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Airline Business Plan

Air Leo

This sample business plan can be edited directly in Business Plan Pro software.

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Financial Plan

This section of the plan offers the core elements for evaluating the financial viability of the proposed new airline. Both in text and in charts and tables, all the key elements are presented to offer a frank appraisal of the venture and the opportunity it presents.

Of particular importance is the following section which presents the key "Important Assumptions" on the core cost and revenue aspects of the airline. These assumptions are based on cost factors involving the proposed Avro RJ100 aircraft, and assume dry leasing of new aircraft (a comparison is also given for a purchase option, although that option, as will be apparent from the numbers, demands a much larger up-front cash outlay, and does not necessarily lead to economies of operation, particularly in the short run).

Among the assumptions made were that the airline will begin operating with just three 99-passenger regional jets, with very low load factors, beneath 25 percent of capacity, and at fare levels that in all likelihood are lower than reasonably expected on the planned route network. These assumptions were taken to ensure a conservative approach to the financial planning, and to demonstrate that even with these constraints the proposed airline can be profitable as early as the first year of operations.

It also was assumed that the aircraft will receive maximum utilization, up to six, seven, or more segments per day. A "wave" or "W" route pattern, and reciprocating or circular routes, was assumed, rather than simply a spoke-and-hub route pattern, to enable service to more destinations and to maximize use of the aircraft. A major feature of the route planning has been to enable business travelers to go and come back from destinations generally in the same day, and certainly in the same week. Crew requirements and hour restrictions also were considered in the planning.

Again, it should be stressed that even with the considerable constraints employed in the calculations, the airline can be expected to carry upwards of 300,000 passengers in its first year, and possibly up to a half a million passengers, and to reach profitability within the first year of operations, with significant growth in both revenues and cash generated thereafter.

The Important Assumptions section also includes information on the third prong of the proposed marketing strategy, which is to employ wet-leased or chartered aircraft to serve high-demand regional, seasonal, and peak-traffic markets as a supplement to the regular scheduled service of the airline. A conservative approach also was taken with this segment, and again it was shown to be a profitable area to pursue, although relatively modest particularly at the outset in terms of overall revenues.

It is strongly suggested that the Important Assumptions section be reviewed carefully prior to more in-depth examination of the financials since it explains the premises on which the financials are based. It also should be noted that the aircraft costing section is based on a segment approach, with aircraft acquisition, operating and crew costs, and some direct sales costs, as well as revenues, apportioned on a "segment" basis. Note that some elements that go into the segment costing are based on hourly costs, extrapolated to the segment length, and others are strictly on a "per segment" basis. The number of aircraft employed are stated at the top, on a "full-time equivalent" (FTE) basis, allowing for variance in fleet size during the year as new aircraft are brought into the fleet.

7.1 Important Assumptions

In addition to the general financial and business assumptions presented in  the following table, the key parameters presented on the next page also were included as Operating Assumptions in formulating the financial portions of this business plan.

Every effort was made to be realistic in these Assumptions, and if anything they were formulated conservatively, particularly in calculating initial load factors and revenue yields which, in practice, should be considerably higher than offered here. Additionally, passenger and cargo fares were considered to be flat over the entire period covered by this plan to compensate for the possibility that additional competition could force fares to remain relatively constant over the period. However, the objective of this exercise was to show that the proposed operation will be profitable even with much lower revenues than would normally be expected, and the numbers do in fact confirm a profitable outcome.

Additionally, expected net revenues from offering peak-demand special flights also are calculated. They are set apart separately from the scheduled-service revenues to show that both types of service - and particularly the more important scheduled service - are viable and the airline will be profitable even without these additional revenues.

The assumptions utilized here are based on dry leasing new Avro RJ100s at a high level of outfitting and with necessary spares included. A separate set of figures is provided following the Operating Assumptions section which gives a cost comparison should the decision be made to purchase the aircraft new, utilizing ECGD export financing for 85 percent of the purchase price of the aircraft.

