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Author Topic: Whats up with all the large bankruptcies?  (Read 4445 times)

Offline schro

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Whats up with all the large bankruptcies?
« on: January 15, 2010, 05:09:19 PM »
I've noticed over the past couple of game years that there's been a significant number of large airlines failing (i.e. in ORD and SFO, and more recently in JFK, LAS, AMS, ATL, and probably soon in PHL) with hundreds of planes that go out in a bang.

Is this simply from a lack of attention, or perhaps a cost structure that doesn't fare well with $900-1000 fuel prices?  I'm rapidly and profitably growing, so I'm curious what has caused the downfall of others...

hybridace101

  • Former member
Re: Whats up with all the large bankruptcies?
« Reply #1 on: January 16, 2010, 06:59:03 AM »
Maybe you can share how you managed to be profitable.  Yes, fuel appears to be a major factor.  In my other game world for instance where I get my fuel for less than $200, all my flights in themselves were profitable.  Now however, with fuel at over $1100 and considering that I have quite a number of flights 3-4 hours long, fuel costs alone are larger than revenues despite a load factor of around 60%.  I'm a start-up airline by the way (2+ game weeks old).   

Offline Sigma

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Re: Whats up with all the large bankruptcies?
« Reply #2 on: January 16, 2010, 07:26:43 AM »
When you're new your airline is always going to have low load factors because people don't know you.  You've got to stick it out for a few game-months to get your LFs up.  Once that happens you should be making plenty of cash unless you're doing other things wrong.  

If fuel prices alone are more than your revenue you're probably doing something else wrong, as even a much higher LF is unlikely to bring you to profitability if your costs are that high.  Either you're running planes with deplorable fuel efficiency or you're simply not getting enough turns per day out of them to get your ticket revenue high enough (or you're simply charging too little for a ticket).

Attached is a sample of one of my planes.  Note that my Revenue on that single plane is about 5 times fuel cost.  And that was taken right now with fuel north of $900.  Even my little regional jets (F100s) are making 5 times their fuel costs in revenue and netting about $800K/week in profit.  When fuel prices are lower you can imagine the profit these planes make.

Overall I still net a 15-20% net profit margin company-wide with fuel prices this high, putting north of $50M/week into the bank.   I was nearly an astonishing unrealistic 40% net margin when fuel prices were low.

hybridace101

  • Former member
Re: Whats up with all the large bankruptcies?
« Reply #3 on: January 16, 2010, 12:20:29 PM »
When you're new your airline is always going to have low load factors because people don't know you.  You've got to stick it out for a few game-months to get your LFs up.  Once that happens you should be making plenty of cash unless you're doing other things wrong.  

If fuel prices alone are more than your revenue you're probably doing something else wrong, as even a much higher LF is unlikely to bring you to profitability if your costs are that high.  Either you're running planes with deplorable fuel efficiency or you're simply not getting enough turns per day out of them to get your ticket revenue high enough (or you're simply charging too little for a ticket).

Attached is a sample of one of my planes.  Note that my Revenue on that single plane is about 5 times fuel cost.  And that was taken right now with fuel north of $900.  Even my little regional jets (F100s) are making 5 times their fuel costs in revenue and netting about $800K/week in profit.  When fuel prices are lower you can imagine the profit these planes make.

Overall I still net a 15-20% net profit margin company-wide with fuel prices this high, putting north of $50M/week into the bank.   I was nearly an astonishing unrealistic 40% net margin when fuel prices were low.

Would you mean my flights are too long for a particular aircraft thus eating-up much needed time?  For instance, my 734s in this game are deployed to destinations at least 2 hours away from the base city (some even reach 4 hours) and turn-around time for that particular aircraft is 70 mins.  The suggested price for that Y route is around $245-250 but I set it at $225 as the manual suggested start-up aircraft do.  The 734 is the only aircraft that comprises my fleet.  

By the way, would you consider the 734 a fuel-efficient aircraft?  

