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?
The pitch
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.
The Hypocrisy
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.
Other opportunities
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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Hi Seth:
Thanks for sharing your critical thoughts on Avatar Airlines. Articles that commend, criticize and even condemn the Company while it is still in its developmental stage (and it certainly is) all bring much needed awareness and presence to Avatar, the very thing that is needed if we are indeed to be successful. You know the saying, “all publicity, good or bad…” I want to thank you up front, for doing just that.
Yet, I’d like to respond to some key points you made in your article, and perhaps will be able to circle back, time permitting, on lesser points on a future date.
“Hypocritical” is in the title of your article, so that’s as a good a place as any, to start. It’s an unfair characterization. Your focus on the fact that e.g., Avatar will offer an option for passengers to pay for an ad-free wi-fi experience (that makes us “hypocrites” in your eyes) , rather than focusing on the fact that Avatar plans to offer passengers a free wi-fi experience as an option, misses a much larger point.
Avatar is primarily about offering passengers greater accessibility and affordability than what is currently available in the low cost market. We are not “hypocrites” for simply offering a few modest premium upgrades for those that may want it. Let’s be clear here. Our “premium” services do not include charging a fee for “premium coach” charging for overhead bins, charging for “more leg room” charging for baggage, charging for boarding early, etc. In my mind, those are not “premium” services – those are “services” or amenities that used to be included in the cost of the ticket. And still should be, in a better business model.
To my knowledge, most low-cost domestic carriers do not offer free Wi-Fi at all (I think Southwest may offer it, and JetBlue offers it, or did offer it free, to T-Mobile customers, if I’m not mistaken). I don’t think offering options in this regard, is hypocritical Seth, and its seems to me that you are blowing it way out of proportion.
We will also offer passengers free baggage – but with a two bag limit for passengers. Are we “hypocrites” if we charge passengers for a 3rd or 4th bag? I don’t think so. We never said “unlimited” freebies, and you’re missing the bigger picture if you focus on the few, limited premium services Avatar will offer. There will also be a small business class upstairs (42 seats) that we will charge a premium for, over the 539 economy seats downstairs in coach. Is that hypocritical of us? Offering genuine options is not hypocritical.
We are simply trying to put the “reasonableness” back into domestic flights. I see in your profile at the bottom of articles, you state that you have “a strong focus on passenger experience” and so I’m constrained to ask you, whether or not you are satisfied with the status quo — the current “passenger experience” on most low budget airlines?
If you are 6 feet, as I am, and flying coach, then for the most part, you’re looking for an aisle seat to have a place for your legs. Is that the kind of “passenger experience” you would like to see continue? I certainly don’t. Laugh if you want to, but do a “google” on “airline standing seats” and see what comes up. I assure you it is not a joke. There are companies already building these things, and eventually, given the “slope” that the market is currently on, there will be a buyer for those seats. It will make the 28″ seat pitch of today feel like 1st class tomorrow, and eventually, the airlines will charge you for that “premium” 28 ” seat pitch as if it were first class.
Somewhere along the way, in the name of profitability, airlines charging for amenities that would have shocked the conscience twenty years ago, are now, reluctantly or begrudgingly, accepted by the public.
Personally, I’m not a huge fan of the food/catering aspect of Avatar’s business plan, but it accounts for a very small margin of Avatar’s revenue, and in an age where the airline meal has all but disappeared from domestic flights in the low-cost model, it merely offers passengers an option. I don’t think that it makes or breaks the company’s plan, either which way.
I would have liked it if perhaps you gave Avatar’s (projected) ability to haul cargo at least equal time to the criticism of the premium Wi-Fi and food option. Your article mentioned it in passing, but there are some markets where we expect the revenue from cargo to exceed ticket revenue. It’s an area that most (if not all) domestic airlines operating smaller aircraft are practically barred from participating in on any meaningful level, because they simply do not have the capacity on their current fleet to haul cargo.
