Tuesday, May 06, 2008

Eos's Fate and Silverjet's Dilemma

[Above: The new all-business-class configuration on Singapore Airlines' A340-500s]

I've been hearing from people who say they loved Eos Airlines and can't understand why it failed, given its terrific in-cabin performance as an all-business-class airline whose product surpassed some airlines' first-class service.

Furthermore, it has been noted, other airlines seem to be optimistic about all-business-class service. In fact, Singapore Airlines is making one of the biggest moves ever into all-business-class flying by a major airline. In mid-May, Singapore will start all-business-class flights nonstop between Newark and Singapore a couple of times a week, and ramp them up to daily by summer. In September, Singapore is expanding the all-business-class service to Los Angeles-Singapore nonstop, again with a plan to ramp up quickly to daily flights.

And Lufthansa is also expanding its boutique all-business-class service, operated by PrivatAir, with flights between Germany and Dubai and India.

So what happened to Eos?

Brutally simple. Eos, flying used 757s, had a cost structure that required its planes (with 48 seats) to fly about 70 percent full, with average fares of about $3,500, to be profitable.

Though it had expansion plans, Eos flew a limited route, New York-London Stansted. On that route (especially with Stansted in the equation), it was heavily dependent on the banking and investment business -- not just in New York but, perhaps more importantly, in London. Remember, the plane flies both ways, and transatlantic traffic originating in London had become increasingly important, especially with the weak dollar.

Lawrence Hunt, the affable and indefatigable founder of Silverjet, has been frantically raising cash since the airline launched early last year. The most recent score was from Middle East investors, who bought a 28 percent stake in Silverjet last week. Hunt says that will help finance a planned aggressive expansion in the Middle East and Africa.

Meanwhile, though, Silverjet is struggling on its Newark-London route, and the challenge is made tougher the fact that Silverjet's London base is the not-so-convenient London Luton Airport.

[Silverjet reported today that it had a 67 percent load factor in April and said it expects that the load factor and yields will “show further improvement in May.]

Skeptics are perched on the trees waiting, but Hunt thinks Silverjet can ride it out, assuming additional financing, because he has hammered the break-even point down enough so that the current average fare of about $2,100 roundtrip will do the trick, assuming loads over 70 percent.

The major U.S. airlines in the New York-London market helped kill off Eos by cutting negotiated business-class fares -- the ones they offer their top corporate customers -- down to the Eos level. American Airlines even threw a new flight from New York into Stansted last October (and announced a second one to come) and was said to be discounting some business-class fares down to the $3,000 roundtrip range.

Meanwhile, British Airways introduced a murderously cheap advance-purchase (62 days) business-class fare of about $2,500 round-trip between Kennedy and Heathrow, and later extended into mid-May -- pretty well covering the business-travel season to the summer lull.

Eos just couldn't compete as the majors kept slashing business-class fares (which had been going for about $9,000 roundtrip, walk-up)

At the end, "Eos's pricing was very similar to Continental, British Airways, American and Virgin Atlantic," said Silverjet's Hunt.

And "with only 48 seats on a 757, the economics were similar to Silverjet's 767s in terms of operating costs," he said. Silverjet runs its 767s with 100 seats.

Given that, plus the transatlantic fare war, Hunt said. "It was very hard for them to offer a price advantage. Eighty percent of their business came from banks and financial services, and those guys started getting deals with Continental and American and Delta in the $3,500-$4,000 range."

Optimistically, Hunt said, "It's going to be a very tough 2-3 years. It was very important for us to get our price point to the $2,000 level where the majors can't compete with us."

As to investors, Hunt said it's been exceedingly difficult to raise money.

"The British institutional investors have got their own problems. For example, one of our largest shareholders was the second-largest shareholder in a bank called Northern Rock that got bought by the government because it nearly went bust. So they had to sell everything -- and we have lots of shareholders in that situation. We've got a big property fund that's invested in us that's 80 percent leveraged. They're not sure whether they can make it or not, and they're selling everything they can to raise cash. So we need to find a different type of investor going forward," he said.

Here's the rest of what he told me in a recent interview:

"Also, we have a pretty tough regulatory environment, from a capital and liquidity point of view,
so you never know what the regulators are going to do.

"We're almost at a cash break-even now. Our planes are going to be nearly 60 to 70 percent full this summer. We're doing okay, but I'm not pretending we're out of the woods yet.

"How many people said I'd never get this off the ground? How many said we'd never raise the money? How many said we wouldn't fill the planes because people wouldn't fly to Luton? If I'd listened to all those people I wouldn't be here now."


No comments: