Monday, March 06, 2006

The Air Taxi: Disruptive Innovation Part B

Continuing with the Air Taxi Discussion...

Next-generation Air Taxi operators will be using VLJs with significantly lower acquisition and operating costs. If the kind of sales volume appears as predicted by optimists, the acquisition costs will be even lower. At published estimate numbers (now cached), the range of direct operating costs per aircraft flight mile vary (depending on how and what one calculates) from approximately $.60 to $1.10 per mile. At these rates, an Air Taxi could charge 4 passengers each the equivalent of a government rate for using a personal car and make between 60% to almost 200% gross profit per trip.

One “Per Seat On Demand” business model uses the assumption that the prices for a seat on an Air Taxi would be only slightly higher than equivalent coach fares, and when total costs of an overnight stay in a hotel and additional car rental charges are factored into the equation, the total trip cost would be less than using the airlines – if they were even available for the same trip segment. If one has to take a longer commercial flight due to airline system route design, the Air Taxi flights might become cheaper no matter how they are weighted.

At the forecasted cost of ownership levels, the Air Taxi’s biggest competition might be from more companies creating their own flight operations activities that would both compete for production output from the VLJ manufacturers and take passengers away from the market.

Factors Working Against Air Taxi Success
In every business sector, entrenched interests have a stake in maintaining the status quo, and to operate within the known business rules and environment. When disruptive innovations introduce new ‘unknowns’ into the environment, these unknowns add perceived risk (real or not) that the established players tend to reflexively react to, in an effort to protect their established interests. Their first instinct is almost always to protect the status quo, instead of evaluating the innovation for exploitation. The Air Taxi concept appears to have triggered such a reaction within the air transport industry.

There has been an ongoing effort for some time by the Air Transport Association (ATA) – think “Airlines” - to offload some of their costs onto the General Aviation community, under the false flag of ‘fairness’, and that effort seems to have been redoubled as the VLJs and Air Taxi concepts move toward reality. The ATA and others can be expected to use many false rationales (safety is a good scary one) and sound an increasingly shrill alarm, but I could write many pages and not do as good of a job exploding the vested interests arguments as this article here. I can only expand upon Mr. Rayburn’s last comment:

The airlines will not recognise that we offer a tremendous opportunity for them to grow. We are not going to take passengers away; we are going to create passengers who will fly to get to the airlines. We are about the best thing that could happen to them.

Airlines: Adapt or Die
The airlines are at a point in their existence where they have to ask the same kind of questions that the railroads in this country had to ask themselves a few years ago. The railroads thought they were in the ‘railroad business’ like the airlines think they are in the ‘airline business’… and the railroads were going out of business (sound familiar?)

What the railroads finally figured out is that they were in the ‘transportation business’ and then they worked hard to integrate themselves with the other modes of transportation where it made sense and gave up markets where they couldn’t make money. This is why you now see many trains completely composed of engines pulling rail cars specifically designed to carry stand alone or semi-trailer container systems; container systems that had been bypassing them on the highways and had been driving them out of business. Embracing the change and competition saved the railroads. How long will it take for the airlines to also divine that they are in the ‘transportation business’?

While the ATA seems to be firing the first shots at the Air Taxi industry, I believe it is only a matter of time before the major labor groups and hub airport operators become more vocal on the subject.

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