Re: [MLUG - DISCUSSION] another pie in the sky Columbia airline plan...

[Nathan Odle <EMAIL:PROTECTED>]

Jonathan King wrote:

> Now, the problems with this proposal are obvious:
>
> 1) Using Jeff City's airport is just not a very good idea; it isn't
> approved for this use, and it's a 30 mile drive for the majority of
> your customers, who are coming from Columbia, and not Jeff City.
>  
Agreed.  It did seem though that they would be running STL flights 
natively from Columbia, with MCI flights stopping off at COU to pick up 
passengers before moving on.  Might have read that wrong though.

> 2) It's unclear that turbo-prop service is the way to go at this
> point, although I guess it's your only decent choice if you're doing
> the KC-midMo-StL loop.
>  
R-Jets are beginning to overtake turboprops in efficiency, at least in 
general aviation circles.  Not sure about the ~20-30 seaters they're 
running Part 121 service with though.

> 3) $80 one way reduces enthusiasm, especially if you are only using
> 19-seater aircraft.
>  

For $160, it might be worth having someone local drop you off at COU and 
fly to STL/MCI rather than drive to STL/MCI and pay for auto expenses + 
parking + more hassle with security.  I wonder though, if $80 one-way 
will pay the bills.  Let's see...

**If you don't want to read a bunch of what amounts to basic arithmetic, 
skip the following 8 paragraphs***

Using a source found on-line from VA Polytech that deals with air 
transportation costs 
(http://128.173.204.63/courses/cee5614/cee5614_pub/Supply_aircraft_cost_model.pdf) 
we can find that the cost of operating an Embraer 120 (a Brazillian 
turboprop commonly used in regional service) to be $0.092 - $0.115 per 
seat mile.  Both STL and MCI are ~120 ASM from COU, so we're looking at 
operating costs of  $0.10 * 120 = $12.00 per seat.  Fuel has gone up 
*significantly* since that study was done in 2000, so we probably need 
to double this (at least) for about $24.00/seat.

Then we have debt service on the aircraft itself (they might lease too, 
but for purposes of this napkin scratch it'd be about the same).  Figure 
that an EMB-120  in decent shape costs around $2.5M.  The cost of owning 
that aircraft is going to be around $2,500,000 * .07 = $175,000/year.  
Figuring 4 one-way flights a day for that aircraft, 355 days a year 
(figure some flight cancellations because nobody is flying), we get 
about $123/flight in ownership costs.  Figuring around 20 seats/flight 
on average (The EMB-120 holds 30 in passenger configuration but I think 
that 20 passengers per flight is a bit ambitious) we've got $6.25/seat 
in ownership costs.

Then we're paying two pilots per plane.  For commercial service, figure 
$150,000 a year for the both (the newbies are the ones who fly the 
regional routes).  With the same assumptions as above that gives us 
$5.25/seat.  Plus a stewardess at $40,000/year (remember we're paying 
benefits too); that's about $1.50/seat for a total of around $6.75/seat 
in crew costs.

Then there's the office staff.  We've got a bookkeeper/accountant type 
at around $60,000/year, a ticketing agent at $25,000/year, baggage 
handler at $25,000/year and a manager of sorts at say $50,000/year.  
That's a total of $160,000/year (but I might have left someone out).  We 
get to divide these guys by as many planes as we're running per airport 
(except maybe the bookkeeper), so let's say 2 planes and give it 
$65,000/year per plane for a cost of $2.25/seat.

Now, office space.  To run a small airline like this would take around 
4,000 square feet of office space I'm guessing, at a cost of around 
$15/sq. ft/year for some metal-building type space + utilities, etc.  
This is $60,000/year or $15,000/plane.  This equals $0.35/seat.

The airport is going to charge us for use per flight, and of course we 
get to tack a lot of that on to the ticket.  I'm still guessing that 
they'll charge for a ticketing booth and hangar though, figure 
$175,000/year or $43,750/plane.  This is about $1.50/seat.

We've got other assets we've got to buy to run this airline (office 
equipment, baggage trucks, tools, etc. etc.).  Let's figure $500,000.  
Debt service on this is 500000 * .07 = $35,000, or $8250/plane.  Call it 
$0.25/seat.

Now...insurance.  I have no idea what the insurance would be for this, 
but let's figure on loss for 4 planes, plus liability, etc. we're 
looking at $300,000 a year.  It could easily be more than this, but I'm 
just going to guess.  That's $75,000/plane, or $1.75/seat.

** Start reading here if you skipped **

The grand total at this point is ~$43.50/seat in costs.  With a ticket 
price of $80/seat this leaves us $36.50, or $259,150 per plane in annual 
profit.  If we're running 2 planes in each location, that's about 
$1M/year in profit.  Less $150,000 annual salary for the guy that's 
gonna own the airline, we get $850K/year.  Not too bad.  There is still 
quite a bit of room in there to absorb some increase in fuel costs, 
etc.  I also don't know if that VA Poly study included aircraft 
maintenance in the operating cost, but even if it didn't we're still 
making some money.  I'll also add the disclaimer that I might have 
missed something big here, but I don't think that I have.

The real question I see then, is the demand.  I've assumed 2 round-trip 
flights from each location (one each to STL and MCI from both COU and 
KJEF) with 20 passengers per plane.  If the idea caught on, I could 
honestly see this happening.  If these assumptions change though, then 
the picture does too.  Double the flights with the same passengers per 
plane (one morning flight, one evening) and your *fixed costs* (a 
relatively low proportion) become lower per seat and profits go up.  At 
the same time, if you fail to average 20 passengers per plane and only 
get half that, then *all* your costs go up significantly and now all of 
the sudden you aren't making money anymore.

So what does this analysis tell us?  That potential investors need to 
focus MUCH more on the demand side of the equation.  Costs are 
relatively easy to nail down, but the question of whether or not people 
use the service is pretty big.  I would want to see major big-time 
market research before putting good money into this deal.

> 4) Neither KC nor StL are major hub airports, so it's unclear why you
> would target them for your service unless it somehow meant you could
> use fewer planes or something.
>  

I agree wholeheartedly.  If you're looking to 'catch' the most 
travellers out of Columbia, you need to pick a hub that people can use 
to get anywhere else with preferably no stops and low ticket price.  ORD 
(Chicago O'Hare) is the perfect candidate in my book for everything 
going east, but actually MCI actually works pretty well for going west 
because you really don't get to another decently-sized airport until you 
hit Denver and that takes you out of 'regional-class' service.  Also, 
ticket prices are pretty low out of MCI due to lower demand.  You might 
wind up with some more layover flights but I'd say price controls for 
most people, not stops.

My guess is that they picked STL/MCI because they're the airports that 
most Columbians travel out of, and it might not be obvious for people to 
hop to ORD instead.  On the other hand, there's actually a decent number 
of flights that might actually terminate in ORD so that might outweigh 
some of this.

Either way, it's EXTREMELY important that they get the destinations 
right, as we've proved above that demand is what's really going to 
make-or-break this thing.

> And there are others.  At some point, I suspect somebody will
> seriously make a go of it with a carrier that goes between Columbia
> and (say) Chicago, but it could take a while.
>  

See above.  ORD, or even Midway would be my dream come true as I think 
that Chicago is pretty much an ideal weekend trip if someone's just 
looking to do some big-city sightseeing.


-N



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