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Aerospace Entrepreneurship & The Complexities of Starting a New Regional Airline

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

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  1. 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

  2. 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

  3. Entrepreneurial Engineering Customer Architect Engineer Builder User

  4. Starting A New Company Perception Idea Business Plan Start Up Growth $$$$$ Reality Business Plan Start Up Growth Idea

  5. 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

  6. 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

  7. Seven “Seed” Investors • Ex-VP American Airlines • America West Pilot • Mature Aerospace Executive • Mexican Businessman • Medical Doctor • IT Executive • CEO & Financial Background

  8. Creating a Business Plan • Define the Market • Select the Airplane • Define the Operations • Find the Key People • Run the Numbers

  9. Initial Route Structure

  10. 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

  11. 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.

  12. 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

  13. 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.

  14. 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.

  15. 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.

  16. 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

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

  18. Airline Operating Costs Great Lakes Atlantic Coast Skywest Mesa SA Airlines Frontier Jet Blue AirTran Southwest

  19. Financial Projections Revenue $ Millions Costs Pre-Tax Earnings

  20. 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

  21. 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

  22. 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

  23. 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

  24. 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

  25. 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.

  26. Our Needs Seed: $ 250K Plan & Raise Money $3M for Certification $7M for Start Up Round A:$ 10M Round B: $ 20M Expansion

  27. Schedule 2004 2005 2006 2007 2008 ACTIVITY Business Plan/ Development Phase I-Certification And Start-Up Phase II-Revenue to Breakeven Phase III-Growth

  28. 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

  29. Development Costs(Projected Costs in $1000) Total Estimated Cost

  30. 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

  31. 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

  32. New Airline Summary • Unique Market Opportunity. • Growth-Oriented Business Plan • Timing Is Right To Exploit • Experienced Management Team Ready • Financing Arrangements In Process

  33. Aerospace Entrepreneurship • Emerging Aerospace Entrepreneurship • Complex Process Requirements • Specialized Technical Knowledge • Significant Up-Front Investment • Experienced Support Base Is Limited

  34. 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

  35. ACE Provided Functions Customer Type Service X

  36. 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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