Amedeo is best known for its focus on the A380 leasing business. Amedeo and Airbus have faced a slow market for the A380. Several people think the aircraft is past its prime and have gone so far as to state the news from the recent Dubai show demonstrates, or indeed, prove this.
Well, is it past its prime? We have published numerous stories on the case for the A380 and the VLA in general. We continue to think the argument put forward by Airbus on mega-cities holds true. The fact that Heathrow is now the most popular airport to find an A380 demonstrates this trend.
What of Amedeo’s “Net Jets Share” Airline for Airlines Idea? We take a critical look at the components behind it and plausibility.
The idea is focused on the creation of an airline to service other airlines as well as to offer lift to gig economy-style businesses such as Google or Airbnb and tour operators who are not inclined to build or expand airline infrastructure and operations. Amedeo has over $1bn of capital invested in A380s, mostly leased to Emirates, through its existing UK institutional investor LSE listed companies/funds (DNA, DNA2, DNA3, and AA4P, although the latter is diversifying and has 777s and A350s in its portfolio).
This idea must be seen as a case of early stage, advance planning. However, it is a positive step to be proactive about the development of a Plan B in case the secondary leasing market for A380s does not fully develop and Emirates does not snatch up the capacity through lease extensions of these aircraft (perversely, Emirates extending at higher rates and for more aircraft is more likely if they and Airbus do not agree on further orders and Airbus winds down the program, as the A380 has no replacement and Emirates growth is built around it – but that is a separate story).
Amedeo’s access to A380s coming off lease begins in late 2022 and covers 22 aircraft at a rate of three to four per year from then. More aircraft could become available if the idea takes off – since Amedeo’s relationship with Airbus and Emirates runs deep, if the business case allows, Emirates-owned older aircraft and, any aircraft Airbus may have to take back from its deals with Emirates and other operators, ought to be available for Amedeo to work with.
Amedeo has mentioned potential operations beginning by 2021, which gives it reasonable time to develop the infrastructure needed over the next few years. This sounds like an interesting idea that has merit, especially the aircraft utilization arguments Amedeo’s CEO Mark Lapidus makes which are examined below, and potential significant funding. As he explained to us: “Best in class is under 14-hour utilisation. With a network of just a few airlines, 18 hours becomes possible, that’s four extra hours to defray costs, but more importantly, earn revenue, so we can charge less per passenger fee.”
Let’s examine how hard key elements of it will be.
- In our view to make this work, a number of airlines need to support the effort. Amedeo will need to harness its principal relationships. Keeping the passenger relationship sacrosanct, so it always belongs to the initiating airline, is Amedeo’s premise. Inviting a gig economy firm to be a part of this may not be something some of the potential airlines this idea needs to work will like or appreciate. (Taxis and Uber is a good guide) On the other hand, if a serious gig economy firm got on board, that in of itself may provoke traditional airlines to join the fray.
- Amedeo has in mind short-term contracts for two to three years that will take up, or effectively block book, a part of the aircraft across product classes offered.
- Geopolitics will be a challenge in some ways, but not completely. A US AOC would allow operations to Asia and to Europe, which may in and of itself support a viable network.
- The higher aircraft utilization planned will enhance efficiency, but it does need to go beyond a single airline (or code shared or JV airlines) network.
Industry Growth – Wind in the sails.
The passenger aviation market is growing at a higher rate now than it has over the past 30 years. The doubling of passenger traffic, historically considered to be a 15-year phenomenon, may now be closer to a 12-year process. Boeing currently forecasts demand at 4.9% per year growth (while 2017 shows over 7% growth). This allows Boeing to report lower VLA demand in their market forecast but ignores the potential created by wider market demand growth.
Low price operators are stimulating demand for travel. WOW is an example, and the increasing emergence of the low-cost, long-haul segment.
Against a backdrop of strong and growing passenger demand, airline product commoditization is progressing rapidly. Seats in all classes offer essentially the same utility, onboard catering is typically outsourced. Cabin crew service levels still differ. But consumer preference tends to focus on the optimal combination of price and availability given timing and convenience. Additionally, JVs and code shares often result in passengers buying tickets on one airline but flying a partner.
Traditional network airline operators find this situation difficult and are clinging to the status quo, reliant on the barriers to entry that are created by their existing control of airport infrastructure.
Amedeo makes the case that it is unclear if traditional network operators will develop their thinking within the next few years to regard A380 as an efficient mass travel aircraft. Equally, gig economy businesses and tour operators are unlikely to grasp this model in scale. Consequently, while demand (traditional ACMI models, such as Hi-Fly. Listen to our podcast with their CEO here) may arise on an ad hoc basis, a more developed model is worthy of consideration.
A4Airlines (Amedeo for Airlines) is designed not to create a model that competes with airlines, but a model that services airlines and fills the network by offering lift that goes beyond the traditional ACMI chartering concept.
Amedeo refers to this concept as “ACCMI-Net Jets Share”, with the additional “C” referring to cabin crew. The service would be structured to enable airlines to seek a scheduled service, where they sell and distribute to passengers, but the flight service is delivered to them on a wholly- outsourced basis.
While some traditional charter work will likely be undertaken to optimize aircraft utilization, the model works most effectively by being able to aggregate lift on the same flight to more than one airline at a time. The key elements in achieving this are onboard product and seat commoditization as well as being able to cabin crew the aircraft in a manner that will be liked by the passengers and will be enhancing and tailored to the service standards across a range of operators, including those who have no actual airline operations such as for the gig economy businesses.
Amedeo advises that they are discussing the concept with certain “friendly airlines” where they can engage in strategic discussions. For example, with Emirates, where their support, as well as their participation, is sought – for example, by providing access to their cabin crew training college. The key with airlines is likely to be assuring them that their customer relationships remain sacrosanct.
An effective operation would likely need the support of a number of airlines globally (or one major alliance), or a number of tour operators and an Airbnb-style platform.
Availability of pilots is clearly a key challenge, as it is across the industry. However, with an A380 fleet, relatively few pilots are required enabling the business to afford to offer differentiating elements in its pilot recruitment. The Amedeo target is focused on 45 to 65-year old’s, offering them more flexible and pleasant working conditions and lifestyle-driven working arrangements.
Cabin crew training and service delivery will be a key element, as mentioned. The cabin crew are the customer-facing element of the business and will need to be equipped to deal with customers from different airlines. The intent will be to borrow and learn from Emirates’ experience in the development of a flexible and multi-cultural cabin crew who are able to transport airline image and service standards.
Branding will be critical, offering an identifiable quality while not imposing too much individual identity which may threaten partner airlines – a “United Colors of Benetton” sort of branding is envisaged.
Passengers will benefit from their loyalty programs with the participating airlines and systems will segregate information to handle this. The idea is very interesting – it will be even more interesting to see who moves forward with this idea. The idea certainly seems to lower the risk barriers to operating an A380.