AirX, the UK-based charter specialist, is adding two further Embraer Lineage 1000s to its fleet, making it the largest operator of the type in the world.
For John Matthews, AirX CEO, building up a fleet of Lineage 1000s is a no-brainer. He’s done it before, but on a smaller scale, with the Cessna Citation X.
Both the Citation X and Lineage are great aircraft, which for one reason or another, now have low acquisition costs on the secondary market. Matthews says this allows him to acquire the aircraft at a much lower cost than newer aircraft, which in turn drives down the cost of chartering out the aircraft.
Whilst the Citation X has several different aircraft types competing in the same marketplace, for the Lineage 1000 the main competitors are the Airbus and Boeing range of bizliners.
Matthews says that the charm of the Lineage is that it’s the poor man’s Boeing BBJ, but the rich man’s Bombardier Global family aircraft. “With 13 seats, I can beat any Global Express price, with double the cabin, literally 100% more or so in cabin size” he says.
Mathews also says that when competing against a BBJ for business, he can offer a price that’s 30% – 40% lower than the BBJ, although he concedes that his Lineage fleet is currently not ETOPS (Extended Range Twin Operations) certificated so can’t yet cross the Atlantic Ocean in one hop, although the company says that it hopes this will come in the next few months.
“The Lineage is a great aircraft for us,” says Matthews. “Because it’s been a failure in the charter market, it was a failure to sell because no one wants them. And its best (for us) to buy aircraft with airliner reliability that nobody wants.”
The Lineage 1000 is based on the Embraer E190 regional jet. In airline configuration it can carry just over 90 passengers, but as an executive layout, it can carry up to 19.
It is part of the Embraer E jet family of regional aircraft, which are in service with many airlines around the world. The E190 and its larger sibling the E195 sold well, with Embraer delivering 582 E190s and 174 E195s.
But whilst the E190 did well in the airline market, the Lineage 100 has not done as well as a corporate jet, with just 26 aircraft delivered. Two aircraft remain in demo service with the manufacturer.
Of those 26 aircraft, two companies operate more than one aircraft: China’s Sparkle Roll Jet with two aircraft from its base in Tianjin and MGM Mirage that bases two aircraft in Las Vegas.
Matthews says that it doesn’t matter to a charter customer if the aircraft has been successful or not, as once they step inside the aircraft, having paid the equivalent rate of a Global Express charter, and see that is has 100% more space, they are immediately won over.
Couple that extra space with the low acquisition costs and it is easy to see why Air X wants to acquire as many of the aircraft as possible. “I’m picking them up at less than 20% of their initial sale price, when the aircraft are only a couple of thousand hours old,” says Matthews. “So, they have two decades of life left, but they have lost 80% of their value. They have no business jet hourly rates on the engines, they have no complicated engine maintenance programs, and we can buy any spares we want from any airline (that operates the E190 family)”.
As the company has become more established, it now has access to much cheaper finance than even just a year ago.
During a conversation with CJI in November 2018, Matthews said that the real rate of interest that the company was paying on loans for aircraft was just nearly 20%. “We were paying on paper 7 – 12%, but in reality, it was nearly 20% as I know what the aircraft was bought for. “If I bought an aircraft for £9 million, and the lease says £12 million with interest on top, then its not really 7% its closer in reality to 20%.”
That has now come down significantly, with Matthews saying that interest rates have come down by double digits.
Part of the reason behind that is that since CJI met Matthews the last time, the company has seen an increase of nearly 70% in its EBITDA (Earnings before interest, tax, depreciation and amortization), and is on track to increase that in the current financial year.
By October this year, the company had already overtaken its charter revenue for the whole of 2018, and on the day we talked, Mathews said that the company was already 0.2% above its annual target in charter revenue for the year.
Part of the reason the company has done so well in the past year is that it has begun forecasting market demand more than it did before. This allows the company to foresee any peaks or troughs in market demand, giving it the opportunity to adjust its pricing based on market demand.
“So, in 10 days’ time, if we see that the Avinode requests are 80% down, we will lower (our prices) to direct operating costs to pick up that work,” says Matthews.
The company can, in its own words, be “massively” competitive in the market, saying that it can often drop its Lineage rate to below old Global Express charter rates. Mathews says that that works because its able to sell its empty positioning flights.
It can do this through Avinode, the online charter marketplace, with the company saying that 95%+ of its income is sold purely through Avinode.
According to Matthews, AirX is now the only brokers-only airline, saying that the company will never again have a direct client. “We closed down the direct client division. And since then, the business and the loyalty from the brokers has shot up.” He says. “We are the only people that are solely broker income only.”
“We talk three time a day,” says Matthews about Avinode, “I talk to them more than I talk to my wife.”
As well as the two Lineage aircraft joining the fleet, the company is also adding another Airbus A340 airliner to its fleet.
That aircraft, unlike the other AirX A340, will be outfitted in a high-density configuration, with the company saying that it will be ideal for the ACMI (Aircraft, Crew, Maintenance, Insurance) market, as well as high density sports charters.
“It will be there to fill a gap,” says Matthews. “Because obviously some airlines have gone bankrupt, and a lot more will go bankrupt.”
Matthews says that one of the reasons he sees airlines going bankrupt is that they have been acquiring brand-new aircraft, noting that whilst demand has not been falling, the yield that airlines get from operating flights has been falling drastically.
He cites the example of football fans wanting to travel abroad to watch their team play, saying that whilst a lot of fans might be willing to pay £150 for the trip, no airline with new aircraft will be able to operate the flight as the yield it gets will not cover its operating costs.
The ACMI market is one that Matthews says will be a major growth area for the company in coming years. “I want to do what Titan Airways is doing, but with used aircraft. I want to do what Hi-Fly is doing, but with used aircraft.” He says. “I don’t need a brand-new Airbus A380, I’m going to look instead at a retired 1998build Boeing 747-400.”
Whilst the fuel costs on an older generation aircraft are higher than those of new-generation aircraft, the lower acquisition costs allow Air X to compete with the more-established players in that market.
Understanding that difference and understanding that it doesn’t matter to the average flyer if an aircraft is brand new or 15-years old, as long as it’s safe and clean, has been one of the keys to the AirX’s success.
“I learnt that most of what I thought about the market was wrong, most of what I thought about the company was wrong, and I’ve learnt, in my eighth year in business, what the general aviation market actually is, value wise, strength wise, and productivity wise. “says Matthews.
“My success has come from living and breathing AirX really, and not worrying about other things that I don’t really understand.”