Deal Memo - Landline - The Flight Log by Ground Control

Today is our first Ground Control Deal Memo – we have $100k to fill up in Landline and are investing alongside industry titans like long time airline investor Ed Shapiro, and past investors like Tusk, Upfront Ventures (Greg Bettinelli), Matchstick Ventures (Ryan Broshar) and Paul English (co-founder/CTO of Kayak.com).

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Even if you don’t want to invest, read on, because Landline provides a great lens to take a look at the transformation happening in our transportation ecosystem – Landline is building the common language between our national and local transportation infrastructures, starting with a bus codeshare network that allows you to board a United Airlines bus from an airport gate, but ends with something truly revolutionary – redefining the idea of the airport to look more like this:

Yes, this is Landline’s Breckenridge airport, code QKB - right off Main Street, just steps from the gondola.

On the way to that goal there are amazing lessons about airline codeshare and interlining, Lufthansa’s Rail&Fly program, flying cars, eco-conscious policy changes, and Skywest, regional air, feeder flights and network planning.

Let’s dive in.

When I was forwarded Landline’s deck I was immediately skeptical. I founded Mozio, the airport transfer aggregator & self-proclaimed “mobility infrastructure for the internet” and still serve as its Chairman. Landline’s pitch, as I heard it, was to “solve the final mile” of transportation by working with airlines to have branded buses at the airport. After I spent 10 years banging my head against the wall trying to get all types of travel industry players to sell Mozio content, I thought it was the height of absurdity to focus on what we had found to be the LEAST amenable partners – airlines – and then layer in additional bureaucracy with airport authorities, TSA security, baggage transfer and more.

It seemed downright masochistic.

But as I delved deeper, I’ve become a huge fan of what David Sunde and his team at Landline are doing. I realized Landline isn’t an airport transfer company, it’s a language translation platform, Plaid for Transportation – our local, regional and national transportation networks don’t talk, and true multimodal transportation won’t be possible until they do.

But what most excited me about Landline was as you get different forms of transportation to start speaking the same language, you can start reimagining transportation networks and hubs, and what an “airport” actually looks like.

As the upcoming transportation revolution continues and Air Taxis merge local and regional transportation, our local, regional and national transportation networks will have to talk to each other. 

I believe Landline is creating the language for that conversation.

We have a class system in transportation – the upper class is air travel – airports are cities unto themselves with their own governance rules, regulations and premium security while buses and trains are second class citizens – no security and no baggage transfer (apparently we don’t care if you blow up a bus or train).

The airport is the unofficial divider, making it extremely difficult for us to integrate these two classes of transportation seamlessly.

But when you think about it even the NATIONAL airline infrastructure doesn’t talk seamlessly amongst itself. If you’ve ever wondered why you can’t book a Southwest Airlines flight that then transfers to a Delta flight, well, it’s because they aren’t part of the same “alliance.”

One of Kiwi.com’s innovations, now being copied for bigger OTAs by tech players like Dohop, is called “Virtual Interlining” – United and American Airlines won’t talk to each other to make it possible for you to combine their flights, but Kiwi will do it for you and issue you one itinerary. It’s the way they ended up ranking at the top of every Kayak search for a while and grew so fast – all the other OTAs were just showing you routes that Delta returned to them, and Kiwi was figuring out how to append a Southwest airline onto the end of a United Airlines trip and rank higher when you sorted on “cost.”

It’s not seamless though – often this requires an additional 45 minutes compared to a normal layover, time you need to budget to go pick up your luggage, recheck it, go back through security, because again, American and United don’t speak to each other. 

The Alliances are the airline’s solution to do some of this for their very limited selfish means – United acknowledges it won’t fly everywhere in the world and having a connecting flight to a specific Indian city that Air India serves but United never will is to their advantage, so years ago they figured out how to do what’s called codesharing, to sell eachother’s tickets, and treat each other’s airline infrastructure as their own – seamless check in, baggage handling and more.

Lufthansa and Deutsche Bahn were the first to realize that codesharing didn’t only have to be for airlines and a few years ago launched “Rail&Fly” which allows you to book a connecting rail leg with Lufthansa.

Rail&Fly provides travel from any of more than 5,600 DB train stations, the ticket is valid on day of but also day before or after, and you can ride any of the trains on the DB network.