For now, I consider 60% a fairly respectable LF since the airline has been operating for a month.

In business/economics, there is a concept called fixed costs and variable costs.  However, I know the key is to determine the variable costs with respect to each passenger flown and the only cost I know that varies with respect to the passenger flown is the passenger fees charged by the airports.  Fuel is a function of miles or hours the aircraft is flying and not a function of how many passengers are flying.  Maintenance is a function of how many aircraft (and engines per aircraft) and aircraft families are in the fleet.
« Last Edit: January 16, 2010, 12:44:11 PM by hybridace101 »

Offline schro

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Re: Whats up with all the large bankruptcies?
« Reply #4 on: January 16, 2010, 03:27:13 PM »
This thread is getting a bit derailed from its original intent - I was hoping to get a post-mortem on some of the larger bankruptcies to gain an understanding of the risks/quirks that are out there for large airlines.

Sigma - Thanks for sharing on the successful airline side - I'm mostly around 4x fuel cost for my revenue levels, and from what it sounds like, an airline configured for success with fuel at $200 isn't going to do so well at $1000.  When I started, fuel was $500-600ish, so I've never really had super wild profits.  What type of plane is that a screenshot of?

The other thing that I think might cause the large airlines to fall is setting C/D checks to not automatically perform, then being away from the game for a while.  I saw pax count gradually fall at Locke in KLAS over the course of about a game year, then in a last ditch effort to save the airline, I saw many of his planes on the market in poor condition lacking C and D checks. I think this may also be happening to Sharpe in PHL right now.

Offline [ATA] - lilius

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Re: Whats up with all the large bankruptcies?
« Reply #5 on: January 16, 2010, 03:59:04 PM »
The size is sometimes a disadvantage. You need to be constantly renewing the fleet, look at competition... all takes alot of time.

hybridace101

  • Former member
Re: Whats up with all the large bankruptcies?
« Reply #6 on: January 16, 2010, 04:36:51 PM »
This thread is getting a bit derailed from its original intent - I was hoping to get a post-mortem on some of the larger bankruptcies to gain an understanding of the risks/quirks that are out there for large airlines.

Sigma - Thanks for sharing on the successful airline side - I'm mostly around 4x fuel cost for my revenue levels, and from what it sounds like, an airline configured for success with fuel at $200 isn't going to do so well at $1000.  When I started, fuel was $500-600ish, so I've never really had super wild profits.  What type of plane is that a screenshot of?

The other thing that I think might cause the large airlines to fall is setting C/D checks to not automatically perform, then being away from the game for a while.  I saw pax count gradually fall at Locke in KLAS over the course of about a game year, then in a last ditch effort to save the airline, I saw many of his planes on the market in poor condition lacking C and D checks. I think this may also be happening to Sharpe in PHL right now.

And here's another tip for those C/D checks to ensure you don't drown yourself into bankruptcy quickly because of those: choose a used aircraft whose C check is more than 10 months away.  Be skeptical when it comes to the low leasing cost as the catch could mean the maintenance checks will expire sooner or later.  Either you want a high initial outlay but it will take a long time before the next maintenance checks are due or the other way around.  Moreover, maintenance costs more expensive for older aircraft of the same type compared to those recently acquired. 

Yes, size can be a disadvantage.  The manual indicates that a quick expansion can be another quick way to bankruptcy if not planned correctly.  I learned that propeller-powered aircraft consumes less fuel per hour than jet aircraft although the former is slower.  So it would also be good to do a speed-to-fuel consumption ratio.  From experience though mounting shorter flights (i.e. those under 1-1/2 hours), especially using propeller aircraft are more likely to work you as you get to use your aircraft more times a day.  Also, notice the suggested ticket prices, there is a disproportionate increase in ticket prices - that is, your ticket prices won't increase at the same rate as the distance of the destination so you will be at an advantage when flying shorter routes. 

