aircanadaa330
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Start Up Costs Questions

Fri Jun 08, 2012 12:27 am

First off I am not sure if this is in the right section but I'm taking a guess here.....


I have been doing some research into when airlines started and how they did it in the past decade. I found Jet Blue interesting because I read that they started with only $120 million...first of all is this true??? If it is how did they do it with so little cash? I know $120 million is nothing to sneeze at but still when you take into count the A320 is about $60 million plus you have to paint the planes, rent offices set up web sites, phone lines, get some seats in those aircraft etc....wouldn't it cost a whole lot more money?? Or am I missing something??
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mandala499
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RE: Start Up Costs Questions

Fri Jun 08, 2012 1:19 am

$120 million? or was it $147 million (can't remember). True? yes.
Back then, fuel was cheap(er that today).
No, they didn't buy the airplanes, they leased it.

Mandala499
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chieft
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RE: Start Up Costs Questions

Fri Jun 08, 2012 11:22 am

You can start an airline with narrow body aircraft for way less than 120 Mio USD.

2 to 3 leased aircraft, A320 or B737, staff, office - you can do it with 20 to 30 Mio USD.
Aircraft are marginal costs with wings.
 
aircanadaa330
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RE: Start Up Costs Questions

Fri Jun 08, 2012 1:29 pm

Quoting chieft (Reply 2):
You can start an airline with narrow body aircraft for way less than 120 Mio USD.

2 to 3 leased aircraft, A320 or B737, staff, office - you can do it with 20 to 30 Mio USD.

Really?? What about deposits on the lease aircraft? Not to mention money to fill the planes with seats??

Quoting mandala499 (Reply 1):
Back then, fuel was cheap(er that today).

Do new airlines have to pay for fuel upfront or can they pay as you go?
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BMI727
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RE: Start Up Costs Questions

Fri Jun 08, 2012 2:27 pm

Quoting AirCanadaA330 (Thread starter):
I found Jet Blue interesting because I read that they started with only $120 million...first of all is this true???

"Only" $120 million? I think the number is about right, but I'm pretty sure that made them one of the best capitalized start ups of the era, which was likely a big part of their success initially.
Why do Aerospace Engineering students have to turn things in on time?
 
mmedford
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RE: Start Up Costs Questions

Fri Jun 08, 2012 7:09 pm

iirc; B6 got an incredible lease deal on the A320s from Airbus. Neeleman originally wanted 37s, but Boeing wouldn't play ball.
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BMI727
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RE: Start Up Costs Questions

Fri Jun 08, 2012 7:44 pm

Quoting mmedford (Reply 5):
iirc; B6 got an incredible lease deal on the A320s from Airbus.

I want to say that JetBlue got some sort of deal where it was like they got a year free or something like that for some or all of the initial planes. And they made a pretty sizable order right when they started too.

Quoting mmedford (Reply 5):
Neeleman originally wanted 37s, but Boeing wouldn't play ball.

I don't think that's true. I vaguely recall an interview where he basically said that they liked the technology on the A320 and were pretty much wanted those from day one. It was Frontier that was basically set to order 737NGs but the price wasn't right and got Airbus instead.
Why do Aerospace Engineering students have to turn things in on time?
 
aircanadaa330
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RE: Start Up Costs Questions

Fri Jun 08, 2012 7:53 pm

Quoting BMI727 (Reply 6):
I want to say that JetBlue got some sort of deal where it was like they got a year free or something like that for some or all of the initial planes. And they made a pretty sizable order right when they started too.

Im going to assume that it was because Airbus was desperate for sales back then? Or did they go through a lessor?

That seems like an amazing deal....
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cmf
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RE: Start Up Costs Questions

Sat Jun 09, 2012 12:26 am

Quoting mandala499 (Reply 1):
No, they didn't buy the airplanes, they leased it.

