What Is La Compagnie’s Business Plan? The Deputy CEO Explains!

As most of you probably know, last week I flew La Compagnie from Paris to Newark. They’re the new airline in the market, offering an all business class 757-200 with 74 seats.

La-Compagnie-Business-Class-757-03

I’ve been following them with great interest since their plans were first announced. For those of you that haven’t been following along, here are the previous “installments,” in chronological order:

On Tuesday I received an email from La Compagnie’s PR company, asking if I was interested in speaking with Peter Luethi, La Compagnie’s Co-Founder and Deputy CEO.

I was thrilled they reached out, because there’s nothing I’d love more than to get a better understanding of their business model.

While I have a lot of questions about the other founder, Frantz Yvelin (who also started L’Avion), I have a ton of respect for Peter Luethi, who isn’t just some serial entrepreneur, but actually an airline industry veteran. He’s the former COO of Jet Airways and EVP of External Communications at Swissair, so this guy has been around the industry.

Let me first report what I learned, and then I’ll share my thoughts at the end.

Peter has a good sense of humor and is a nice guy

I try to inject humor into this blog as much as possible, though it can get slightly awkward when you actually talk to the person that runs the company you were talking about.

I mean, among other things I’ve said:

  • “Their business model is as flawed as the 787’s battery was for the first year, but that’s part of the fun”
  • “I just hope the people that came to work for them didn’t quit their day jobs…”

He started by confirming that they did indeed all quit their day jobs to come work for La Compagnie. I loved the fact that he had a sense of humor about it, and hopefully he understands no offense was meant on my end either. 😉

Service failures on my flight addressed

Before I started asking questions, he took the opportunity to address some of the issues I had on my flight.

The crew was apparently spoken to regarding a couple of the issues:

  • The plane apparently does have a coat closet, so he wasn’t sure why I would be told otherwise
  • The crew has also apparently been spoken to about the seatbelt sign situation (which wasn’t a big deal — I mentioned it in the trip report because I thought it was funny, and not because I thought it was a real issue)

Perhaps the most interesting conversation was about the plastic cups.

I mentioned in the trip report that drinks were served in plastic cups between meal services. He explained that “many airlines do this,” and it’s by design because otherwise there’s a lot of drinks that get spilled between meals, as people try to sleep.

La-Compagnie-Business-Class-757-16

I’d like to think I’ve flown a fair number of airlines in business class, and I’ve never found that to be the case. It’s interesting to learn that this is apparently an intentional choice by La Compagnie.

I also brought up that the website said La Compagnie would have three flight attendants per flight, while in practice my flight had six. He explained that La Compagnie will indeed have three flight attendants (plus the purser), and that there were six because they’re still training.

I countered by saying that most airlines have one business class flight attendant per 10 (or so) passengers, and he claimed that they have an efficient service process in place, and that it won’t be any problem offering a good service with just three flight attendants. It’s one of the reasons they have a two course meal service.

La-Compagnie-Business-Class-757-14

The service took forever on my flight with six flight attendants, so I guess time will tell whether that’s true or not…

La Compagnie business class should be best value business class, not best business class

He explained that their business plan was to compete on price point above all else, as La Compagnie isn’t claiming to offer the world’s best business class product (or the best business class product in the market, for that matter).

La-Compagnie-Business-Class-757-04

La Compagnie’s long term plan is to charge between 30% and 50% less than the major legacy carriers in the market.

Peter explained that due to mergers & acquisitions, bankruptcies, etc., there just aren’t many options out there anymore for consumers looking for a different value proposition. Smaller businesses and independent entrepreneurs don’t have enough volume to get corporate discounts from the big carriers, so he said this is a great alternative for them.

Are you happy with the way stuff has been executed so far?

Generally I always root for the “new guy” in the market, though there’s no denying in this case I’ve been giving La Compagnie a hard time.