Offline Daveos

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Re: Whats up with all the large bankruptcies?
« Reply #7 on: January 16, 2010, 04:44:03 PM »
This thread is getting a bit derailed from its original intent - I was hoping to get a post-mortem on some of the larger bankruptcies to gain an understanding of the risks/quirks that are out there for large airlines.

Sigma - Thanks for sharing on the successful airline side - I'm mostly around 4x fuel cost for my revenue levels, and from what it sounds like, an airline configured for success with fuel at $200 isn't going to do so well at $1000.  When I started, fuel was $500-600ish, so I've never really had super wild profits.  What type of plane is that a screenshot of?

The other thing that I think might cause the large airlines to fall is setting C/D checks to not automatically perform, then being away from the game for a while.  I saw pax count gradually fall at Locke in KLAS over the course of about a game year, then in a last ditch effort to save the airline, I saw many of his planes on the market in poor condition lacking C and D checks. I think this may also be happening to Sharpe in PHL right now.

As lilius said, the sheer size is often a disadvantage.  It is hard to keep an eye on everything that goes on with a huge fleet - it is almost too much to manage.  Problems can also arise when airlines attempt to buy new aircraft.  As there's the upfront cost and payment on delivery, I've seen many an airline (including myself!) not budget properly for the payment on delivery.  A huge airline value does not always mean a huge amount of cash on hand and this can cause some bankruptcies.  

This can cause problems with lease renewal and maintenance too.  Once maintenance is skipped then Company Image is affected and profits fall, it can all spiral out of control and the massive leasing costs cannot be funded anymore.  Loans are then often used to cover costs, but with profits low, they cannot be repaid fully and so on...the situation gets worse and then competitors take passengers and important routes.  Unless a player notcies at the start of the chain then often it impossible to reverse the decline.  The typical bankruptcy graph is (as you noticed) characterised by a slow fall in passenger figures as leases expire and CI falls.  If a player does own aircraft then they can try and sell them to get cash on hand, but this results in the loss of routes and if the aircraft are not sold, the graph dips even more.

Large airlines (as I've stated somewhere else) are also pretty mundane once you've wiped out the competition.  Some bankruptcies arise through boredom, whereby the airline is just left alone whilst a player concentrates on another game or something else.  This leads to the scenario above.

I suppose the final reason is market saturation.  Even large airlines can stop making money once competition reaches breaking point.  If players in a region are still expanding then its not just the little airlines that can lose out.

I hope thats of some use and interest :)

Dave

Offline Name_Omitted

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Re: Whats up with all the large bankruptcies?
« Reply #8 on: January 16, 2010, 05:18:44 PM »
My A330 fleet is, per plane, making less than my Dash 8-Q400.  Per dollar spent on hardware?  not even close.

The Fokker 100 is a real money maker, and there are a lot of them on the used market.  That being said, I downgraded from them to turboprops, and am doing well.   If I did not need to leverage the 100's to lease the Dash-8's, I would have gotten rid of all of them as well.  I will be really styling when my A380's are off lease in another year.

Offline schro

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Re: Whats up with all the large bankruptcies?
« Reply #9 on: January 16, 2010, 06:20:59 PM »
My A330 fleet is, per plane, making less than my Dash 8-Q400.  Per dollar spent on hardware?  not even close.

The Fokker 100 is a real money maker, and there are a lot of them on the used market.  That being said, I downgraded from them to turboprops, and am doing well.   If I did not need to leverage the 100's to lease the Dash-8's, I would have gotten rid of all of them as well.  I will be really styling when my A380's are off lease in another year.

I've been watching your progress fairly carefully - we've stuck to different markets so we haven't done battle yet :-).

I'm having the same issue with my A340's - I make better money with MD81's than I do with them...

Offline Sigma

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Re: Whats up with all the large bankruptcies?
« Reply #10 on: January 16, 2010, 08:33:46 PM »
This thread is getting a bit derailed from its original intent - I was hoping to get a post-mortem on some of the larger bankruptcies to gain an understanding of the risks/quirks that are out there for large airlines.