Most importantly for the airline, and for DB, is that you can sell the rail connection ticket in the same way, i.e. speaking the same language, that the airline is used to. This opens up a ton of distribution channels for DB that weren’t previously available – every international traveler who didn’t realize how convenient it was to just jump on the train from Frankfurt to Stuttgart, now has that option presented to them.

And importantly, Lufthansa now has many more “airports” to fly into. They are actually, technically, train stations (A Hauptbahnhof is a central train station in Germany), but for the purposes of the common codeshare language, they have an IATA code, the commonly used airport coding system we all recognize (“SFO,” “JFK,” etc.) and so can be sold in the same system.

If that wasn’t clear, Stuttgart’s central train station has an airport code that allows Lufthansa to sell a “flight” that is actually a train from Frankfurt to a Stuttgart “airport” that is actually a train station.

This is where Landline is brilliant – Landline is building the infrastructure to help every airline launch their own version of Rail&Fly – with an embarrassing lack of rail in the U.S. it’s really Bus&Fly, but still – every airline can now expand their route map to, well … anywhere.

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In short, Landline becomes part of their “alliance,” allowing United Airlines (their second major airline partner) to sell a route to Breckenridge (QKB) on United.com as if it was a normal regional jet route.

Landline integrates with the airport’s baggage system to facilitate a seamless transfer of baggage between the flight and the bus …

And you board from the Tarmac or Gate.

In order to make this happen, Landline has built a truly impressive solution stack.

Landline is helping airlines like Sun Country expand their coverage map, running buses airport to airport and enabling coverage to spots that couldn’t rationalize jet service but CAN rationalize bus service.

Most of Landline’s airports really are airports simply being used as bus stations, but to understand just how big it could get let’s go back to that house in Breckenridge.

The truly revolutionary part here is to understand that QKB is a made up IATA code. It’s literally a house that Landline set up as an “airport.”

Landline could put an “airport” next to every ski slope or main street in any city center. In the same way Lufthansa turned 6,500 train hubs into codes they could sell, Landline could add non-airport hubs like bus or train stations or simply start their own.

Measuring travel company revenue during 2020 and beginning of 2021 is incredibly tough, but based on current forward bookings, Landline platform sales will reach a $4M run rate by July, and they already have two major U.S. airlines signed up. Without adding any new hubs, Landline will achieve an $18M run rate by YE 2021. They’ve got two major partners, United and Sun Country, that they’ve already integrated with and can expand to multiple other airports with fairly seamlessly, so there is healthy growth in existing partnerships.

In order to further understand how big this could get it’s important to delve a bit deeper into the existing regional transportation infrastructure.

First it’s important to understand that United, Alaska, Delta and American don’t actually run their own regional jet connections, one provider does – SkyWest Airlines.

With a $2.5B market cap, they are the major player in regional commercial air transportation in the United States.

But again, they are restricted to airports, and there are only 503 commercial airports in the U.S.

But it should give you an idea of how to do some bottom up market sizing, and if you believe that there are potentially 10x more more “airports” to be formed to “fly” into in Landline’s model, it could be much, much bigger.

Second, it’s important to understand how airlines currently view these regional flights - as “feeder connections” to main legs.

And third, as we’ll elaborate in our section on supporting trends, many of the regional jets are being retired by airlines to save on costs – there is a healthy chance that much of SkyWest’s business is better served by buses and Landline can eat significantly into existing regional jet traffic.

I’ll keep this one quick – if the amount the team has already accomplished doesn’t speak for itself, Landline’s founder & CEO David Sunde used to be on the network planning team at Alaska Airlines, was the director of Ops at SurfAir and his co-founder Ben Munson successfully restructured Seaborne Airlines after two major Hurricanes in 2017, founded advisory firm Embark Aviation and led the network planning department at Alaska Airlines (where the two met). 

Some of my initial “you must be a masochist” tendencies upon reading what Landline was up to deserve addressing – specifically that working with airports isn’t easy. Working with airlines isn’t easy. And working with the TSA, Transport & Security Administration, isn’t easy. Combine all three and it would be understandable if you were running for the hills.

The good news, and the really really simple answer, is that Landline has already proven that they can make it work, and more than once – United AND Sun Country airlines, in more than one airport.

But can it scale quickly enough to be interesting? What I find most interesting about the model is that there ARE huge upfront costs to onboarding a new airline but once you do, rolling out new hubs and lines is comparatively easy, and those huge upfront costs become moats.

