How my airline failed - On a Wing and a Prayer

TM

Cruising to Profits – Short Story Series

Ricardo V. Pilon

Curmill Aviation Publishers

www.millavia.com

By

On a Wing and a Prayer

Start-up Airline Roots Air – How my airline failed

How a business model fails when

the value proposition as delivered is not what was designed

it is not validated against purpose and market strategy

the building blocks of the business model are not stackable

there is no consistent pattern that can be communicated to customers.

Copyright Millennium Aviation © 2001-2014 – All Rights Reserved.

The request for the Cruising to Profits trademark has been formalized and registered.

1

BACKGROUND

Roots Air, the airline that was going to revolutionize the airline business in Canada,

pioneered a number of industry “firsts” that are now common practices in international

commercial aviation. It was the first airline to introduce a premium economy cabin with

almost business-class service and amenities. Roots Air introduced subscription-based

pricing and even offered an unlimited travel membership dubbed the “Gold Card.” The

airline offered “more for less” and appeared to have everything going for it to entice

customers and make a dent in Air Canada’s domestic air transportation market.

But Roots Air failed. It collapsed under circumstances that most entrepreneurs would dread.

Even those with airline startup experience. Once its flight operations commenced it was

hemorrhaging, suffering from load factors averaging 12-15 percent and bleeding almost

250, 000 dollars in cash each day.

However, the foundation for a successful airline was there if the design and delivery of the

business model had been carefully crafted, validated, tested for consistency and executed

as designed in the prevalent market then. It would have existed today if it had followed the

Cruising to Profits planning process and if it had applied the embedded techniques.

ROOTS AIR

The idea for launching a new domestic Canadian airline was born when Air Canada and

Canadian Airlines International engaged into discussions that led to a full merger of the

two carriers. The airline was to become the “0.25” increment to one dominant airline, a

niche carrier aimed at attracting business travelers by providing a real, and improved,

alternative. The airline would be built on the backbone of an Airline Operating

Certificate (AOC) owned by an existing charter airline called “Skyservice Airlines”.

BUSINESS MODEL AS DESIGNED

The concept that they developed was for a high-performance niche airline that would

focus on the needs of the discerning business traveler, providing competitively priced

service to a highly focused group of major business destinations in North America. This

concept, if executed, would provide Skyservice Airlines with a major growth and

expansion opportunity.

Passengers would be enjoying superior service without paying fares normally associated

with traditional multi-class airlines. Additionally, the airline would focus on attracting

interline passengers and airlines desiring seamless one-ticket connections and fares to

and from anywhere in the world. In the press comparisons were made to the success

achieved by Virgin Atlantic Airways as a role model. The new airline would be a co-

branding and marketing venture with fashion retailer Roots Canada and Skyservice

Airlines.

Out of the Box

“We want to give Canadians a truly

differentiated choice and with our

new marketing partner Roots Canada,

we have developed an airline brand

that is unique in this industry. By

taking the airline concept out of the

box, we are marrying Skyservice’s

superb airline credentials with Roots’

understanding of branding and

lifestyle credentials. Roots Air breaks

the traditional pre-flight and in-flight

experience. We are bringing a fresh

new model to an industry that has

been doing the same thing for more

than 50 years.”

Executive Vice-President and Chief

Commercial Officer, Roots Air



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KEY BUILDING BLOCKS

1. Value Proposition

Roots Air was built around the value proposition of “more for less”. More quality, an

enhanced service and improved customer experience around superior lounges, cabin interiors

and meals. Roots Air customers would feel as if they belonged to a celebrity club. This

superior services was offered at a discount of 25-50% in the premium classes compared to

prevailing fares and fare structures offered by Air Canada in the domestic Canadian market.

From a customer point of view, the offering was a clear “win-win”.

2. Revenue Streams

The revenue streams under Roots Air’s business model would primarily be from (1) travel

agents using Global Distribution Systems and (2) interline passengers from other airlines

desiring seamless one-ticket connections and fares to and from anywhere in the world.

3. Customer Segments

The target market was assumed to be predominantly the business market. The target customer

segment in the Roots Air business model was twofold. First, the corporate business travelers.

Secondly, the independent and price-sensitive business travelers. In order to cater for this

market Roots Air allocated two cabins of its three cabin aircraft to business. The front cabin

targeted the executive market, whereas the middle cabin target cost conscious business

travelers. These two cabins occupied nearly two thirds of the real estate area of the aircraft.