That’s not because of the delays, but because of how they’ve been handling them. So I asked Peter if he’s happy with the execution the airline has offered so far, in terms of both operations and social media. I explained I was excited about the airline and really wanted to be on the inaugural, and it’s very tough for an airline to build buzz around a product when they don’t publish anything about their plans. I mean, I asked on Facebook when the inaugural would be, and was told “soon, very soon!”

He started by explaining the reason for the delay so far. Their current 757 is coming from Icelandair, and the modifications were delayed by two weeks. During that time they had their cockpit crews “inspected,” so that all eight of the airline’s captains could be instructors as well (obviously they’re certified on the plane already, but specifically to have an instructor certification).

As of this coming Monday, La Compagnie will operate five times a week, as of September 8, they’ll operate six times a week, and as of November 2, they’ll operate daily.

I explained that I understood the delays, but more specifically was wondering about the way everything was communicated. I specifically brought up that on La Compagnie’s Facebook page they said they couldn’t legally communicate in English. He laughed and thought that wasn’t the case, but did clarify that they weren’t allowed to have a US website until July 21, since they just got US approval from the DOT, TSA, and FAA as of July 20.

I mentioned the Facebook thing really did happen, and he said he’d look into it. For anyone that doesn’t believe me… 😉

La-Compagnie-English

So when you say 30-50% lower fares than legacies, what does that mean?

La Compagnie has ridiculously low introductory fares right now — two people can fly business class between Newark and Paris for $2,014.

Cheap-La-Compagnie-Ticket

Obviously that’s not sustainable, so I asked Peter long term what kind of prices they were aiming for. He said 30-50% lower than legacy carriers, but what does that mean in practice?

In other words, sometimes I can find fares between New York and Paris on Delta/Air France for $2,000 roundtrip, while other times they’re $10,000 roundtrip.

He explained that they’ll continue to have a simple fare structure with three types of fares — flex, semi-flex, and best buy, and they’ll likely range from $1,800 to $7,000 (or so) roundtrip.

Obviously the current ~$1,000 per person fares won’t continue, so that gives you an idea of where things are headed.

Is La Compagnie business class that much better than OpenSkies premium economy?

As I mentioned in my previous blog posts, the thing that’s so fascinating about La Compagnie’s sub-par business class product is that every other airline in the market either has fully flat business class seats or plans to install them.

Meanwhile OpenSkies has a premium economy product with very comfortable and spacious recliner seats. So I asked Peter what he’d say to people that suggest the products are actually similar, and that La Compagnie business class was more comparable to OpenSkies premium economy than to OpenSkies business class.

He totally disagreed there and found it ridiculous, and said that their product isn’t anywhere close to premium economy.

What will you do differently than Silverjet, EOS, and Maxjet?

All business class transatlantic service has been tried before and consistently failed. What does La Compagnie know that Silverjet, EOS, and Maxjet didn’t?

Peter explained that the problem with Silverjet was that they claimed to have a first class product at a business class price, and in a recession there’s no way that can work.

He further noted that EOS and Maxjet had distribution problems, and that their cost structures weren’t right.

Peter claims that’s one of the biggest strengths of La Compagnie — they have the cost structure right. They have very low fixed costs, a small management staff, and they have a great deal on their plane.

How do you weather a recession?

Okay, so even if an all business class product were to work when the economy is good, how does it work during a recession? Peter explained that he thinks they’re targeting a different market that’s more resilient during a recession. Specifically, independent entrepreneurs, artists, lawyers, etc., while he thinks big companies cut back more during those times.

Let’s talk about the cost structure

At this point I asked Peter if I could just rattle off some numbers, and that he was free to add anything. Specifically I referenced the Boeing website, which talks about the cost to operate a Boeing 757-200. The direct hourly operating cost of a 757-200 is ~$14,000 (this doesn’t factor in the other costs, which Boeing estimates brings it to ~$20,000 per hour).