Daveos actually answered this fairly well a couple questions above.  But it boils down to the fact that 90% of large airline bankruptcies are a result, not of doing something wrong, but of doing nothing at all.  It can be forgetting about plane deliveries you have scheduled and running out of cash which can start a death spiral.  It can mean not resetting your pricing as inflation and fuel costs increase, making a once-profitable airline run into the red.  This sorts of things always started to happen about 30-50% of the way into the shorter games we used to have, which is why I wasn't a particular fan of the change to the oft-requested (mostly by newer players) longer worlds, as they always simply die off as times goes on.  Once you figure out the "formula" for success it's exceedingly easy to make tons of money and easy to forget to log on.

Quote
Sigma - Thanks for sharing on the successful airline side - I'm mostly around 4x fuel cost for my revenue levels, and from what it sounds like, an airline configured for success with fuel at $200 isn't going to do so well at $1000.  When I started, fuel was $500-600ish, so I've never really had super wild profits.  What type of plane is that a screenshot of?

That shot is actually from an A300, which is, by far, the best plane in the game for thick-route domestic operations in my opinion; or even international throughout Europe.  And that's with a nicely spaced, mixed-class configuration.  Back when you used to be able to increase the density without a corresponding decrease in pax, I could fit almost 400 people into an A300.  You can just imagine the profit potential back then -- a single plane could net enough profit to pay for itself in less than a year.  It is cheaper in terms of fuel/pax to fly 2 x A32Xs on a route but it requires significantly more overhead.

Which leads to the biggest secret to making loads of cash -- Density.  It would seem obvious but so many people fall prey to not heeding it.  So many overhead costs, namely Marketing, are a function of the number of flights and especially the number of routes that you fly.  If you can limit the number of routes/flights that you fly, by flying larger aircraft to fewer (but very dense) routes.  You will make a fortune.  Marketing is probably the biggest impact to your bottom line savings by doing this.  When I've created "Regional"-esque airlines in the past flying almost all Fokkers to all sorts of smaller points, my Marketing budget could be as much as 40% of my revenue just to get it up to a 100CI -- I simply had so many routes it cost a fortune to market my company.   With my latest game I went the opposite direction and rather than stake claims on many routes right off the bat, I took 100% of the demand on the biggest demand routes I could find, starting with the closest locations to me.  As a result, my Marketing budget is less than 5% of my net revenue to maintain the same 100CI.  That's a staggering savings.  If my Marketing budget was 20% of my revenues, and for many it is (or more), I'd be spending an extra $50M/week on Marketing than I am now, which would put me nearly into the Red.
« Last Edit: January 16, 2010, 09:13:21 PM by Sigma »

Offline type45

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Re: Whats up with all the large bankruptcies?
« Reply #11 on: January 16, 2010, 08:48:30 PM »
I've always stay an eye on them, I find something: they have a lot of high fuel-burn or low fuel efficiency planes(tons of A310, 744, MD-11, etc ;) ) some even not owned but leased. Leasing cost is something even worse than fuel price......

I faced the same problem in ATB2 and it finally killed me. This time I stay away from them or drop them before the fuel price go up.