4. Customers

In order to fill these cabins with full fare paying passengers, it was crucially assumed that

corporate Canada would express its dismay with Air Canada’s deteriorating service levels by

abandoning it in huge numbers. In addition, to fill the rest of the capacity on planes, Roots

Air would attract the leisure travelers with a fun and trendy economy class service.

5. Channels

Even though eCommerce had made its initial entry in the trade, Roots Air was exclusively

concentrating on the intermediary channel of travel agents using GDS’. Where other airlines

were attempting to reduce distribution costs by encouraging online direct bookings, Roots

Air would pay agencies an uncapped 8% commission on all sales and postponed the

introduction of an online booking engine on its web site.

6. Partners

Roots Canada had built a reputation for style in the retail business and was considered an

excellent reputable brand that would give the airline instant recognition. In addition, the

airline interline partners would extend its organic network considerable and allow Roots Air

to offer a real alternative to Air Canada. Finally, the Royal Bank of Canada was a partner in

the loyalty program.

7. Activities & Assets

The key assets of Roots Air would be (1) its brand, (2) its superior airport experience through

signature lounges, (3) its superior inflight service experience and (4) a generous and

rewarding loyalty program. All operational activities were aimed at creating a superb

customer experience.



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8. Key Resources

Roots Air was using the flight and cabin crew of Skyservice Airlines, since it was also able

to operate the airline using Skyservice’s AOC. In addition to the airport, cabin and flight

crews, other key resources included the venture capital provided by Research Capital in the

amount of CAD 40 million.

9. Cost structure

It was assumed that Roots Air would be able to make use of the low cost structure of

Skyservice, which varied between 0.09¢ and 0.12¢ 1 per Available Seat Mile (ASM)

depending on type of operation and aircraft. However, the airline did decide to acquire a very

young fleet of Airbus aircraft for Roots Air with one of the aircraft just leaving the factory in

France.

BUSINESS MODEL AS DELIVERED

When Roots Air first took off there were a number of glitches in the check-in computer

systems and late delivery of two aircraft. Half of the flights between Toronto and Calgary

had to be cancelled during the first week, but the services were quickly recovered owing

to the deployment of the spare B727. Due to concerns about the overcapacity and fierce

competition on the Los Angeles to Toronto route, the Chief Commercial Officer decided

to postpone the launch of the service and announced services to Edmonton instead (2 daily).

Booking levels remained relatively flat (between 1000-1500 a day) after the launch and the

average load factors in the first week were a mere 33.8% between Toronto and Calgary,

and a slightly higher 47.9% between Toronto and Vancouver. Although this could be

expected for a start-up, some of the Calgary flights were very empty with only 20 and 21

passengers on board and it became apparent that the timetable was not performing at all,

causing speculation that it was perhaps not considered suitable by the target customers.

The loads in Gold and Silver Class were particularly disappointing and the marketing

department and strategy team started discussions on how business traffic could be

increased. Furthermore, there were some service delivery issues with Silver Class in that

the cabin divider (separating it from Bronze Class) had not been installed in every aircraft

due to lack of time, causing confusion among flight attendants which service to perform.

Within Skyservice and Roots Air some managers had concerns about the viability of Silver

Class and were wondering how the performance of the airline could be improved. In

particular, the team was not sure how business class bookings and traffic could be increased

and what marketing could do in the short-term.

1 All figures in Canadian dollars.



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CRUISING TO PROFITS METHOD

The Cruising to Profits calls for a process of 7 phases with 10 steps, that ultimately boils

down to five key activities:

1. (Re)define the purpose and key identity of the airline

2. Breaking down the building blocks of the business model into measurable pieces

3. Recreating a consistent stack of deliverable building blocks that support the

ultimate value proposition for attainable customer segments

4. Validating the business model design against market-specific strategy tests

5. Concentrating on how the model is executed and delivered from the customer’s

perspective.

6. Align departments (functions) against the delivery model of the value proposition

from end-to-end.

In the case of Roots Air because it was a startup, the market structure and competitive

environment would be the starting point to validate the opportunity. We would start by

combining the following activities and sequence:

A. (4) to define (1) – Using the Cruising to Profits CompassTM tool

B. (5) validated against (1) – Cruising to Profits CompassTM tool

C. (3), then (2) – Cruising to Profits ThermostatTM tool

D. and finally (6) - Cruising to Profits CompassTM tool

A: This would have shown that the corporate traveler segment is typically not stimulated

by lowering fares, and that independent travelers would not understand that premium

economy was available due to the restrictions in the GDS display screens at the time,

showing in the “Y” cabin. Further, it would have shown that the entrenched Air Canada

frequent flyer program Aeroplan would be the key hurdle to overcome if one wants to tap

into the business travel segment. In addition, a startup airline has to prove itself before it

gains the confidence of the traveling public, notably seasoned travelers.