From what I remember their business plan very specifically excluded leasing. The reason was David Neeleman's experience from the leasing business. He didn't want to drain company money to create leasing company profit. He wanted to keep that money to expand his company. He used the 130 MUSD and his contacts to arrange finance.
Don’t repeat earlier generations mistakes. Learn history for a better future.
 
aircanadaa330
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RE: Start Up Costs Questions

Sat Jun 09, 2012 1:00 am

Quoting cmf (Reply 8):
From what I remember their business plan very specifically excluded leasing. The reason was David Neeleman's experience from the leasing business. He didn't want to drain company money to create leasing company profit. He wanted to keep that money to expand his company. He used the 130 MUSD and his contacts to arrange finance

Then how would he come up with the deposit money with only $120 million?

Side note; is leasing really that expensive?
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BMI727
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RE: Start Up Costs Questions

Sat Jun 09, 2012 1:36 am

Quoting cmf (Reply 8):
From what I remember their business plan very specifically excluded leasing. The reason was David Neeleman's experience from the leasing business.

On the whole yes, but towards the beginning they leased some of their planes. I can't quite figure out how many, but I think it was at least 8.

Quoting aircanadaA330 (Reply 9):
Then how would he come up with the deposit money with only $120 million?

Cut a deal with Airbus, and the initial deposits aren't necessarily large. The original order was for up to 82 planes with a value of $4,000,000,000 which works out to about $48,000,000 per. Figure they get the planes for $40,000,000 each and a 5% deposit on the initial firm order of 25 works out to $50,000,000 plus the options. It's a big chunk of the money, but not necessarily huge. And remember that Neeleman was not some nobody starting up an airline or a mom and pop operation looking to grow but was rather a known name in the industry who had been involved with Morris Air.
Why do Aerospace Engineering students have to turn things in on time?
 
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Starlionblue
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RE: Start Up Costs Questions

Sat Jun 09, 2012 3:03 am

Quoting aircanadaA330 (Reply 9):
Side note; is leasing really that expensive?

It very much depends. You may be able to get better deals buying outright. However leasing has big advantages in that cash flow is known beforehand.

Quoting BMI727 (Reply 10):
And remember that Neeleman was not some nobody starting up an airline or a mom and pop operation looking to grow but was rather a known name in the industry who had been involved with Morris Air.

Probably a big factor. Airbus took a gamble but it's not like they delivered all the planes on day one. If things had gone south after a year, they would have gotten the planes back and most would not have been delivered from day one anyway.
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aircanadaa330
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RE: Start Up Costs Questions

Sat Jun 09, 2012 3:00 pm

Quoting BMI727 (Reply 10):
firm order of 25 works out to $50,000,000 plus the options. It's a big chunk of the money, but not necessarily huge. And remember that Neeleman was not some nobody starting up an airline or a mom and pop operation looking to grow but was rather a known name in the industry who had been involved with Morris Air.

I forgot about his past....that makes sense now.

Quoting BMI727 (Reply 6):
Frontier that was basically set to order 737NGs but the price wasn't right and got Airbus instead.
Quoting mmedford (Reply 5):
Boeing wouldn't play ball.

Is Airbus more friendly to new start ups then Boeing? I know that Froniter wasnt a start up at the time, but thinking about it....Virgin American and Skybus went Airbus....and not Boeing
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mandala499
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RE: Start Up Costs Questions

Sat Jun 09, 2012 10:06 pm

Quoting aircanadaA330 (Reply 3):
Do new airlines have to pay for fuel upfront or can they pay as you go?

It depends in each case. But generally, the new airline has to negotiate their payment terms with the fuel company.
Over where I am, it's "cash as you go" or "prepay what you reckon you need, then any overruns gets settled at the end of month", and later, go to pay at the end of month.

Mandala499
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cmf
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RE: Start Up Costs Questions

Sun Jun 10, 2012 4:57 am

Quoting aircanadaA330 (Reply 9):
Then how would he come up with the deposit money with only $120 million?

Using the planes as security.

Quoting BMI727 (Reply 10):
On the whole yes, but towards the beginning they leased some of their planes. I can't quite figure out how many, but I think it was at least 8.