You have to view Avatar’s plan in its entirety, to get a true sense of why it has the capacity to be successful, rather than just picking at its individual parts in isolation. It is a classic illustration of why certain things are more than just the sum of their individual parts.
Advertising is a nearly trillion dollar industry worldwide. We believe that we are going to capture some of that market. Something that you did not mention was the “marketing” aspect that is a derivative of the advertising profit center. We will give passengers an opportunity to earn free travel by participating in market surveys/focus groups. It may not be for everyone, but for budget-conscious families it may be the way to bridge the gap to air travel instead of packing up the family car. Marketing firms pay good money to sponsor focus groups to provide valuable feedback to manufacturers and service suppliers. I’m not telling you something you don’t know. Avatar, with permission from passengers electing to participate, will amass a fortune in data that can be mined for that purpose, and earn a fee for doing so. Yes, you could argue that passengers giving up information is tantamount to paying hard-earned cash, except it isn’t hard-earned cash. What it is, is a means to an end, for at least some people. It is an option, short of digging into their wallets, so to speak.
In an age where profits on low-cost carriers come solely from ticketed passengers, as one with a “focus on passenger experience” – I would ask you to at least keep an open mind about Avatar – if not a cautious optimism. Avatar’s use of multiple profit centers that are not solely centered on ticket revenue – would be a welcome reprieve to budget-conscious travelers.
I fully understand the skepticism, given the time it has taken Avatar. I’m sure I don’t have to tell you the challenges a company faces as a startup trying to get that “first money in.” While money won’t solve all of the challenges Avatar needs to meet to become a successful operating carrier, it sure will get us over a very significant hurdle to so becoming.
Avatar won’t be for everyone. Not for every investor and not for every passenger, and that’s ok. We don’t need “everyone” to be successful, for reasons I’ve already stated. Given the current climate, people will either see the value or they won’t.
I’ll close the way I started: articles like yours really do help to bring awareness to Avatar. While we can certainly disagree on a lot of things (and we do) the fact that we can have this dialogue is invaluable. Have a Happy Thanksgiving holiday Seth.
Michael E. Zapin
EVP and Chief Legal Officer
Avatar Airlines, Inc.
Appreciate the response, Michael. But the fact that y’all are recycling an old idea that never had traction (and didn’t even bother to update the spreadsheets) does not instill much confidence.
My use of the word “hypocritical” was meant to stir up some conversation. I have no problem with an airline, especially a ULCC, choosing ancillary revenue as a core component of its business model. I think that is a very smart idea. I think going to market saying you won’t be and then highlighting all the places you will is bad form. Own the fact that the tix are stupid cheap and that other parts come with a surcharge rather than trying to pretend they don’t.
I’ve written extensively on the “standing seats” bit that you identified and, unfortunately for your argument here, it is a joke. Yes, AvioInteriors keeps putting the SkyRider seat on display. But no one who is taken seriously in this industry believes that it will be certified and fly, especially not in the US market.
You missed a few details on the free wifi conversation and are probably a few years late in being able to claim that you’ll be unique in offering that, whether LCC or full-service. That’s much more likely to be the norm by the time your planes are in the air, not the exception. And there’s the part where none of the companies doing it have a model that fully covers the costs, despite access to all the same customer personalization data and such y’all are hyping. You’ve given no reason to believe that Avatar is better positioned on that front than airlines with large, established teams that have been working in this space for years to refine the offering.
The focus groups revenue stream is another amusing one to me. Compensating survey responses with airline-related benefits (typically FFer points) is hardly new. That’s been around for years. The amount paid is trivial, however. Similar to the WiFi bits, it is unclear why Avatar’s version is any different than those who have come before and not delivered nearly the yields you’re claiming to be able to generate.
There must be some reason that the business model you’re pitching failed to generate traction for the past 25(??) years. Suggesting that it is simply because others don’t have the vision, rather than because it is a bad business model, is certainly better for your sales pitch but also probably not true.
Happy Thanksgiving to you as well.