B: The premium cabins were at the crux of the value proposition but were poorly delivered

because operationally it was complex. At the airport but especially inside the aircraft the

service offerings (cabins) did not stand out. A proper planning process would have

delivered the service offering at all touchpoints in line with the identity of a premium

business-oriented airline.

C: For each of the key value propositions, the entire delivery process has to be designed.

It may then turn out that from an operational point of view, not all key value propositions

can co-exist and work in parallel. The Cruising to Profits - ThermostatTM would have

shown that Roots Air could not deliver three service products in tandem and that its identity

did not fit its primary target segment (corporate travelers).

D: The realities of a startup are such that the focus should be on those customer segments

that can more readily be penetrated and captured than the corporate business travelers. This

expertise feeds into the Cruising to Profits method and yields a more accurate perspective

based on which the business model can be designed, component by component. Roots Air



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would have had to focus on positioning its identity and value proposition as a fun, novel

and rewarding experience in the adventure and other leisure market segments. Backpackers

and visiting friends and relatives that are willing to use other channels to procure tickets.

This would have also entailed a more direct B2C push by Roots Air and an operational

online booking engine from its early planning days.

CRUISING TO PROFITS- RESULTS

Based on market research and business intelligence, as well as expertise obtained in the

field of practical airline management, a departure from the focal point around business

travelers was necessary to reflect the startup realities. The Airline Planning and Strategy

team approached Virgin Atlantic to enter into discussions about a rescue or turnaround

plan.

Adopting the Cruising to Profits method, the transformation plan would have followed

the three pillars and 7 phases of 10 steps, i.e.

Redefine: A niche leisure-based operator aimed at building strong lifestyle relationships

with infrequent travelers with a longer-term vision of entering the business travel segment.

Given the brand, the airline would play a wider role in people’s lives than pure air

transportation.

Resize: A reduction in capacity plans and the removal of wide-body Airbus A330-300

aircraft from the fleet in order to reflect the market size and startup realities.

Rebuild: A systematically redesigned business model that would be consistent and use a

transformational plan consisting of building blocks that support and reinforce the airline’s

purpose (redefined) and size.

The transformation plan (or turnaround plan) would follow the Cruising to Profits

solution and would have prescribed the following:

Value Proposition

The brand would closely aligned to Virgin Atlantic and renamed Virgin Red. The

relationship with Roots Canada would be maintained for life-style appeal outside air

transportation. The carrier would be a niche leisure and luxury adventure-based lifestyle

service provider that build relationships with people that travel infrequently but are socially

active to recommend the airline. Travelers would have the option to become members in a

lifestyle club allowing customers to customize their experience around the pure air travel

component. Fares would be attractive as all luxury amenities would be available in

membership concierge levels (for frequent travelers) or a-la-carte for those that do not

travel frequently. The Gold, Silver, and Bronze classes of services that were to reinforce

Canada’s historically strong Olympic performance would be replaced by Platinum,

conveying the message that all customers can treat themselves under a pay-per-use or

premium membership level to a nice lifestyle and travel in class in Economy. Business

Class would only be re-introduced with a wider customer base.



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Revenue Streams

While the GDS would still have been a key component, focusing on a single-cabin

premium economy cabin would have allowed it to be understood in the GDS’ by travel

agents. Membership sales would be a key component to target infrequent travelers or

frequent travelers that had not yet built loyalty with Air Canada in Aeroplan. Other revenue

streams would involve merchandising from Virgin and Roots-related products and services

through commissions, as well as interline traffic from international airlines that did not

want or could not cooperate with Air Canada due to alliance group ties.

Customer Segments

Roots Air would abandon its reliance on corporate travelers and focus heavily on the

customer segments that fit its identity and purpose, i.e. (1) infrequent leisure travelers, and

(2) independent business travelers that are not hooked into Aeroplan. This precise focus

would allow Roots Air to identify people for 1-1 relationships and create a lifestyle service

offering with more breadth and depth.

Customer relationships

As per above, individuals with whom strong 1-1 relationships could be built, recognizing

that each individual has different profiles and personalities depending on when and where

she or he travels. It would be the basis for a true personalized loyalty scheme.