Operating Assumptions	FY 2003	FY 2004	FY 2005
Aircraft in service (FTE)	2.83	5.33	7.33
Aircraft in service at end of FY	5	7	9
Cost per aircraft if purchased	$26,000,000	$26,000,000	$26,000,000
Annual leasing cost per aircraft	$3,120,000	$3,120,000	$3,120,000
Insurance rate % of aircraft cost	1.5%	1.5%	1.5%
Annual insurance cost per aircraft	$390,000	$390,000	$390,000
Captain's Annual Salary	$60,000	$66,000	$69,300
First Officer's Salary % of Captain	80%	80%	80%
Flight Attendant's Salary % of Capt	30%	30%	30%
Salary Burden as percent of Salary	20%	20%	20%
Crew members per flight	Flght-2/Cab-3	Flght-2/Cab-3	Flght-2/Cab-3
Crew contingents per aircraft	3	3	3
Total crew per aircraft (min.)	Flght-6/Cab-9	Flght-6/Cab-9	Flght-6/Cab-9
Flight Hours/Month for Crew	80	80	80
Average Total Salary Cost/Hour	$202.50	$222.75	$233.89
Total aircraft maint. cost/hour	$800	$800	$800
Fuel burn kg/hour	2,100	2,100	2,100
Fuel cost per kg	$.35	$.35	$.35
Handling cost/segment (ave.)	$360	$400	$440
ATC cost/segment (ave.)	$120	$130	$140
Land/depart charge per seg. (ave.)	$150	$180	$210
Parking fee/aircraft/night	$150	$170	$190
In-flight items/pax -- Value	$6	$7	$8
In-flight items/pax -- Premium	$8	$9	$10
Percent/revenues commissionable	40%	35%	30%
Commission payable	9%	9%	9%
Ave. reservations cost/pax/seg	$2	$2	$2
Average segment (hours)	1.25	1.30	1.35
Annual segments	6,520	11,808	15,638
Ave. total capacity/segment (pax)	99	99	99
Ave. Annual Load Factor (%)	50%	65%	75%
Ave. split Value/Premier	79/20	79/20	79/20
Average fare per Value pax/seg.	$110	$110	$110
Average fare per Premier pax/seg.	$143	$143	$143
Cargo per segment (kgs)	700	700	700
Ave. cargo tariff per segment/kg.	$.50	$.50	$.50
Ave. cargo tariff per segment	$350	$350	$350
Average pax revenues/segment	$5,775	$7,507	$8,933
Average cargo revenues/seg.	$350	$350	$350
Total ave. revenues/segment	$6,125	$7,857	$9,283
Total ave. costs/segment	$4,972	$5,449	$5,741
Total ave. net yield/segment	$1,153	$2,408	$3,542
Total revenues/year	$39,935,000	$92,775,456	$145,167,550
Total operating costs/year	$32,417,440	$64,341,792	$89,777,758
Total net oper. revenues/year	$7,517,560	$28,433,664	$55,389,792

Peak-demand special flights on key regional/seasonal/intermittent routes
The figures provided in this section represent a "best estimate" calculation of the costs and revenues expected to be derived from special peak-demand flights on key regional, seasonal, and intermittent routes. These figures, which also were approached conservatively, though realistically, supplement the figures derived from the assumptions concerning regular scheduled service.

The following assumptions were applied for these special flights:

	FY 2003	FY 2004	FY 2005
Flight Segments	48	60	100
Average length of segment (hrs)	4.0	4.0	4.0
Ave. wet-leasing cost of aircraft/hr.	$4,000	$4,000	$4,000
Ave. cost per flight segment	$16,000	$16,000	$16,000
Handling cost/segment (ave.)	$360	$400	$440
ATC cost/segment (ave.)	$120	$130	$140
Land/depart charge per seg. (ave.)	$150	$180	$210
Parking fee/aircraft/night	$150	$170	$190
In-flight items/pax -- Value	$12	$14	$16
In-flight items/pax -- Premium	$16	$18	$20
Percent/revenues commissionable	50%	45%	40%
Commission payable	10%	10%	10%
Ave. reservations cost/pax/seg	$2	$2	$2
Ave. total capacity/segment (pax)	160	160	160
Ave. annual load factor (%)	75%	80%	85%
Ave. split Value/Premier	90/10	90/10	90/10
Average fare per Value pax/seg	$250	$250	$250
Average fare per Premier pax/seg	$325	$325	$325
Cargo per segment (kgs)	600	600	600
Ave. cargo tariff per segment/kg.	$1.20	$1.20	$1.20
Ave. cargo tariff per segment	$720	$720	$720
Average pax revenues/segment	$30,900	$33,560	$35,020
Average cargo revenues/segm.	$720	$720	$720
Total ave. revenues/segment	$31,620	$34,280	$35,740
Total ave. costs/segment	$20,053	$20,462	$20,883
Total ave. net yield/segment	$11,567	$13,818	$14,857
Total revenues/year	$1,517,760	$2,056,800	$3,574,000
Total costs/year	$962,544	$1,227,720	$2,088,300
Total net revenues/year	$555,216	$829,080	$1,485,700

