A start-up airline?

Most of us don’t think of the airline industry — which is extremely capital intensive, has seen little technical innovation, and has chronically unprofitable big players — as fertile start-up ground. That is why I was so pleasantly surprised when I recently had the distinct pleasure of meeting Ray Webster, who was until this year the CEO of easyJet. For those of you unfamiliar with easyJet, it is a low-cost airline based in Europe. Its operations are similar to Southwest or to Ryanair, the latter of which was also recently mentioned in this space.

Ray is an engineer by training and has the laid-back style typical of a technology start-up CEO. His story of the early days at easyJet also had the distinct feeling of a start-up, from the SoMa-style warehouse office to the Chairman who would personally walk the terminal helping with customer service. What I found most interesting however was the way in which the key easyJet’s success, namely innovation in the business model, was similar to technology-driven innovation.

In particular easyJet, and the other low-cost providers, were the first to move away from a hub-and-spoke route architecture towards a point-to-point architecture. In the traditional airline business, a combination of regulation and economics lead to each hub being dominated by single carrier. This dominant player then made most of its money on hub-to-hub routes where it enjoyed monopoly pricing power. Feeder flights to these hubs were provided as required by regulation and as loss leaders to keep the inter-hub flights full.

With the point-to-point model, time and expense are greatly reduced if no transfers are required. Additionally, and quite importantly, the hubs are no longer a bottleneck and thus a source of delay. Finally, because the route network is no longer interconnected, delays tend not to propagate around the system. The reduction in delays is important, not only because it impacts customer satisfaction, but also because it allows for more efficient utilization of the very expensive aircraft.

Webster and easyJet founder Stelios Haji-Ioannou had a number of fundamental insights which led them to this architecture. The first was that the E.U. had agreed to deregulate travel within Europe, thus breaking the strangle hold of the national carriers. The second was that the smaller, efficient, jets, originally designed for feeder flights, would make excellent point-to-point platforms. Finally, the realized that demand for air travel was extremely sensitive to price and that a lower price product could attract a whole new range of customers rather than just competing with existing offerings (this is important given the installed capacity of the existing airlines).

They then went on to lease 2 airplanes and eventually build an airline which focussed directly on this new customer base — which is primarily cost-sensitive holiday travellers — which bucked industry trends in a number of other ways, including bypassing the travel agents and selling high quality food in-flight. As I listened to Ray, it occurred to me that in many ways the low cost carriers are not that different than a traditional start-up like Skype. They’ve seen a way to use changing technology and regulation to challenge massive incumbents, to give customers a better value, to make a product which was once a luxury available to the masses, and to make a ton of money in the process. It is precisely because easyJet prevailed against the conventional wisdom that it is good reminder to cast a wide net when considering what could make a successful business.