So $14,000 times eight hours is ~$110,000. Divide that by 74 (the number of seats), and you get $1,500. That’s what you’d need to charge per ticket not factoring in:

  • Taxes
  • Anything other than a 100% load factor
  • Anything except direct hourly operating costs, which only make up a portion of overall costs (this doesn’t cover any of the other costs)

I finished by saying they’d basically need to charge $3,500 per seat roundtrip just to break even on direct hourly operating costs, and they’d need a 100% load factor at that. So I asked what I was missing.

Peter said those numbers were off, and assumed they were based on a new aircraft.

So realistically what is your goal/what are you projecting in terms of fares and load factor?

This is the part I found most interesting. I asked what La Compagnie was realistically aiming for in terms of average fares and load factor.

They’re hoping to average $3,000-3,500 per roundtrip ticket, with an average load factor of 75-80%.

So, with all that out of the way, what are my thoughts?

It was fascinating to learn La Compagnie’s perspective

I really appreciate Peter taking the time to speak with me. Perspective like this is incredibly interesting, so I’m really grateful he spoke with me. I certainly understand the business model more now from La Compagnie’s perspective.

I guess for me there are two big questions, which only time will answer:

  • Are people willing to pay an average of $3,000-3,500 per roundtrip on La Compagnie?
  • Is La Compagnie business class really more like business class than OpenSkies’ premium economy?

I don’t have a definitive answer, but I guess the market will decide.

There’s no doubt La Compagnie faces an uphill battle. The shortcomings for an all business class startup are endless — no frequent flyer program, not enough frequency, no partnerships, no corporate contracts, only one route, etc.

Are people willing to pay an average of $3,000-3,500 per roundtrip on La Compagnie?

Again, the long term plan is for business class fares to start at around $1,800, but they’re hoping to achieve an average fare of $3,000-3,500 (because not everyone will book a non-flexible ticket).

Lets look at the other carriers in the market. Perhaps the most direct comparison is OpenSkies. They have a true, fully flat bed in business class, are part of British Airways (so you can earn and redeem miles), etc.

Lets pull up random, non-promotional prices in business class over the coming year. They’re charging $2,400-3,300 for their fully flat business class:

Business-Fares-2

Business-Fares-1

Meanwhile they’re charging $1,300-1,700 for their premium economy product:

Premium-Economy-2

Premium-Economy-1

Not trying to draw any conclusions here, but at the same time I don’t really see how La Compagnie will be achieving their goal numbers. Yes, they might be cheaper than full fare business class (or even discounted business class on legacy carriers), but they’re going head to head with an established carrier in the market that’s operating a very similar model to their’s (except has a bigger backing, and has economy and premium economy as well).

Looking at OpenSkies

I flew OpenSkies back when they first started flying, and was quite impressed. They have a fully flat business class product which is similar to British Airways Club World.

OpenSkies-Business-1

OpenSkies-Business-2

They also have a premium economy product which is much better than average.

OpenSkies-Premium

Given that, it will be interesting to see if consumers feel La Compagnie’s angled business class product is competitive with OpenSkies’ flat bed business class, or if the La Compagnie product is closer to OpenSkies’ premium economy.

Bottom line

At the end of the day, my goal with this blog is to help you guys make smart travel choices.

Right now La Compagnie is the best transatlantic value out there. $2,014 for two people to fly between Newark and Paris in summer is cheaper than virtually all coach fares. Giving them a shot is an absolute no brainer, if you have the need to fly that route.

Give them a try for yourself and see how you feel.

Long term though, is there any way I could in good conscience recommend people fly them?

If the fare is the same as OpenSkies business class, then I’d definitely go with OpenSkies. If the fare is the same as OpenSkies premium economy, I’d definitely go with La Compagnie. If the fare is somewhere inbetween… well, that’s where it gets interesting.

Best of luck to them, and I’ll certainly continue to watch closely!

I’d love to hear what you guys think based on the above info!

Comments

  1. I think this is a good analysis. I would also compare fares of the big carriers as well. I get emails all the time from consolidators offering Europe fares that are often quite cheap. And those are real business class products on real airlines.