Channels

Roots Air would use the GDS’ for initial ticket sales including its interline partners, but

built relationships with people by phone prior to travel, and with a personal touch while

processing through airports. Personal contact would be the main channel, supported by an

online booking channel and a strong presence of Virgin as a key global audience channel.

Partners

Virgin would become its main branding partner, while Roots Canada would remain as the

Canadian lifestyle partner. In addition, the relationship with the Royal Bank of Canada

could be maintained as a loyalty and credit card, potentially also providing access to

lounges and act as a boarding and in-flight shopping pass.

Activities

The main activities of Roots Air would branch out of the traditional air transportation space

and would revolve around lifestyle, well-being, adventure, entertainment, and life

experiences. The fact that in order to get to a destination one needed to take a plane would

only be important as it relates to maintaining a consistent lifestyle experience. It would no

longer be about aircraft and flying. This would set Roots Air as “Virgin Red” apart as a

clearly identifiable and differentiated concierge solution at affordable prices.



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Key Resources

Key resources for the turnaround and longevity of the new business model would include

financial support (RBC, Virgin, Roots and other VC partners) and lifestyle partners in

luxury, adventure, well-being, entertainment and travel in general. In terms of delivery and

execution, the very people that make up the airline would be the most important group of

resources. All staff would have to understand that in order to relate to customers, they

would have to relate to the purpose of individual’s trip. Their approach in communicating

with customers would always have this common denominator. The personalized approach

would require more staff, meaning the airline would have to rely more on self-service

technology in other parts of the process (such as booking, bundling, possibly check-in).

Cost Structure

Stripping out the expensive business class and blurred offerings would reduce the cost per

available seat mile. All aspects that were driving the costs to go up would be linked to the

person using the services; then bundled into service offerings on a pay-per-use basis, except

for those that purchased a membership. Membership levels would be determined based on

projected and cost using predictive analytics. This is part of the Cruising to Profits

Magnifying GlassTM tool.

CRUISING TO PROFITS TOOLKIT

The Cruising to Profits tools referred to in the case study are those below. Only a

description is provided to protect the intellectual property rights associated with the in-

depth workings of these tools.

Cruising to Profits - BarometerTM

Description: This tool allows people to see a new and promising future for their companies

based on a shared sense of purpose.

Cruising to Profits – The Magnifying GlassTM

Description: This tool allows companies to identify profit and revenue leakage and identify

areas in which the business model building blocks are not consistent from a value

proposition point of view. It includes financial data.

Cruising to Profits – The ThermometerTM

Description: This too allows companies to assess their business model’s performance

against its potential. It provides a score and relates also to financial data.

Cruising to Profits – The ThermostatTM

Description: This tool allows people to identify initiatives that will shift the Thermometer

upwards, ranked by priority levels. It includes predictive analytics.

Cruising to Profits – The CompassTM

Description: This tool allows people to craft a business transformation plan in a systematic

and consistent manner that takes into consideration all building blocks and departments.



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Cruising to Profits – H2, The Human Capital MultiplierTM

Description: This tool allows people to identify which talent sets are required to achieve

and deliver the airline’s business model to the potential it needs to be experienced and

perceived by end customers.

ABOUT THE AUTHOR

Ricardo V. Pilon is an airline business model transformation methodology and profitability

specialist. He is CEO at Millennium Aviation, Inc. a boutique executive coaching firm

specialized in business model innovation, transformation and profitability revival

techniques. Ricardo has over 19 years of airline and senior management experience in the

areas of strategic planning, pricing and revenue management and marketing. Ricardo is

also Chairman at Avia-Invest Holdings, Inc., a Visiting Professor at the integrated aviation

management program of McGill University as well as Concordia University. He is a

certified IATA instructor and published author, entrepreneur and investor. He frequently

speaks at international conferences. Ricardo is based in Montreal, Canada.

Ricardo V. Pilon recently also published a new book entitled “Cruising to Profits -

Transformational Strategies for Sustained Airline Profitability,” of which the introductory

Volume 1 – Second Edition was released on 10 February 2014. The practical guide will be

released in late 2014.

CONTACT

Curmill Aviation Publishers, 5436 Royalmount, Montreal, H4P 1H7

t: +1-800-839-9046

e: [email protected] e: [email protected]

Cruising to Profits®

www.cruising2profits.com

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How my airline failed - On a Wing and a Prayer

Leadership & Management

Transcript of How my airline failed - On a Wing and a Prayer