Courting Chapter 11: Leasing Large Aircraft from Carriers without Proven Records of Reliability

With every major U.S airline having filed for chapter 11 at least once since 2002, the airline industry is a high-risk and high-cost arena.  Maintaining profitability is a major challenge for airline executives when faced with a soft economy, rising prices, fuel costs, wage expenses, and the need to meet seasonal consumer demand, particularly considering multi-million dollar asset costs anytime additional lift capacity is needed.

“There are airlines failing all over the planet right now.  There are a number of people trading in this business that are right on the thin edge.  In recent months there have been several airlines in theU.S.alone that have gone to Chapter 11.  The market is constantly changing, and clients are getting dumped on a regular basis that thought they had lift secured,” says Chris Lapointe, general manager of Flair Air, a Canadian large-aircraft charter firm. 

Maintaining competitiveness without major capital outlays to meet cyclical demand requirements is vital.  To meet these requirements, many airlines are looking to charter carriers for short and longer-term lease arrangements in lieu of making large capital expenditures on asset acquisition.  But choosing a reliable carrier can be fraught with risk in itself.  With flights scheduled, if the charter company suddenly folds, consequences can be disastrous for any airline.  And it is little less harsh if a charter company’s planes don’t arrive, don’t fly, or have mechanical issues—all delaying the airline’s promised service. 

As with any industry, there are always unreliable operators.  In the airline business it is a significant undertaking to enter into any lease agreement with a charter company—as you are essentially trusting them with a portion of your business.   For these reasons it is paramount for an airline to select a reliable charter carrier as a partner in service: the right firm can virtually guarantee that flights proceed without a hitch, whereas an ill-advised choice may bring aircraft mechanical failures, delays, poor service and ultimately financial setbacks.

“Normally it’s reliability we look for,” says Stephen Arbib, Vice President of Sales at SkyLink Aviation.  “We have to make sure because we are the ones on the hook with our clients.  Ultimately when we’re dealing with the clients, we’re the ones contracting through them, so whatever operator we deal with, we have to make sure they are reliable.” 

For SkyLink Aviation, reliability is just as important as safety.  SkyLink specializes in providing aviation to governments, such as the United States, UK, Canada, Italy, Germany and others, and international organizations such as NATO, the International Red Cross, the United Nations and USAID. The company is involved in non-combatant operations only, including emergency airlift and evacuation, troop rotations, peacekeeping, delivery of humanitarian assistance, logistical support, and mission-critical fuel supply.

SkyLink flies over 600 worldwide charter operations per year. The countries SkyLink charters to include Iraq, Saudi Arabia, Afghanistan, Lebanon, Kuwait, Somalia, Mozambique, Angola, Rwanda, Western Sahara, Ivory Coast, Sudan (including the Darfur Region),Peru,Cambodia, all the countries ravaged by the Tsunami in 2005, and others.

“When you’re hiring a charter service to move military troops into a disaster recovery or war zone on a moment’s notice, it is obviously an urgent matter,” says Arbib.  “Reliability is a primary thing we look for when we enter into an ACMI arrangement.”

SkyLink has chartered flights of various sizes through over 100 different agencies worldwide, and over the years in the industry Arbib has heard it all: unreliable charters that show up late--or not at all, overbooking, delays, planes pulled out of service with no replacement, not to mention charter carriers folding.

“We’ve heard too many stories with these types of problems.  Fortunately it hasn’t happened to us because we are selective about who we work with, and as a result our service has always been excellent” says Arbib. 

One amongst the many air charter services SkyLink has used is Flair Air, who operates a fleet of Boeing 737s--and will be adding 767 operations by the end of 2012.  The company has worked extensively with Flair for projects for the Canadian Department of National Defense, usually under an ACMI agreement that includes fuel. 

In Air Charter Firms, Size Matters

For Arbib, the size of the air charter firm can make a big difference. Choosing a smaller carrier with only one or two aircraft can create problems down the road when mechanical or other issues arise.

“The size of the charter service’s fleet is part of reliability,” explains Arbib.  “You want to make sure the charter company has multiple aircraft in case one has mechanical problems, they can replace it with another.”

“It also depends on the aircraft needed.  Some contracts require larger aircraft, some smaller.  Usually the sweet spot is the 737.  Flair’s offering is quite good, because they have the 400.  It’s a little more versatile than the smaller ones like the 200s, but again it depends on the requirement,” says Arbib.

A versatile offering from the charter company is important.  According to Lapointe,

“There are a lot of different aircraft types and requirements out there, but with between 76 and 170 seats, the 400 is definitely a good mid-range solution.  It covers any narrow body operator that is operating Airbus 320’s or 319’s or 321’s, or anybody in the Boeing family.  This could provide a good solution on a shorter, medium and long term basis.”

Charter carrier oversize can be a detrimental factor to versatility and responsiveness, where too large a carrier can result in inadequate attention and unresponsiveness.  Larger charter companies can often be involved in numerous types of operations including scheduled services which can distract from their smaller charter operations activities—and size does not provide a hedge against the Chapter 11 threat.

“In the business that we are in, we often have to react within 24 hours or less,” says Arbib.  “Many of the larger operators that deliver charter services can’t react as quickly.  So, being nimble, able to react quickly, able to price out quickly and get the crew and aircraft ready is very important to us.  Whatever operator we deal with, we have to make sure they are reliable, and we have found Flair to be extremely reliable.”

Lapointe says that although they are a smaller carrier, they are nimble and responsive, and are backed by the venerable maintenance provider Kelowna Flightcraft.  Flair has a longstanding relationship with Flightcraft and is located at the same facility.

“We’re a small company, under 100 employees, and our management group is

close-knit--so we have flexibility.  Yet, we’re in a relationship with Flightcraft, which was established forty years ago by aviation legends Barry Lapointe and Jim Rogers, has thousands of employees and is the third largest airline inCanada.  They have tried-and-true support mechanisms in place, including finance and aviation expertise.”

From Lease to Acquisition

According to Lapointe, lease agreements can be structured to eventually move from ACMI lease through several stages ultimately to purchase.  This option could appeal to start-ups or airlines that want to expand service routes gradually while proving their ability to perform financially as well as operationally.

“These types of arrangements are a lot less expensive than buying aircraft up front and assuming all that debt,” states Lapointe.  “We can be in and operating under an airline’s brand with a turnkey service in weeks.”

Responsiveness Amidst Chapter 11 Filings

In Mid-September, 2011 a Toronto based tour operator had a World Tour program that was in trouble. There were three weeks to go before departure and the French airline that had been contracted to operate the program suddenly declared bankruptcy and was unable to do the trip.  Flair was contacted and immediately started completely reconfiguring one of their B737’s from 158 Y-class seats to 76 business class seats. This included sourcing and purchasing the seats, and establishing a new approved LOPA for the new configuration. Over the next 3 weeks international permits, over-flight permissions and ground arrangements in 13 countries were finalized.  The tour program then went off as scheduled, with no noticeable service issues to the customers.

“Flair Air is really one of the great airlines,” says Arbib.  “We have found them to be extremely responsive and reliable.”

For more info about Flair Air visit http://www.flairair.ca/ or write Flair Airlines Ltd. 5655 Airport Way, Kelowna, BC, Canada V1V 1S1 or call (250)-491-5513.  E-mail: chris.lapointe@flairair.ca

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