Offline Tiberius

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Re: Whats up with all the large bankruptcies?
« Reply #12 on: January 16, 2010, 08:57:45 PM »
Well the post-mortum on Locke Air in Vegas was a combination of fuel prices and C/D checks.  My biggest losers when prices went high were my 767's, which, admittedly, I'm still learning how to use on long-haul routes.  They simply were not paying for the leasing costs, even though my individual long-haul routes were profitable.  The 767's also were not used very efficiently outside their big long haul's, I didn't have the time (I was on vacation when I failed), to add a large number of routes to about 30 767's with 5-6 hours of spare time, each aircraft, every other day (working around maintenance and some shorter routes I HAD set up).  The cash reserves were very low over the last 4 years, and D checks came and were taken care of for most, but not all, of my planes.  The C checks came up early after last year's D checks, and I didn't have cash to spend on them.  C checks expired, then planes started getting grounded a couple months later, and fines were accrued, and of course I still had bills to pay.  When I finally bankrupted (2 days early from the game's forced BK), I was about 1 billion negative cash, with 600 million in loans.  When I was about 600 million negative cash I put all the MD-80's not used as collateral (about 35) on the market because it was still "theoretically" possible for me to get positive, pay for maintenance, and continue with my other aircraft (70 leased MD-80's, 20 more owned and used as collateral, 40 Airbuses, 30 767's, 10 777's, and 12 Q-400's).  There ya go buddy!  Be careful with the C-check scheduling (I suggest, once you get in the 100's of aircraft range, staggering them out so they don't all come up in the spring, making you negative, and thus you spend the rest of the year getting positive; do like 10 a month or something just to spread it out).  Also don't go into long-haul's too early.  I really should have just bought another 100 MD-80's and soaked up the rest of the routes in the US from Vegas (there were tons I didn't even fly to past the 1560 range on the east coast).  Fleet commonality was a small issue, but the costs were probably only 5-10 million higher a month from the new types I added (airbuses, q400's).  Good times!  And props go to Go Away in Vegas - tough cookie.

Also I agree with whoever mentioned the density strategy.  It's awesome and I love it.  And another note from someone else about aircraft purchases was right on.  I almost bankrupted in 2002-2003 when I took delivery of 10 purchased 777's.  Had to sell every single one of them over the next year (at a marked up price :) I probably made 20 mil each plane).
« Last Edit: January 16, 2010, 09:02:16 PM by hellsey »

Online hershey1

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Re: Whats up with all the large bankruptcies?
« Reply #13 on: January 16, 2010, 10:21:09 PM »
The fuel wasnt the problem for Dirty based in DUS it was the fact that
the C checks and D checks came all at once for my MD 87 fleet the
avg c-checks were 2x the amout of a A320 as was the D checks....

I am now basd in LAX have 4 A320 aand making a little profit here
enought to add another plane and add j class seats

Glenn

hybridace101

  • Former member
Re: Whats up with all the large bankruptcies?
« Reply #14 on: January 17, 2010, 04:12:14 AM »
On a side note, the downside to having wide-bodied aircraft is that longer turnaround times are required.  A turnaround time of a little over an hour will do for narrow-bodied jets to minimise the risk of delay/cancellation due to quick turnaround time but for wide-bodies, you will need around 2 hours.  It will cost more in terms of ground time and less flights flown but it less compared to cancelling a flight.  We've lost lot of revenues due to cancellation.  That means that for a 1-hour flight (each for the onward and return journey), you will need 6 hours before resuming the next flight hence making only 4 flights/day hence it is key that these destinations you choose are nearby but have a high passenger demand.    

As a result, I had to suspend my MNL-KUL-MNL leg which lasts a little over 3 hours and replace it with a MNL-XMN-MNL leg.  Now, I only fly 3 flights/day and have only 1 aircraft in my fleet.

Finally, going back to the observation that inaction leads to bankruptcy, it's understandable that not everyone will be able to attend to this game all the time.  So let's see how we can devise an "autopilot" strategy that will ensure stability while the player is away.
« Last Edit: January 17, 2010, 02:10:18 PM by hybridace101 »

knutm1980

  • Former member
Re: Whats up with all the large bankruptcies?
« Reply #15 on: January 20, 2010, 05:35:49 PM »
Finally, going back to the observation that inaction leads to bankruptcy, it's understandable that not everyone will be able to attend to this game all the time.  So let's see how we can devise an "autopilot" strategy that will ensure stability while the player is away.

