You might be forgiven for believing the 747-8i has a future customer on the horizon. After all, Avatar Airlines sent a “Letter of Intent” two weeks ago to the aircraft manufacturer in which it repeats the idea that it might want to buy 30 of the planes at some point in the future. That letter was also published on the carrier’s website and some media outlets happened to be made aware of its existence. A few took the bait and ran ill-advised stories suggesting that it was a serious consideration. A tiny bit of critical thought shows that could not be further from the case.
Avatar is interested in purchasing 30 new 747-8s, (passenger-version) to be delivered within 3-5 years, a deal that could be worth over $10 billion dollars to Boeing. The Company intends to release its IPO during this time which would be dedicated for this specific purpose. The timing is right for keeping the 747 alive. Rather than zeroing in on long-haul luxury, we believe Boeing should rethink the aircraft on a cost per available seat mile (ASM) which would result in more people that fly with less airplanes in the sky.
Avatar will likely never fly
Avatar’s history covers decades and the business model has not changed much. The company wants to charge lower fares to induce demand and fly larger planes so the costs per passenger are low enough to make money doing so. The 747 is an iconic aircraft to meet that goal, especially given that many are parked in airplane graveyards today, recently retired from commercial service. The planes might be cheap to acquire (Avatar estimates $15-25 million in its prospectus), but the costs to launch an airline are significant and the company does not have the cash on hand today. Barring a miracle it likely never will.
After decades of no one investing in the flawed business model why should that change today??
Even if it does launch service, the 747-8i is a bad choice for Avatar
The point of the company’s business model was to buy cheap frames and cram a ton of seats inside, reducing per passenger costs to find profits. Assuming the many used planes took flight and the company started making money it would have to modernize the fleet. That’s where this theoretical 747-8i order comes into play. But the capital costs to acquire the new planes would be massively out of scale with the used planes. Even by Avatar’s own estimates the new planes will cost 15-20x the used ones. Yes, the operating (fuel) costs will drop a bit with the newer planes. But not enough to cover the massive capital expense of acquiring those planes.
Buying the new, very expensive planes destroys what little bit of success the financial models might hold. It is unclear if the executives truly think they can boost those costs so much and still remain profitable or if this is just a misguided effort to generate positive press and hopefully bilk some investors.
Somewhat ironically, there will be a fleet of large aircraft with low passenger seat mile costs coming on to the used market over the next several years. If Avatar really wants a fleet of new, extra-large planes cheap and ready to fly for long enough to give the carrier a chance. Not that it is a good idea, but they’d be massively cheaper than the 747-8i frames and still carry a ton of passengers. The larger fuselage could even be appealing to the company’s idea of making its planes flying billboards for paying advertisers.
So why release the letter??
Avatar needs investors. Lots of them. And it needs those investors to be more keen on the dream of owning an airline than the reality of operating one. The most recent iteration planned for 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.
Presumably interest in the 2020 version was also light. Getting some positive press coverage for the business model and future plans, including the IPO and multi-billion dollar aircraft order, could help the company secure investors. No wonder the Letter of Interest just happened to make it into public view.
And, unfortunately, plenty of media took the bait.
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