A bit of a post-mortem on Eos:
Most of the articles about the bankruptcy have mentioned either oil prices or something related to the credit meltdown (Eos had additional financing lined up, but it fell through), but to suggest the airline failed because of either of those things is missing a far larger issue: Eos was never, ever, ever close to succeeding.
Sure, the airline put out announcements about how great everything was going, including this now-laughable note after MAXjet went under: “Industry failures, rising oil prices, a weakened economy and planned reductions in corporate travel have neither diminished travelers’ enthusiasm for Eos … nor hindered the company’s march toward becoming an unqualified business success…” Right.
And various media continued to print that type of nonsense without bothering to do the small amount of online research necessary to see that they were burning through cash at an impressive rate. As I wrote back in January, under all the hype lay an operation that was burning through about $5 million in cash each month. They hit investors up for more cash a few times (in total for about $200 million), but each $50 million infusion would last less than a year — and that cash burn never really diminished. They were down to $9 million in cash midway through last year before they received $50 million from investors. The business was never close to succeeding.
Why? Let me throw a few reasons out there:
- An all-business class airline that flies between New York and London has a major drawback: during a sizable chunk of the year, traffic falls off a cliff. Wayyyyy off a cliff. And with no coach (or premium economy seats) to offer, those 48 cushy lie-flat seats aren’t very attractive to leisure travelers. And in the airline industry, especially as a start-up, you can’t afford the cash drop off that comes with slow business travel periods. No cash means your fixed costs are burning through that $50 million investment.
- They were never able to get fares close to where they needed to be to succeed. Even before American Airlines introduced their purely evil JFK-Stansted service, Eos couldn’t get fares high enough. Once AA came along (and everyone else lowered their business class fares), they had no chance. Their business plan did not allow them to sell 40 seats at $1200 each way. Yet that’s what they were left with. With AA’s flight it was all over.
- The New York to London market looks incredibly attractive for startups (ie, MAXjet and SilverJet) because it’s the largest international business class market. So every start up will make the point that if they only generate 2% market share, they’ll be profitable, blah blah blah. If only it were that simple. So much of that traffic is locked up in corporate deals that the huge New York-London pie is more crumbs than pie. Eos didn’t make inroads in the corporate market (in part because they shunned travel agents at first) and in part because they underestimated the difficulty of getting people to switch due to their frequent flyer affinity. Those corporate deals are also at fares well below where the airline needed to be to make any money.
- I know they tried very, very hard to market their product, but they never succeeded: they never managed to explain how Eos differed from flying first class on BA or Upper Class on Virgin. In fact, that was an interesting problem from the start: consumers are pretty happy with BA and Virgin’s business class products. How do you convince people that they really aren’t happy with it and that they should try a new service? One way you do that is by not going through advertising agencies like Spinal Tap through drummers. Another is by having marketing staff actually flies the airline once in a while. Et cetera. If the company could never succinctly tell the story of why they were better, they had no chance of convincing people to switch.
And on and on. There’s so much more here — maybe this won’t be my last post on the subject.
In short, fares that are too low + marketing that is too weak + competition that is too brutal = disaster.
On a final note, after Skybus shut down I wrote a little blurb about SourceSpeed, the small company that ran the airline’s website and how they were owed $250,000 at the time of the shutdown. I knew them because they also ran Eos’ website and were a great group of guys. Sadly, they were listed as creditors for $127,000 in Eos’ bankruptcy filing. This is a brutal industry, and today I thought a lot about the 450 people out of work and how Geoff from Sourcespeed will absorb $375,000 in unpaid invoices. It’s still going to get worse before it gets better.