I think that was related to get enough frames quick enough. The exemption confirming the rule 
Quoting BMI727 (Reply 10):
And remember that Neeleman was not some nobody starting up an airline or a mom and pop operation looking to grow but was rather a known name in the industry who had been involved with Morris Air.

I doubt they would have been able to do it without this.
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mandala499
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RE: Start Up Costs Questions

Sun Jun 10, 2012 8:09 am

Quoting cmf (Reply 8):
From what I remember their business plan very specifically excluded leasing. The reason was David Neeleman's experience from the leasing business. He didn't want to drain company money to create leasing company profit. He wanted to keep that money to expand his company. He used the 130 MUSD and his contacts to arrange finance.

In my books, that's the same...   
You're right, he didn't dry lease the planes... he lease-purchased the planes... and at times, that could work out cheaper over the long run!

Quoting aircanadaA330 (Reply 9):
Then how would he come up with the deposit money with only $120 million?

As CMF said, used the planes as security, And Neeleman had a proven record, all he needed to do was come up with the 5% deposit for the production slots... the rest is given to the financial services to do their magic.
(Same with all these mega orders these days, it's only a matter of the 5%, and the rest is "revolving" money!).

Mandala499
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cmf
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RE: Start Up Costs Questions

Sun Jun 10, 2012 1:20 pm

Quoting mandala499 (Reply 15):
You're right, he didn't dry lease the planes... he lease-purchased the planes... and at times, that could work out cheaper over the long run!

When in doubt look at the annual report 

Per the 2002 report, I think the first they published publicly, they had 21 owned planes and 16 on operating lease.

"We typically finance our aircraft through either secured debt or lease financing. We have
arranged financing for our first five deliveries scheduled for 2003. Although we believe that debt and/or
lease financing should be available for the remaining 44 firm aircraft deliveries, we cannot assure you
that we will be able to secure such financing on terms acceptable to us or at all.
...
Our aircraft leases expire as follows: one in 2009, one in 2010, two in 2012, four in 2013, two in
2018, two in 2019, one in 2020 and three in 2022. All 21 owned aircraft are subject to secured debt
financing. We have taken delivery of three aircraft in 2003, two of which have begun scheduled service.
Two were financed through 20-year sale and leaseback transactions and one was leased under a 12-year
operating lease. We have arranged financing for three of the remaining 12 aircraft to be delivered in
2003."

So the plan called for debt financing but reality required a combination.
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mandala499
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RE: Start Up Costs Questions

Sun Jun 10, 2012 1:38 pm

Quoting cmf (Reply 16):
So the plan called for debt financing but reality required a combination.

As expected!   
The 21 owned I assume was still undergoing financial leases or debt financing...
And 16 operating leases... Not surprising...

But hey, many thanks for that, much appreciated. I stopped following the JetBlue story in early 2001, and the next thing I knew, they were already sizeable...

Mandala499
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cmf
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RE: Start Up Costs Questions

Sun Jun 10, 2012 1:55 pm

Quoting mandala499 (Reply 17):
As expected!   

Pretty much. Rules are made to be broken  
Quoting mandala499 (Reply 17):
The 21 owned I assume was still undergoing financial leases or debt financing...

Debt financing according to the annual report "All 21 owned aircraft are subject to secured debt financing."
Don’t repeat earlier generations mistakes. Learn history for a better future.
 
BMI727
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RE: Start Up Costs Questions

Sun Jun 10, 2012 3:12 pm

Quoting cmf (Reply 14):
I doubt they would have been able to do it without this.

Certainly. Nobody is going to give $120 million to just anybody. And furthermore, the initial investors in JetBlue were not newbies either but included some fairly big names, some of which also invested in Morris Air.

Quoting mandala499 (Reply 15):
(Same with all these mega orders these days, it's only a matter of the 5%, and the rest is "revolving" money!).