  2. I guess “time will tell” is right. Because clearly they’ve done all of this number-crunching, and more, and they know they’re not going to get 3500 on the average ticket.

    I wonder what the endgame is.

  3. Your 757 DOCs are waaaay off. Think closer to $8k/hr for DOCs (including m/x reserves) and $10k/hr with overhead and consumables, based on 250 MGH. If they are smart with costs, their numbers can probably be reduced a further 10%.

    He is absolutely right that Eos and Maxjet failed due to distribution. The same distribution model that will kill his operation unless he invests in full type-A legacy messaging, BSP membership and inbound/outbound IET capability. Right now, I don’t even see them in MITA yet let alone with concurrences. You cannot sell business class without those expensive distribution add-ons. Even then, the market for web sold O&D traffic between New York and Paris simply isn’t large enough and he won’t even be drawing a significant fraction of it.

    Sad to say but I’ll give them 6-8 months at most, unless their backers have huge capital reserves they are willing to waste.

  4. Nicely done, Lucky. You asked some very good, insightful questions and I found this to be an interesting read. Right on.

  5. @ Sean M. — Fascinating, always love your insight! Based on your experience, how much revenue do you think they they would have to generate per flight to break even?

  6. @Lucky – Thankfully, I am well qualified to answer any questions about the financial pitfalls of running an airline operating a single 757! 🙂 They will need to generate at least $120-130k/RT to have any chance of surviving. That means average unit roundtrip revenue of ~$2200-2500 at 75% LF in their current config.

    Seems simple enough, but can they hit an average 75% LF at those fares? Conventional wisdom says no. The cost side is probably in order, but their revenue projections are probably a bridge too far.

  7. I guess I am not very smart. How in the world can he say his product is not anything like OpenSkies premium econ? Implying his is better, how? Again, I dont claim to have any expertise in this (I have flown OpenSkies though), but to say his product is some how different and better, I dont get it. Your review speaks volumes. My two cents.

  8. I would think that the best way a carrier like this could really distinguish itself is to make all of the pre-boarding process and post-flight less a pain in the butt. I don’t know if that’s possible out of Newark. Or JFK. Or Laguardia for that matter. Also don’t know if you can make post-flight less a pain in the butt if it’s a flight requiring you to go through immigration/customs. Also don’t know if LGA has customs to make it a relevant option.

    But, that’s a place to stand out. Make check-in not only quick and efficient, but actually pleasant and enjoyable. It’s a very small operation. The check-in/gate agents, who are probably the same people, have only 1 flight to worry about. Make it simple. Make it easy.

    Not apples-to-apples, but I had a short, 1-hour flight for work a few weeks ago and did not fly commercially. Though, not on something like a Gulf Stream either. It was some kind of 9-person, single engine propeller plane. Flying commercial would’ve been more comfortable, but to be able to be airborne within 5 minutes of arrival was amazing. Didn’t get frisked, patted down, zapped in a nude photography booth, my possessions didn’t get X-rayed. Nothing at all. Walked from the car to the plane and took off.

    Clearly, La Compagnie can’t get you from your car into the air within 5 minutes. But, I think they can really provide a clear difference on the ground. Since that’s the most unpleasant part of the entire experience, that is where you can really make a name for yourself against the huge airlines you’re competing with.

  9. They really should get their PR in order. I mean, you’ve been blogging, tweeting, posting on facebook and whatnot, and only now do they start paying attention. They could have been riding that wave for weeks, and they’d get their messaging through instead of confusion.

    Did he at least say that he’s going to keep in touch with you?

  10. Wait did you publish your full trip report yet for your flight? I’d think your perspective may be different now that you talked to a Compagnie executive before publishing the full trip report, no?

  11. Lucky,

    I think Boeing’s fuel cost per gallon number is wrong. Cut that fuel cost in half and you have a much more sustainable business model.

    I personally think a bare bones business class product is long overdue. While I love the level of service in current premium travel, it is a luxury that most people/corporations don’t need and is a incredible waste of resources, if they’re honest with themselves. Private jets have a purpose (time is money), caviar on a business trip does not.