I'm currently just testing out the demo version to see if it's something I enjoy. I have a very tiny but growing airline and it frustrates me a little with this tiny airline that teh game seems to progress rather slow and not a whole lot to monitor, obviously, with a larger fleet I'm sure it would be more things to go through. But in terms of hands on handling of yoru airline, does it get a bit more needy for constant attention? Or could you log on say once, twice a day to make sure things were running smoothly?

hybridace101

  • Former member
Re: Whats up with all the large bankruptcies?
« Reply #16 on: January 21, 2010, 07:42:16 AM »
1. It is really a matter of time to see some growth in your airline.
2. I was a bit surprised to know than in a span of 6 "game months," I made my investment on bigger aircraft back.  In fact, that is the only aircraft in my fleet and I have more than doubled the money I started with.  Having said that, the key is to find "high yield" routes meaning those where there is a sizeable demand for at least some business class seats. 
3. Also, you may want to come back from time to time to check if competition has grown in the routes you already established as well as the routes you plan to establish.  That could really pose a threat to you or challenge you to rethink your strategy.  I don't advise establishing yourself in a place where there is plenty of competition already, at least at the start. 

COUGAR

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Re: Whats up with all the large bankruptcies?
« Reply #17 on: March 08, 2010, 03:09:50 PM »
I had to rebuild Vayudoot from scratch and have just managed to reach back to the levels i was at before: things were going great and I had cash balances in hundreds of millions. And it was so strange that I just couldnt understand what was happening! Maybe some of the others here can help me figure out what happened last time, becoz I am confused as hell.

Heres out it went:Things started going wrong when I decided to replace my fleet of leased ATR's and Airbus A320's with owned planes. My strategy was simple: order XX planes to replace an equal number of planes on lease. I first saved up enough cash to put down a down payment for the order (actually 50% higher: so if i need 200 million down payment, i waited patiently till i had 300 million in cash balance). As each aircraft came in, i took a loan of an amount equivalent to the value of the incoming aircraft. So if the value of each plane was 20 million, then I took a loan of 20m using the new plane as collateral , repayment period 4 years. And so on when each plane entered the fleet. I planned to sell of the planes after a certain period and based on what I worked out, i would be paying 40%-60% less despite loan interest and all that as compared to a leased fleet. by the time the loan was repayed, i would sell of the plane and start over again with a fresh fleet. With a new fleet of average age less than 5 years, i would save enormously on maintenance as well.

This strategy worked fantastically as far as replacing my entire ATR fleet was concerned. But then when i tried the same strategy for my A32X fleet, things started to go horribly wrong! I found that amount of loan i could take even with a plane as collateral went spiralling down, so much so by the time the 5th A321 entered the fleet, the available loan amount even with plane for collateral was down to a few lakhs!

I suspect there is something wrong with the way the loan system works. Can someone explain?

Offline JonesyUK

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Re: Whats up with all the large bankruptcies?
« Reply #18 on: March 08, 2010, 07:17:54 PM »
There is an upper limit to how much you can loan, even if you have more assets than you currently have loans. I think it's about $400m

Offline schro

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Re: Whats up with all the large bankruptcies?
« Reply #19 on: March 09, 2010, 12:38:24 AM »
Members of the Owl Alliance get my full airline evaluation for free to help them improve :-)

Couple quick things for you -

1. Max amount you can borrow in the game seems to be about a half billion.

2. High amounts of leverage in this game and real life are high risk. You'd be a much healthier company if you could cashflow the purchases (i.e. buy the planes you're already flying from lessors as their leases run out). 

3. Going with #2, high amounts of debt give you very little wiggle room if fuel spiked or you ran into other financial difficulties because you're already maxed out on your credit line. Having fully owned planes is very helpful in a fuel spike, as it gives you a competitive advantage over your competition since your overall costs are lower when everything else is constant.  Being highly leveraged puts you at a disadvantage - All I'd have to do as your competitor is task about 10 planes to match demand on your best looking routes, and you'd be out in less than a game year

 

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