nutshell what would you say?
In a nutshell, I would say don’t do it. An airline is not a shop. You need to have a number of things. First of all you need to have a reason for doing this. If you’re starting an airline because you want profitability then there are a lot of other businesses that are less complex and give you better profit, particularly in a region or part of the world that we live in, these are areas where you are competing with mostly government-owned airlines, which means you’re not competing on an equal footing.
Number two, you can’t set up an airline if you don’t have an airport. We don’t have, like in Europe or America, an airport every 200 miles and the airports that we have either have an airline in or are dedicated to some specific reason. So you have to be careful. My advice to people is not necessarily to rely on a spreadsheet in a business plan because there is a lot of speculation and numbers. You can easily make everything look beautiful on a spreadsheet but can it deliver in reality? This is where you need to do much more in due diligence than just a nice business plan.
You’ve recently started operations in Russia and Kosovo. Why?
About two years ago, we said that is going to be our next focus point and twelve months ago we used to have two destinations in that corner of the world, east and west of the ex-USSR. Today we operate to 12 or 13 airports. Some of them are in Russia. The reason we do this is very simple. It’s a big population, the economy is going in the right direction and people are all open to travelling a lot and they have the money to spend. We are going to lots of other smaller airports.
Are there any plans for routes to London from Morocco?
We will start operating from our Air Arabia Maroc into Gatwick from Casablanca and Tangier.
Are there plans to fly to the UK from Sharjah?
No, our business model does not allow us to do seven-hour flights from here. To be honest, it’s too long of a sector, it’s not just the aircraft. We don’t believe our product will work for a seven- or eight-hour flight.
Even though the industry is not doing well and IATA has come out with projections that show the recovery is going to take some time, how do you feel about carriers like Pegasus flying the UAE?
It’s only natural that you will find more airlines coming to the UAE at this time. I think competition is a double-edged sword. On the one hand, it generates more business and it’s a sign there are people on a certain route. And competition is good for consumers.
Any plans to spin off or publicly list Air Arabia Maroc?
We have not really considered that. The company is doing well.
Any further plane purchases in the coming?
Nothing in the pipeline at the moment.