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Aerospace Entrepreneurship & The Complexities of Starting a New Regional Airline. “The lessons Learned in Starting A Regional Airline in San Antonio, Texas”. Presented by: Ben Jurewicz April 21, 2005. MIT Engineering Systems Division Leadership Seminar

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Aerospace Entrepreneurship &The Complexities of Starting a New Regional Airline

“The lessons Learned in Starting A Regional Airline

in San Antonio, Texas”

Presented by:

Ben Jurewicz

April 21, 2005

MIT Engineering Systems Division Leadership Seminar

April 21,2005


Agenda

  • 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


Entrepreneurial Engineering

Customer

Architect

Engineer

Builder

User


Starting A New Company

Perception

Idea

Business Plan

Start Up

Growth

$$$$$

Reality

Business

Plan

Start Up

Growth

Idea


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


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


Seven “Seed” Investors

  • Ex-VP American Airlines

  • America West Pilot

  • Mature Aerospace Executive

  • Mexican Businessman

  • Medical Doctor

  • IT Executive

  • CEO & Financial Background


Creating a Business Plan

  • Define the Market

  • Select the Airplane

  • Define the Operations

  • Find the Key People

  • Run the Numbers


Initial Route Structure


Targeted Market

Current Air Travelers:679,737 Pass./Year

U.S. Cities

Mexican Cities

Note: On Average There are 1,862 Pass./Day or 93 Pass./Day/City


The Right Size Aircraft(For Targeted Market Demand of 93 Pass./Day/City)

Utilization

Passengers in One Airplane

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.


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.

Baseline Aircraft

Embraer 145 Regional Jet


Alternative Aircraft

Avcraft Dornier 328Jet

  • 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.


Business Strategy

  • ProvidePoint-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.


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.


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


Pricing Structure(Compared to Southwest Airlines One-Way Fares To/From San Antonio,TX, Indicated by the Symbols)

SAX Proposed

Fare Structure


Airline Operating Costs

Great

Lakes

Atlantic Coast

Skywest

Mesa

SA Airlines

Frontier

Jet Blue

AirTran

Southwest


Financial Projections

Revenue

$ Millions

Costs

Pre-Tax

Earnings


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


Building A Management Team

  • 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


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


FAA Certification Process

  • 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


Great Plains Airlines (GPA SAGA)

State (OK)

City

(Tulsa)

GPA

Investors

Court

(Bankruptcy)

FAA

(FSDO)

Lawyers

ORJC

GPA

(CEO)

Dornier

Key 5

SAA

COSA

EMG


Raising the Money

  • 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.


Our Needs

Seed: $ 250K

Plan & Raise Money

$3M for Certification

$7M for Start Up

Round A:$ 10M

Round B: $ 20M

Expansion


Schedule

2004

2005

2006

2007

2008

ACTIVITY

Business Plan/

Development

Phase I-Certification

And Start-Up

Phase II-Revenue to

Breakeven

Phase III-Growth


Development Plan

MAJOR TASKS:

  • 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


Development Costs(Projected Costs in $1000)

Total Estimated Cost


Business Start-Up

MAJOR TASKS:

  • 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


Investor’s World

  • Must Be Interested in Specific Business Area

  • Typically, Won’t Read A Business Plan

  • Different Types at Different Levels

    • 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


New Airline Summary

  • Unique Market Opportunity.

  • Growth-Oriented Business Plan

  • Timing Is Right To Exploit

  • Experienced Management Team Ready

  • Financing Arrangements In Process


Aerospace Entrepreneurship

  • Emerging Aerospace Entrepreneurship

  • Complex Process Requirements

  • Specialized Technical Knowledge

  • Significant Up-Front Investment

  • Experienced Support Base Is Limited


Aerospace Center for Entrepreneurship (ACE)

Government

Agencies

  • ACE

    • Function Is to Do

    • Aerospace

    • Entrepreneurial

    • Engineering

New Aerospace

Businesses

Entrepreneurs

Investors

Note: (1) Prefer to Be Associated with Academic Center

(2) Includes Virtual Meetings Based on Numedeon Technology

(3) Conceived As a Self-Sustaining, Non-Profit Organization


ACE Provided Functions

Customer Type

Service

X


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


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