To onboard a new airline, Landline has to deal with the network planning or alliances at the airline, who after deciding if it’s a good idea, liaise with the distribution department, who figures out how to implement the connection to their system. A simple interline agreement can take a month. More complex codeshare can take 5-6 months. The distribution team has to work with the e-commerce team team to make sure that the website and the PSS will display the seat type. They then need to develop a new seat map and trigger a new type of customer communication. When all that is done Landline sends over a schedule file with the capacity and the airline uploads it to the system. There is significant time to set up the connection and it’s a pain in the ass, but the attractive part to me is that, once you have them up and running, Landline isn’t being displaced – you have moats galore.

To onboard a new airport, the airline works with the Landline security team to come up with a process for the two to work together, the TSA checks that and approves the manual change. Landline then goes to the hub airport with the airline and says here is how we plan to get buses on and off the airfield, and they approve it.

The entire process is 3-6 months from airline deal to airport deal to launching of the first route. 

Once the airline deal is done it can be 3-6 weeks as you are JUST dealing with the hub airport – you’ve already figured out how to display a new route on the airline.com website, the airline/Landline security protocols and more.

There are undeniably huge barriers to scaling upfront, but those barriers exist 4 times (ignoring international expansion here), one time each with United, Delta, American and Southwest. It’s a BIG mountain to overcome, but then once Landline is in the door, and a part of the airline’s network, Landline can roll things out pretty quickly – after Landline onboarded Sun Country’s network, they were able to roll out 5 new airports in quick succession.

I worried about two particular parts of their business model when I saw it - Gate Economics and Bus Economics. And then who takes on the Risk for it all.

We’ve all seen the $.99 cent Megabus advertisements and I’ve worked in ground transportation long enough to know the margins on long distance bus & train rides can be in the single digits. 

But Landline makes $35 per passenger on an average of a $70 bus ticket (bundled into the airfare) from a Denver to Breckenridge airport.

It’s worth noting that Greyhound might cost you about $10 for the same route, but that neglects the fact that to catch that Greyhound bus you might have to go into the city center (which might cost you a $55 taxi ride itself) & you might have to wait an hour or two to catch the right bus.

While I think there will be people who decide to figure out their own way to Breckenridge for cheaper there will be plenty who don’t – I personally find it absurd that there are people who will pay $300 for a flight instead of $30 for bus or $90 for a train to get from NYC to DC even though, “all in” travel time is maybe 4 vs 6 hours, but the DC-NYC flight corridor is so common they call it the “shuttle,” so there will likely be plenty of people who decide that a more expensive ride is worth not having to wait for baggage claim, extra waits and the logistics of potentially finding the bus station in the city center or at some far flung airport parking lot.

The next relevant question then is how much does it cost to rent a gate at an airport and can you make the gate profitable not only for Landline but more profitable than a flight.

An airline can pay up to $50k a month for a gate rental at a top hub like Denver, a pretty steep hurdle to hit for a startup. At first glance that seems insurmountable until you do the math and realize that Landline needs to basically fill up one bus a day per gate in order to break even on the gate.

But profit isn’t the only thing, opportunity cost matters too – during COVID there weren’t a lot of flights running, so gates were free and open to use. Landline’s traction is great, but when things rebound and airlines are fighting over gates again, are the buses liable to get pulled out in favor of more lucrative flights?

The answer is no, and in order to understand why you need to understand that the priorities of the network planner aren’t any one flight or location but are to build network effects.

Network planners spend their days thinking about how to add incremental seats into the network. The thing they care about most is simple – how many dollars it takes to put more seats into the network, more feeder flights that bring more people into the central hub at more diverse times for connections to other parts of the network to create those additional network effects.

Feeder flights are sometimes run at a loss because if having a Breckenridge bus connection helps United Airlines sell 20 more $1000 tickets from NYC to Denver, the real value of that feeder flight/bus connection is actually much higher than the $35 profit margin that it makes, it could potentially be $20,000 if every one of those 35 people is a person who books a United Denver to Paris flight that would have otherwise been an empty seat.

Using buses instead of planes is a way to add those feeder routes at a much lower cost.

Some quick stats to emphasize this point:

There is clearly an economic use case where buses will simply make more sense than a regional jets and an opportunity to expand the market, bringing feeder routes into the network that regional air never made sense for.

Overall I believe the economic case is strong.

