Revenue Red Flags for Airline Finance
When should lenders & investors be cautious about an airline’s revenue strategy?
People providing airline finance often find it easier to evaluate costs than revenue – they know exactly how much they will spend and simply assume that they will sell enough seats to generate a return. The mechanics of how airlines perform revenue management and earn income through ancillaries, loyalty and other sources can also seem like a black-box to outsiders, so it is even hard to know what questions to ask.
As a result airline investors can find they lose money as their assets underperform financially. Conducting a full revenue-side analysis of a business plan accounting for all the relevant trends in dynamic pricing, branded fares, loyalty and product marketing economics* should be a full-time job for a team of investment analysts. This article presents five questions that investors can ask to get this work started.
1. Who are the airline’s customers? Only being able to distinguish customers by route and cabin is lazy. I would expect the airline to distinguish between people who buy seats for their own travel and passengers whose seats are paid for by other people like their employers. The airline should be able to define it’s true market segments based on human-level attributes like age, gender and motivation for travel.
2. What is the airline’s pricing strategy? Being cheap is lazy. The airline should have a well thought out strategy to monetise a range of market segments covering seat-sale, ancillaries and branded fares, and while there is nothing wrong with being cheap or expensive per se an airline should know when it can be cheap and when it can be expensive. An airline with a well-defined pricing strategy will be cheap in some markets and expensive in others, reflecting it’s local network and brand strengths.
3. How does the airline intend to use dynamic pricing? Vague answers about big data and technology are lazy. There are several techniques of dynamic pricing* and the airline should be aware of them.
Inability to answer these questions or lazy answers are big red flags.
4. Who are the competitors? It is also worrying when an airline only tends to talk about one or two competitors as in reality airlines have many competitors, including non-airline companies attracting their share of a traveller’s spend like hotels, restaurants and experiences.
5. Does the airline rely on being the cheapest or lowest cost? The biggest red flag of all is when the airline relies on being the cheapest or lowest cost in the market – that means they do not understand their own value or know how to sell their product, and rely on buying rather than earning market share. Cost advantages like access to cheap aircraft during periods of low demand in the business cycle may prove transitory. Unless the investors can change the management team’s mindset a lot of money will be lost very quickly.
I would not personally put money into any airline that raises any of these red flags.
* Check out these other articles here on Airline Revenue Economics to learn more
Dynamic pricing 1 (paid subscription required)
Dynamic pricing 2 (paid subscription required)
oliver AT ransonpricing DOT com