To be clear, I'm not saying that the deposit was 5%. I just used that as a ballpark to illustrate that making an order isn't necessarily ridiculous for a startup with enough capital.
Why do Aerospace Engineering students have to turn things in on time?
 
mandala499
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RE: Start Up Costs Questions

Sun Jun 10, 2012 4:04 pm

Quoting BMI727 (Reply 19):
To be clear, I'm not saying that the deposit was 5%. I just used that as a ballpark to illustrate that making an order isn't necessarily ridiculous for a startup with enough capital.

Coincidentally, that is the number being touted around for securing delivery slots when making an order these days.
It's "around" 5%...
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imiakhtar
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RE: Start Up Costs Questions

Sun Jun 10, 2012 4:29 pm

Quoting AirCanadaA330 (Thread starter):
I have been doing some research into when airlines started and how they did it in the past decade.

You should watch this video of Tony Fernandes, CEO of AirAsia on how he started with $250k in 2001:

http://www.youtube.com/watch?v=hD3oF...c7PlpM6I0ON6A&index=1&feature=plcp
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aircanadaa330
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RE: Start Up Costs Questions

Sun Jun 10, 2012 10:18 pm

Quoting cmf (Reply 16):
lease financing

I take it this is lease to own?

Quoting imiakhtar (Reply 21):
You should watch this video of Tony Fernandes, CEO of AirAsia on how he started with $250k in 2001

thanks for sharing, its a great video. The story of Air Asia is very interesting, I am amazing they were able to do that. Although he didnt start an airline, he bought an airline for dirt cheap, I am surprised...but then I wonder what the condition of the old airline was.

I had no idea he went from music to airline over night.... thats what really makes the story impressive!
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Starlionblue
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RE: Start Up Costs Questions

Sun Jun 10, 2012 11:37 pm

Quoting aircanadaA330 (Reply 22):
I had no idea he went from music to airline over night.... thats what really makes the story impressive!

Hmmmm. Sounds familiar... 
"There are no stupid questions, but there are a lot of inquisitive idiots." - John Ringo
 
aircanadaa330
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RE: Start Up Costs Questions

Sun Jun 10, 2012 11:48 pm

Quoting Starlionblue (Reply 23):
Hmmmm. Sounds familiar...

I take it there were others?
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cmf
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RE: Start Up Costs Questions

Mon Jun 11, 2012 11:13 am

Quoting aircanadaA330 (Reply 22):
I take it this is lease to own?

Don't know what the details are.

Quoting aircanadaA330 (Reply 24):
I take it there were others?

One claim to be a virgin.
Don’t repeat earlier generations mistakes. Learn history for a better future.
 
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Starlionblue
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RE: Start Up Costs Questions

Mon Jun 11, 2012 12:03 pm

Quoting aircanadaA330 (Reply 24):
Quoting Starlionblue (Reply 23):
Hmmmm. Sounds familiar...

I take it there were others?
Quoting cmf (Reply 25):
One claim to be a virgin.

I meant Richard Branson. He started in the record business, actually with a record shop, then founded Virgin Atlantic.
"There are no stupid questions, but there are a lot of inquisitive idiots." - John Ringo
 
chieft
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RE: Start Up Costs Questions

Tue Jun 12, 2012 4:57 pm

It is always better to have much cash in the pocket if you want to start an airline.

However, most don't have 100 MUSD and more. Most start-ups catch some older aircraft for low lease rates and thus low deposits. If you lease an A320, for instance, then you get an aircraft, which is still in production. For the average passenger it is an aircraft they know and that they see widely on airports and lots of people know, that it is an A320.

You can lease a new one for about 300TUSD per month or as little as 65TUSD per month. Does an average passenger see, if they fly in a 1998 vintage bird or a 2012 one? As long as they keep the interior clean and maintained: No.

And that's why you can start-up an airline with as little as 10MUSD; OK, that's really risky as you have no cash reserves at all, but it can work. You start off with one or two aircraft, kick-off the cash-flow and add a 3rd aircraft after a couple of month. Then you grow as you business allows.

That is a very minimalistic approach, but numerous airlines started like that.

Even fuel purchase can be managed; you can get comparable good rates and a fuel credit card if you provide some security to the fule provider.

Just a simplified view...
Aircraft are marginal costs with wings.

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