Aircraft cost on a purchase basis
If a decision is made to purchase the aircraft for the new airline rather than dry leasing them, then a considerably larger cash outlay will be required, even with export financing guarantees from the ECGD. For instance, here is a notional cost projection based on five new Avro RJ100s, well fitted with passenger amenities as well as the most up-to-date communication and navigation gear:

Cost per aircraft	$26,000,000
Total cost, five aircraft	$130,000,000
Financing to be provided by Export Credit Guarantee Department of the UK	85%
Interest rate	7.5%
Insurance	1.5% on value of the aircraft
Cash outlay required for down payment	15%, or $19,500,000
Amount to be financed	$110,500,000
Insurance, per year	$1,950,000
Depreciation chargeable against revenues per year for 10 years	$13,000,000
Annual payments on five aircraft based on 120 payments (10 yrs)	Approx. $12,000,000
Total cost of aircraft w/ payments and interest	$163,500,000
Residual value after 10 years	Approx. $65,000,000
Total real cost of five aircraft assuming sale at end of 10 years	Approx. $98,500,000

Based on these figures, comparative per-segment costs in the following years are shown:

	FY 2003	FY 2004	FY 2005
Aircraft in service (FTE)	5	5	5
Segments per year per aircraft	2,303	2,215	2,133
Total segments	11,519	11,076	10,665
Total cost for down payment	$19,500,00	$0	$0
Total cost for insurance per year	$1,950,000	$1,950,000	$1,950,000
Total cost for payments/year	$12,000,000	$12,000,000	$12,000,000
Total raw cost per year	$33,450,000	$13,950,000	$13,950,000
Total raw cost per segment	$2,904	$1,259	$1,308
Cost per segment w/ depreciation	$4,032	$2,433	$2,527
Cost/seg/yr w/ depr & recov value	$3,416	$1,846	$1,917
Comparative cost for five aircraft dry leased w/ insurance/year	$17,550,000	$17,550,000	$17,550,000
Cost per segment as above for dry-leased aircraft	$1,524	$1,585	$1,646

This comparison obviously does not examine the possible tax consequences and other factors in considering the comparative cost of dry leasing versus purchasing, but it does demonstrate that lower short-range acquisition costs result in an immediate lower segment cost for the aircraft as well as lower up-front cash requirements.

7.2 Key Financial Indicators

The accompanying chart, which is based on the actual financial projections for the proposed airline, clearly shows a pattern of solid growth over the first three years of the operation (and which would continue into the future), which the financials consider in depth. There is a good balance between revenues and costs, yielding healthy gross margins, and in a predictable, steady pattern of growth. Financial turn-over also is in good balance and, as other tables and charts show, with careful planning of expenditures cash flow is maintained in good balance throughout the life of the plan.

7.3 Break-even Analysis

As the accompanying chart demonstrates, the break-even point comes at a relatively modest monthly passenger load, under 22,000 passengers per month, which represents an average passenger load factor of only about 40 percent with a fleet of three RJ100s operating about six segments each per day. It is anticipated that this load will be reached fairly early in the new airline's life and, in practice, much higher loads - into the 65 - 75 percent range during the first year of operations - can be anticipated based on the overall business and marketing plans for the airline.

7.4 Projected Profit and Loss

As the accompanying Profit and Loss chart clearly demonstrates, the proposed airline has the potential to achieve profitability, on a month-by-month basis, by as early as the third month of operations, and to end the first year comfortably in the black - an indication of the strength of the market and the marketing plan for the venture, given the conservative nature with which the numbers were calculated.