  12. @ Joey — Nope, haven’t published the full report yet, it’s coming next week. Don’t think my perspective will change, really. I’ve already shared my major thoughts, and those will be reflected in more detail in the trip report.

  13. I’ve been trying to figure out a long weekend trip for sometime in August or Sept and this has motivated me to visit Paris with my wife and another couple. 2 tixx for $2011 when the cheapest non-stop in coach is $1623 (AA) or $8275 in biz (Delta) really can’t be beat.

    Recognize this is unsustainable and that the product doesnt compare to the competition. But that being said anybody who is interested in visiting Paris in 2014 should be taking advantage of this deal.

    Thanks!!

  14. @Sean M: “The same distribution model that will kill his operation unless he invests in full type-A legacy messaging, BSP membership and inbound/outbound IET capability. Right now, I don’t even see them in MITA yet let alone with concurrences. You cannot sell business class without those expensive distribution add-ons. Even then, the market for web sold O&D traffic between New York and Paris simply isn’t large enough and he won’t even be drawing a significant fraction of it.”

    What do all those abbreviations mean? What is “full type-A legacy messaging”? What are concurrences?

  15. @snic – To put it as simply as possible, a “new generation” distribution model doesn’t work for Business Class travelers. There aren’t enough of them who book through channels other than their corporate travel agency using GDS systems with all the bells and whistles. A startup doesn’t have leverage to negotiate down GDS fees and the cost of setting up this functionality will easily run into 7 figures and multiple years. They also need interline agreements (concurrences) and onward traffic beyond their gateways to grow traffic. They don’t have these and by the time they get them, the cash will probably have run out.

  16. Another pretty obvious issue is that Paris isn’t London. NY has a lot of O&D traffic, to be sure, but Paris still isn’t a huge business destination, and things can get really dry in the winter (ex Christmas) and the spring (ex spring break). And even at that, as Sean M. says, businesses tend to buy their tickets exclusively through corporate travel agency channels. People who expense their tickets also tend not be very price sensitive. As for leisure travelers, well, let’s just say that for the most part they’re not going to fly business class at all, even at a discount. It’ll be interesting to see how long this lasts. Like, everyone here, I hope they can somehow survive.

  17. From a marketing standpoint, he can call it “business” all he wants. If your hard product is on the bottom end of what’s out there, you have an uphill battle.

    For the market that he is trying to target, the truth is, there’s two types of products: Economy with 30″ of pitch, and “not Economy with 30″ of pitch.” By having an inferior hard product, he’s certainly decided that they will only going to play a pricing game. If he prices his fares at “business class” prices, then he’ll lose to well informed competition. So, they can market their product however they want; price is going to be king.

  18. From I’m reading in all the comments, it seems that La Compagnie won’t be able to target the true business travelers. Additionally, what is the business travel market for NYC – Paris route?

    However, I do see that this may go for the leisure travelers who want to get to Europe, ideally in biz class, but who will never spend more than $3K on a biz class ticket, and really don’t know the difference between “real” business class. I just wonder how big that market is?

    If a coach ticket costs around $1,000 to europe, and I can get to Paris on a “biz” class ticket for $1500, I would pay the extra $500 just for the fun. I would probably do this for every european trip I would have. This is doable if you are in NYC. But for everybody else, it gets more complicated.

    So I wonder if La Compagnie has plans to partner with other airlines, loyalty programs etc.

    Bottom line IMO, it seems that La Compangie is trying to fill in a gap between Economy (or Premium Economy) and “true” Biz Class. Is there a market for that?

  19. While I love the level of service in current premium travel, it is a luxury that most people/corporations don’t need and is a incredible waste of resources, if they’re honest with themselves.

    The alternative is to pay their employees vastly more. Two jobs both require IAH to DBX 2x a month both jobs pay $300k. One lets you fly Emirates Business class and the other premium economy. How much more will you have to make up for premium economy?

