The Avatar Airlines dream is not new. The corporation was founded in January 2004 (though maybe prior iterations existed) and nearly sixteen years later it finally is ready – again – to launch its service. Maybe. The company reapplied to the FAA for the necessary licenses last week. Its prior application was dismissed without prejudice in 2017 after a decade of floundering. This time around the business model looks remarkably similar, including the hypocrisy in some of the marketing and the low odds of success.
I believe someday I could fly passengers for free and make money.– Barry Michaels, Avatar’s Founder
The company is clear that it will need to raise cash to get its planes off the ground and intends a $300 million convertible stock offering in January 2020 to deliver that funding, launching service a year later. That’s arguably better than the 2015 pitch to investors that went nowhere or the 2016 version that proved similarly unsuccessful. The buy in minimums are the same, however, as is most of the business model. The company still plans to connect major US cities with 747s carrying 581 seats each and selling tickets to price-sensitive customers who don’t care about things like what time of day the flights operate. Can this iteration succeed where the others failed?
Avatar’s plan is supersized in optimism and aircraft size. The company plans to take 747-400s out of the desert, retrofit them with 581 seats (all economy on the main deck and a premium cabin upstairs), and fly between major US cities. Citing the low acquisition cost – $15-25mm per aircraft – and low operating costs per seat mile (thanks to the high number of seats) the company expects that it can sell seats cheaper than everyone else and still turn a profit.
Avatar plans only four fare classes, defined by the advance purchase window. The simple fare structure will make things easy for consumers, the company argues, as there will be no guessing around whether they’re getting the best fare.
For the aviation industry Avatar pushes its aircraft size as a win, moving more passengers with fewer resources and at a lower cost per seat flown. It also expects that it will not adversely impact other US carriers’ operations based on its limited schedules, small route network and generally off-peak flight times. The company also notes (with awful grammar) in its filing that “Less aircraft moving more passengers, will help the entire domestic aviation industry, by alleviating some of the significant air traffic congestion currently plaguing the skies.” How that happens by adding more planes and not eroding the competition’s operations requires creative reasoning, but such claims in DoT filings are not uncommon.
In explaining the desire to launch a new carrier Avatar starts with a discussion of the unbundled products that airlines sell today.
Amenities once included in the price of a ticket, now come at a premium. Baggage, seat selection and leg room fees – to name a few – all add to the bottom line for most carriers but subtract from the overall experience and value for average budget-conscious consumers. For them, it is simply a matter of paying more for less, with no viable alternative.
The carrier will solve that problem by selling advertising. Lots and lots of advertising.
Tempered only by FCC [this likely should read FAA – ed.] safety regulations and requirements, nothing will be sacred. Anything that you see or touch will be available for purchase. Management even envisions patrons using the restroom and being “greeted” by a named brand bathroom tissue company when they look inside the lid of the lavatory bowl. The outside of the aircraft may be adorned by e.g., Pepsi, Google or any other named brand on a massive aircraft “wrap.” Tray tables and overhead bins will be virtual billboards in the sky.
Were it just the advertising to make up the missing revenue perhaps the story would be simply amusing. For a carrier launching with low fares the ancillary revenue is critical to turning a profit. Avatar’s plans on that front make some financial sense. But there’s more.
Avatar intends to charge for products and services on board as well. Indeed, while bemoaning the unbundled services on one hand the carrier expects to make up a significant portion of its revenue from such sales on the other. Want a snack on board? Catering costs extra, and the company forecasts an average of $4 per passenger of revenue on that front.
Inflight entertainment and connectivity will also be on offer. The wifi will be free to passengers, supported by advertisers paying more than the cost to deliver the service.
Free Wi-Fi subsidized by Avatar’s “Avatizing” partners in exchange for landing page ads will provide an added free perk for Avatar’s passengers.
Passengers will also have an opportunity to buy out of the ad-supported version, further helping the revenues. That no other airline has managed to pull off such a marketing deal yet does not appear to faze Avatar. As for the movies on board, those come at a cost. Nothing wrong with that business model, except for suggesting the company wants to get away from charging fees for everything and then, in fact, charging fees for things. The company expects to realize ~$2.50 per passenger of revenue in this category.
The company will allow passengers to buy in to a standby flight option, paying an annual fee for access to unsold seats at 48 hours out. It will also sell trip cancellation insurance – all tickets are strictly nonrefundable – and hopes to transport cargo, especially from inbound foreign carriers that cannot carry it onward within the USA. The company will sell access to its inventory for tour operators and travel agents as well, further generating incremental revenue to the operations.
The company also acknowledges that access to 747-capable gates at many of its desired airports is limited. To that end it will build its own terminals, each capable of holding 1,200 passengers and up to four boarding bridges. The company also expects to derive concessions revenue from those terminals. In the business plans, however, it seems to skip over the cost of building them.
A recycled idea
The financial statements Avatar included in its $300 million prospectus appear to be recycled from the 2015 version. They speculate that the carrier can launch in 2016, while the new FAA application targets 2021 for first flight. The predicted route maps are recycled as well.
There also appears to be confusion in just how quickly the company will grow. In most of its financial statements it indicates 14 aircraft in the fleet at the end of its first year of operations. In the FAA application it suggests only nine planes will be flying, with point-to-point service connecting Los Angeles, Las Vegas, Orlando, Houston, New York, Chicago, San Francisco and Phoenix.
That the prospectus predicts only an 84% load factor is a nice concession from the company’s expectation that low fares and induced demand can deliver near 100% occupancy on board. The spreadsheets also run their calculations based on never selling the most expensive economy class seats, a more conservative view than necessary.
But the prediction of full planes from day one is almost certainly unrealistic. Ditto the predictions of selling just as much catering and IFE/C on a short hop from LA to Las Vegas as for a transcon flight.
The company also claims to be in conversation with Boeing about buying as many as 30 new 747-8i jumbos to further improve its CASM numbers. Never mind that Boeing’s backlog has the 747 line drying up in four years, well before Avatar would have a change to IPO and raise the cash to buy those planes. Or that buying new planes would destroy the business model thanks to the acquisition costs.
Avatar is unlikely to fly
The Avatar plan has nearly all the same holes it had in 2005 and in 2015. Maybe the advertising sales opportunities on board are slightly better now, but expecting to make up enough revenue on that end to offset the cheap fares is unlikely to succeed. There are other approaches, like travel packages where hotel or car commissions offset the fares, which could be more successful. U/LCCs around the world have had some success with that approach, though scaling it up can prove challenging, especially as fewer US consumers purchase full packages than in other regions.
And Avatar is not alone in pursuing the dream of bringing the 747 back into short-haul service. There is a reason that the Queen of the Skies, the Boeing 747, attracts so much attention and awe with airline startups. Baltia played that game. Aura and Family Airlines were two others that teased such plans. And One Caribbean is the most recent to bring a jumbo on board.
None of them went anywhere and Avatar likely faces a similar fate. But sometimes it is fun to dream.
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