All cost items are covered in this Profit and Loss chart and, while the organization and salary and cost items presented are not lavish, they both cover the needed functions adequately and also allow some margin for movement. Given the business plan's stress on utilizing technology to control staffing and related support and marketing costs - big problems for many airlines - the plan presented here should enable this airline to accomplish far more with less, and simultaneously to present less of a "command-and-control" problem to the management team.

All flight and cabin crew salaries are included in the line designated "Operational" in the top section of the chart, with all non-salary aircraft operational costs included in the same section. All revenues, which derive almost entirely from airline operations (both scheduled and special flights) are also provided in the top area, along with a deduction for the direct cost of sales, such as reservations fees and commissions (an area that hopefully can be reduced even further through e-reservations and e-ticketing, though it probably cannot be eliminated altogether. Clearly the affect of these charges on the bottom line can be seen in this chart, even figuring that 60 percent and more of airline clients will utilize electronic means for ticketing). The rest of the chart is broken down by functional area, outside of direct flight operations (which also include aircraft acquisition costs).

Finally, it is worth noting that a net operating profit of more than [XYZ] million USD (on an equity investment of under [XYZ] million USD) is projected for the first year, with a net profit of more than [XYZ] percent. Profits in the second and third years show substantial growth, with a combined net profit in excess of [XYZ] million USD projected for the third and fourth years, even given the limited size of the fleet (up to nine mid-sized jets by the end of the third year of operations) projected for the airline.

7.5 Projected Cash Flow

Cash flow is probably the factor that makes or breaks more businesses than any other, and it is even more critical to consider in a venture as capital-intensive as is an airline.

As the accompanying chart and table readily show, with careful planning and control of resources and expenses, cash flow crises should not pose a threat to the new airline. Even allowing for a [XYZ] million USD up front deposit on aircraft leases (which would be charged against operational expenses as the airline begins flying) and other significant up-front costs, as shown in the accompanying illustrations, at no time does cash on-hand become a major issue during the first year, and even less so in the follow-on years.

While an investment of about [XYZ] million USD is modest by regional airline standards, the financial and business planning done here should indicate that the venture is quite feasible in the market. Nevertheless, it would offer an extra cushion of safety to arrange for availability of additional credit facilities or cash reserves, or equity investment, to be called up only as needed in the short-run should cash demands out strap expectations, immediate revenues, and on-hand cash on a temporary basis.

It should be noted that a 30-day accounts payable repayment schedule is included in the planning for the financials. However, a majority of the airline's revenues will come from online sales, with payment by credit cards and generally rapid settlement, and also from ticket sales from travel agencies that are required to make payments usually in half the accounts payable schedule used in the assumptions for this plan. Given the large fluxes of cash, even these payment methods allow for significant amounts of funds to be receivable at any given time but, again, the financial calculations indicate that this should pose no significant problem to the airline's financial management or cash liquidity.

7.6 Projected Balance Sheet

As the accompanying Balance Sheet indicates, the proposed venture will maintain a healthy position, even with limited hard assets other than cash and leased aircraft, and the company's net worth is projected to grow beginning from the end of the first year from about [XYZ] million USD to [XYZ] million USD by the end of the second year, and to more than [XYZ] million USD by the end of the third year, with continued growth at about the same remarkable rate beyond that.

7.7 Business Ratios

The accompanying table offers key business ratios, based on the financial plan for the proposed airline. It is worth noting that even in the first year of operations, and with conservative planning, a profit, albeit relatively modest, is feasible - something unusual in the airline business. Even in the first year, the investor can expect a return on equity about [XYZ] percent, and then significant cash growth going into the second and third years, with ROE figures upwards of [XYZ] percent on a cumulative basis.

Care must be taken to control costs, to plan routes, schedules, and capacities carefully, and to take on high-cost items with caution and with an eye to timing. But the basic elements for a solid business are evident in this plan's financials. Prudent, experienced management will regard these caveats carefully and, in so doing, will see the airline through its initial challenging launch into a period where growth will be both solid and sustained. A long-term (five-year) financial plan is included among the appendix.