  20. @John –

    Defined benefit plans would still be the primary employee retirement vehicle if your argument held water. If you’re running your business properly you are always weighing cost vs. benefit. There is a cap in the value an employer places on an employee, as there is a floor to the value an employee is willing to accept.

    If I’m running the company that has employees fly twice monthly long-haul, I would absolutely be interested in saving $50k to $75k a year each by having them fly La Compagnie as opposed to Air France. If an employee puts up a fight, and I value that employee accordingly, I’d pay them an additional $25k to stick around. And if you prefer sitting in a Air France Business Class seat 24 times a year as opposed to a La Compagnie seat and $25k, then you have your priorities out of order.

    You don’t have to, nor should you, take my word for it. Just look around. What I’ve said above is the same reason why 1st class is slowly being removed from various airlines and premium economy is slowly being increased. My argument is that a Premium Econ/Biz hybrid, like La Compagnie is not a bad idea, if they can find the right balance.

  21. And if you prefer sitting in a Air France Business Class seat 24 times a year as opposed to a La Compagnie seat and $25k, then you have your priorities out of order.

    I already make and have enough money, I don’t want an extra $25k a year. I want to be comfortable and be waited on.

  22. Ron,

    Are you familiar with the law of diminishing marginal utility? If you’re already making 300k or 600k an extra $25k isn’t nearly as valuable to you as 32 hours of comfort and luxury per month.

  23. Then you can buy your own ticket. And as an employer of many who fly internationally, I would question where your priorities lie.

    Mr. Bingham, is that you?

  24. What I’ve said above is the same reason why 1st class is slowly being removed from various airlines and premium economy is slowly being increased.

    But, business class is much nicer than first class was 20 years ago and premium economy on something like Lufthansa is where business class was 20 years ago. They are moving the needle up in terms of premium rather than down.

  25. Then you can buy your own ticket.

    Presumably one would take their book of business to a competitor with a more generous travel policy. That’s the reason business and first class exists. If companies could get away with having everyone travel in coach, they would. But, they don’t. Because, they can’t.

  26. I know where I stand financially, and I know I would absolutely take $25k over marginally better comfort and luxury I have no need for.

  27. As I said, you don’t have to take my word for it.

    Is business class now nicer than first class was 20 years ago?

  28. I totally agree with Cory’s comment. In such an industry I think point of differences and point of parity analysis is a must. If your hard product is not on par with competitors then you have to be different somewhere else. He says he’s looking to fly small businesses/firms, independent business travellers, etc. in and out of Paris which is obviously not London in terms of business travel. I hope he run a nice quantitative market analysis to say that, because if the only potential market is Paris area and NYC area and you don’t offer anything different (who would fly La Compagnie other than NYC and Paris residents?) then there’s something wrong. Outstanding ground services and MUCH shorter time between check in and take off could be a good POD but it really doesn’t seem they way the want to go, plus I fear market size is simply not there.

  29. Their product isn’t good enough to compete with genuine J and their projected prices aren’t low enough to compete with Y+. They’re stuck in an uncomfortable middle.

  30. I work for a large multi-national corporation. Our corporate policy used to allow employees to travel in business class if the segment was longer than 9 hours. Unfortunately that policy has changed and now we must always book in economy at usually the lowest faire. To fly business, I have to call the airline and upgrade myself to the “lowest upgradable faire” and then use miles. Since La Compagnie doesn’t have any airline partners, I won’t be flying with them for business.

  31. I keep reading all these comments about how their beds aren’t flat and who in their right mind would not want to sleep flat? I don’t want to sleep flat because I have sleep apnea and sleeping at a small incline, say 30 degrees, solves that. The numbers are something like 20% of adults 18 and up have sleep apnea, and those numbers rise as you get older and fatter. Just picture all your parents and grandparents always falling asleep in their easy chair… Picture all those commercials with adjustable beds… there is a market for that and those are the people who want to sleep in these non-flat beds.

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