Out of the Box

When a Business Collapses Because of a Miscalculation

By Menachem Lubinsky on January 04 2008

With rising fuel costs, increased competition and a growing cadre of dissatisfied passengers, this might hardly be the time to start a new airline. But in the past few years, business travel has exploded on many levels, including the launch of several all-business class airlines. Flying for most people is by far no longer the luxurious experience it once was. Crammed into tight quarters, dealing with long delays on security lines and crowded airports, and the increased specter of long runway delays and lost luggage, business travelers and others have gone out of their way to upgrade to the coveted Business Class.

MaxJet and Eos were two new airlines that were banking on the idea that an all-business class airline would attract not only the rich and famous but passengers seeking to escape the negative experiences of flying economy class. The two-year old MaxJet, for example, flew 767s from New York, Las Vegas and LAX to London’s Stansted Airport, a far more convenient airport than Heathrow and Gatwick for some business travelers. Last week, the airline abruptly closed down, with the exception of taking care of stranded flyers via other carriers.

Marketers probably advised the MaxJet entrepreneurs that their mode of travel was the wave of the future and even with Eos in the picture, success was almost certain. I can see a spread sheet in the MaxJet business plan that projects how a growing number of Americans and Europeans will prefer the upgraded travel. They probably included the steady growth of business travel and concluded that this was a potentially highly successful business.

They almost certainly banked on the fact that the large carriers would not go after the Stansted Airport route. They were wrong. By mid-October American Airlines with its huge infrastructure and expansive frequent flyer program began daily service from JFK. American plans a second nightly flight to Stansted from JFK beginning in April. Who knows if American won’t abandon the plan after it got rid of MaxJet. Meanwhile, Eos is probably trying to figure out how to keep its costs down and with MaxJet out of the picture it may be a bit easier to stay afloat. It, for example, flies the more fuel efficient Boeing 757’s and seems to also be considering routes that are not used by the large carriers.

A miscalculation in a business plan is nothing new. Some of the best laid business plans go awry because of changes in the business climate or even advances in technology. MaxJet might have had information that American will not fly the Stansted route. It could have relied on industry experts that did all kinds of analysis to show that the idea of an all business class carrier could not fail. It probably thought that the fuel prices were so high that they could not possibly go any higher.

Sometimes planners can’t get themselves to face a possible glitch in their plans. They become so enthusiastic with their own idea that they don’t ask themselves, “what happens if” In the case of Max Jet, the question might have been: “What happens if a large carrier like American or Continental decides to go after the Stansted market?” What happens if American determines that there are enough travelers seeking to avoid Heathrow or businessmen who want to arrive at an airport a short drive away from London’s Canary Warf?

The question then arises if MaxJet could have developed a contingency plan in case American goes after it or if fuel prices rise beyond what they projected in their cost analysis. It could have considered more efficient jets or opted for routes that the large carriers were less likely to compete in.

A business management consultant explained that people often get carried away with an idea “that adds up.” In other words, once they are able to connect the dots and it all seem to make sense, there is no looking back. If the idea fails, he says, they are usually quick to fix blame on something that they had no control of. Truth is that they may have thought of the potential problem, but dismissed the possibility as too remote and therefore should not play a part in their ultimate decision.

I recall reading a business plan by two young entrepreneurs who had intended to solicit investors for a new technology idea in the hospitality industry. The plan extensively quotes sources in the industry that appears to make the case for the service that can help a hotel better plan its occupancy rates.. It includes an elaborate marketing plan that targets hotel chains and independently owned hotels. After much delay in securing the funding, the business was launched.

It took a year for the business to take off and then the unexpected happened. A major media source featured a similar concept that was being introduced by one of the large chains, severely impacting their business. Of all the contingencies they thought of, they never thought of competition from a chain, although the report said that the company had announced three years earlier that they would develop the technology. Here the miscalculation stemmed from the research falling short. Unfortunately, miscalculations are an everyday occurrence in business.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.