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 Lufthansa already offer 134 feeder connections per day from 17 German cities to Frankfurt airport, and plan to expand the network this year. In 2019, the aviation industry carried 23 million air passengers on domestic connections, of which 8 million were in feeder flights and 15 million purely domestic flights.” Source – Clean Energy Wire
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).
The Risks to Scaling – Insane Bureaucracy
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.
The Economic Case:
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.
Bus Economics - How much money per bus ride does Landline make?
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.
Gate Economics – how much does it cost to rent a gate?
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.
Opportunity Cost, Feeder Flights & A Day In The Life of a Network Planner
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:
- The average turnaround time for an airplane is 1 hour, while the average turnaround time for a bus can be 15 minutes.
- 1 hour to fly a jet, a CRJ 200, a normal jet SkyWest would use, (which again, is getting retired), is $4,000, for 50 seats. The equivalent number for a Landline bus is $600 for 35 seats.
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.
- Airline Streamlining – airlines are increasingly retiring smaller and less profitable, regional jets.
- Government Streamlining – there is less and less appetite for subsidizing regional transportation.
- Environmentalism – regional air travel is some of the least eco-friendly and governments are already starting to legislate it away.
- Air Taxis – flying cars are the epitome of the merging of local & regional transportation and will require a reckoning in how these systems speak to eachother.
Airline Streamlining – Retiring the Nickelback of the Skies