Blue Skies and Future Bankruptcies

by JT McGee

pc12-surf-airOne of the truly fascinating things about business is that there is no shortage of people who love to lose money.

The New York Times published article about a new airline startup named Surf Air. The company offers all-you-can-fly options at a price of $1,650 per month (plus a $500 flat membership fee.) Monthly dues will put you on an 8-seat PC12 single-prop airplane and away you go.

Let’s just hope you don’t mind turbulance.

One can see the allure of such a service. Private flights require zero security checks, and you won’t have to wait in line to board. Plus, if you fly via Surf Air, each flight is essentially free. You pay $1,650 a month whether you catch 200 flights, or skip the skies all together. So if you want to fly to a California city just to grab a bite to eat at your favorite restaurant, you can do that without concern for the economics.

The business model has its obvious weaknesses. The only people willing to subscribe are those who think they’ll use it the most. It follows in the footsteps of other failed all-you-can-fly plans like that from American Airlines, which launched in 1981 at a cost of $250,000. American Airlines later discontinued the program for the heaviest users, a move that made it a defendant in the courtrooms, but undoubtedly saved it millions of dollars.

That won’t stop Surf Air from raising money – this time is different, after all! The NY Times says it has raised $11 million in venture capital, with plans to roll out the service in 50 different cities home to larger airports. Perhaps they could recruit the old Westward Airways team, which flew three PC12s in passenger flights for all of 13 months before closing their doors.

It’s easy come, easy go in the airline business. All you need is a few million bucks and enough audacity to think that you can be profitable in a business that hasn’t generated a single dollar of cumulative profits in its history. Forget returns on capital – everyone since Orville and Wilbur would just like their money back. According to Wikipedia, you could recreate Surf Air with $9.9 million to purchase three PC-12 airplanes.

NY Times knocks it out of the park with a quote of an airline analyst, “The problem in facing growth is you think you’re making money, so you go buy a bigger train set and you realize, wait a minute, we haven’t been making money.” That’s the best description yet for a high capex, high fixed cost business model. You might make money on accrual, but there’s no free cash flow on the cash flow statement.

Surf Air currently flies between three airports in California. If you’re a frequent flier between LA, Santa Barbara, and San Francisco, you should check out a membership. Take it for all it’s worth now, because who knows how much longer this model will stick around.

Prediction: Surf Air adds a flat per-flight fee within the year, learning from the medical insurance business that a copay significantly reduces a consumer’s willingness to consume.

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