Why Silverjet had to crash land

It seems almost as regular as take-off and landing – a new airline takes to the skies, climbs effortlessly to cruising altitude where it soars for a while, buoyed up by passenger enthusiasm for a new concept and the sheer momentum of its launch; then it faces a buffeting from the financial forces that all airlines, but especially new ones, must weather, before being forced back down to earth, sometimes in the financial equivalent of an emergency landing. Often there are corporate casualties.

It happened to Sir Freddie Laker's Skytrain in the 1980s; it nearly happened to Virgin Atlantic in the 1990s, before Sir Richard Branson found an injection of cash to keep his airline financially airworthy; and now it has happened to Silverjet, the low-cost business airline that, until late last week, flew between London, New York and Dubai. Silverjet suspended all services as it went into administration – the corporate equivalent of a crash landing.

I must confess I never flew Silverjet between Dubai and London, though I was tempted. With high business class fares on competitor airlines and packed airplanes, Silverjet looked a viable alternative and – at least on the Dubai route – a valid business model.

You would have thought demand for flights from the oil-rich Gulf to the financial capital of Europe would have been sufficient to at least ensure London-Dubai would have been a financial flyer.

But that was only half the equation that formed the Silverjet business model, and I think to find the real explanation for its demise you need to look at the other half – London-New York. Cracking this route has been the holy grail of the airline industry for decades, especially in the lucrative market for business travelers. At first, Silverjet seemed to have got it right – in January 2007, when the first Silverjet plane took off for JFK, the business world was buoyant, and oil was somewhere in the region of $75 a barrel. The decisions to add more flights to New York, and expand the service to Dubai, looked like the beginnings of a sound growth strategy.

But with hindsight, those were the halcyon days for Silverjet. By the summer, the sub-prime crisis and credit crunch were taking effect, reducing the number of transatlantic passengers, and oil was starting the inexorable climb that saw it recently touch $137 a barrel. It would never again be so good for Silverjet. The demise of two similar airlines, MaxJet and EOS, were the harbingers of things to come.

In these circumstances, where the fundamental assumptions of the business model are wiped out over a few months, maybe it seems naïve for Lawrence Hunt, the founding Chief Executive of the airline, to blame the industry analysts for his problems. He claims that the negative writings of the "scribblers" in the City of London cost him $14m worth of business, which would have been enough to keep the airline flying now.

Galling as it must be for a man with such expertise to see people he regards as "amateurs" question his model, it is impossible to agree with him. The analysts who raised doubts about the Silverjet business model cannot really be blamed for making potential passengers think again on flying the airline. Who consults the City research web pages before booking a plane ticket?

If the analysts can be said to have had an influence on Silverjet's demise, it is more likely that they sowed seeds of doubt in the minds of any potential financial backers who might have helped Hunt over the lean period. There was sufficient interest shown by wealthy supporters in London, as well as in the UAE, to have kept Silverjet in the air, but in the end the figures just did not add up. No investor, no matter how convinced they were of the basic concept, could justify making a bonfire of dollars just to prove Hunt's point.

The essential point is this: Any airline must have deep pockets – or access to financial reserves outside its core business – to help it through the hard times. This is what kept Virgin Atlantic going in the dark days of 1991, and what has kept the non-profitable parts of British Airways, Lufthansa and American Airlines going through recent crises. There is probably still room for a business-only airline. Indeed, BA has plans to start its own service between London and New York.

But it is unlikely it will be a stand-alone enterprise, much rather part of an already-existing global aviation group. And it is very unlikely it will offer the kind of fares Silverjet admirably proposed. Business-only, yes; low-cost, no.