The third issue is who is taking on the risk – SkyWest operates with a cost plus model – the airline takes all the risk regardless of whether or not they fill seats and SkyWest gets paid for their costs + a built in revenue on top.

Landline wants to shift to a cost+ model but currently takes on the liability for United’s Denver to Breckenridge bus. In a sign of that transformation, their Minneapolis to Duluth route has a 50-50 liability split with Sun Country airlines.

This is a worrisome part of the model.

There is the obvious – that a massive behemoth airline would not do their due diligence and make economic decisions to enable routes that aren’t profitable, or external factors would interfere (like, maybe, a pandemic) and Landline would lose the money, not the airlines.

But there is a potential bigger issue I alluded to when it comes to “feeder flights” – the airline could know exactly what it’s doing, and serving a regional airport could still make economic sense for an airline even if a particular route itself is a loss – if more posh New Yorkers book the NYC to Denver route because there is now a direct connection to Breckenridge they may not care if the bus to Breckenridge is profitable.

There is the potential for a bit of an agency problem here – it may make sense for an airline to spin up routes that are barely profitable for Landline.

To get their foot in the door Landline has had to take that risk, and I’m confident that they understand they need to get to a risk model that makes more long term sense.

What ultimately makes me bullish on Landline is four major trends.

AV Geekery once called the CRJ-200, one of the most common jets used for regional air travel, the Nickelback of the Skies in an article ranting about what an awful aircraft it is.

It wasn’t a surprise to then see that plane among the ones that Delta is retiring on an accelerated schedule.

As airlines seek higher efficiencies and profit margins there is a real chance that the smallest standard airplane is a 75 seater instead of a 50 seater, leaving a larger and larger gap that Landline could fill, giving airlines the “feeder flight” capability they are looking for at much lower cost.

There is a little known government act that passed during airline deregulation in America called the Essential Air Service, which guaranteed that small communities that were previously served by airlines before deregulation continued to be serviced.

“The Department currently subsidizes commuter and certificated air carriers to serve approximately 60 communities in Alaska and 115 communities in the lower 48 contiguous states that otherwise would not receive any scheduled air service.”

The Essential Air Service is just scratching the surface – it pledges that any towns that had air service BEFORE deregulation will maintain it, and doesn’t account for the last 50 years of development, leaving many local governments to try to solve this problem on their own.

Many, recognizing the value of commercial air service, are subsidizing regular flights themselves:

How long until many of these cities decide that they don’t want to subsidize costly air transportation anymore and switch to a bus?

France recently banned certain regional flights in order to promote more environmentally friendly options.

Buses are not only cheaper but vastly more green.

And France isn’t the only country doing this.

As the push for environmentalism gets stronger, I expect governments around the world will start passing legislation that is similar to France and Germany.

But by far the most exciting trend is the rise of flying cars. Air Taxis are already going to force a reckoning with what an airport is, and with Blade, Joby and others going public in SPAC deals, a future where we have real local air transportation for more than the .01% is around the corner. 

The mere merging of a local form of transportation, the taxi, and a form of transportation like air travel that is synonymous with long distance airlines, Air Taxis are a symbol for the coming bridging of the gap between local/regional and long distance transportation networks – they are going to HAVE to speak to each other.

And this merges with a few of the other trends. One of my favorite newsletters, The Diff by Byrne Hobart, went deep on Air Taxis recently:

Byrne’s bullishness on air taxis is partly due to the expected relationship with established airline players – but that isn’t going to happen without a way for them to speak to each other.

Over the next 5-10 years we are going to be forced to figure out how to duplicate some of what an airport offers, from bag check to security, away from the airport and in the city as more people want to take an Air Taxi straight to the tarmac. I expect there to be entire other businesses adapting rooftops for flying cars and installing lounges & security in high rises.

The idea of selling a full flight that ends in Midtown Manhattan won’t be ridiculous, and in order to do so more and more airlines are going to have to figure out how to interface with new forms of mobility, and vice versa.

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Thanks for reading!

David Litwak & The Ground Control Team

Sponsored by Mozio, Mobility Infrastructure for the Internet

The Ground Control community, podcast & newsletter are made possible through the generous sponsorship of Mozio, the ground transportation platform used by Booking.com, Agoda, TUI, Despegar, JetBlue, Air France, Hertz, AMEX GBT and more. Mozio powers the world’s biggest travel brands with airport transfers, ride share integrations and more.