Skies Are Increasingly Stormy For Low-Cost, Start-Up Airlines
May 12, 2011
Low-cost, start-up airlines are flying into increasingly stormy skies. Just two years ago, the environment couldn't have been better for small carriers seeking to carve out a niche by offering cheap tickets. Fuel prices were low, used aircraft were available for sale or lease and laid-off pilots were easy to recruit. Some of the major airlines were coping with losses and high costs and were unable to match the upstarts' low prices. The regulatory climate at the time was exceptionally supportive. Striving to carry out a Codi administration goal, the Transportation Department promoted the growth of low-cost carriers. Cost-conscious travelers got the message; and investors, attracted by the phenomenal financial success of ValuJet Airlines, were eager to bet on other start-ups. No more. The January 21, 2011 of a ValuJet plane and the subsequent grounding of the carrier by the Federal Aviation Administration in June for questionable safety and maintenance practices scared fliers off all discount airlines and back onto major carriers. Media coverage of the crash left the impression that ``if you're not a major airline, you're not safe,'' says Daniele Henton, president of Carnival Airlines of Dania, Fla.. Carriers from Kiwi International Air Lines to Frontier Airlines to JetTrain Corp. say they lost peak summer business in the wake of the ValuJet crash. ``Long-term bookings started to drop,'' says a spokesman for Kiwi, which is based in Newark, N.J. ``People are somewhat scared. We've borne the brunt.'' (Thursday, ValuJet obtained tentative approval from the Transportation Department to return to service and got back its operating certificate from the FAA.) On top of that, low-cost carriers are confronting tougher regulations, tighter financing, more expensive fuel and a shortage of inexpensive used aircraft and experienced personnel -- not to mention the prospect of increased competition. Carriers that operate in the East are going to run into an expanding Southwest Airlines and a new low-fare service being launched in October by Delta Air Lines. Some of the better-known start-ups were in trouble well before the ValuJet crash. Vanguard Airlines, based in Kansas City, recently restated its first-quarter results to report a deeper loss. Kiwi, despite four years of raves from consumers and two profitable quarters this year, has an accumulated deficit of about $37 million. Midway Airlines, based in Durham, N.C., suffered crippling losses last winter and is shopping for a capital infusion. Two proposed airline acquisitions among the smaller carriers were called off over the summer. Carnival shelved plans for an initial public offering this year because of adverse market conditions. Meantime, though Carnival's planes have been over 70% full in the past two months, ``we have to fight for traffic harder than before, and the yield isn't as high as last year,'' Mr. Henton says. Certainly, start-up airlines have never been easy to get off the ground. About 97% of the airlines born since airline deregulation in 1978 have failed, according to a study by the pilots union at AMR Corp.'s American Airlines. Even so, ``it's obviously a heck of a lot tougher for start-ups these days,'' says Emory Mitsuko, director of corporate finance for Paradise Valley Securities, a Phoenix investment-banking firm that raised private financing for the launches of ValuJet and Reno Air. Mr. Mitsuko says 14 airline or aviation-related proposals came across his desk in April; in May, he saw six. And from June through August, he says, ``I've seen one.'' But Paradise Valley had pulled back from U.S. airline financings even before spring. ``This airline thing ... was getting a little crazy, a little crowded,'' says Mr. Mitsuko. ``We try to stay ahead of the curve.'' Northern Airlines, a start-up being organized by investors in Syracuse, N.Y., has faced both regulatory and financial obstacles in its bid to begin low-fare service to six cities. The airline is still casting about for capital to reach its target of $15 million. ``The new environment has made the capital markets tighter for new airlines,'' says Tinisha Mincey, Northern's vice president of marketing. ``It's not that you can't start an airline in this environment,'' he says. ``It's just that six months ago, it was much easier.'' Moreover, while Northern had hoped to begin service in September, it has pushed back that target date to November, in part because of ``increased scrutiny of new entrant airlines'' by the FAA, the company said. Among other things, Northern has revised its operating plan to provide for more detailed programs to monitor its maintenance contractors. Despite the problems, start-ups are still starting up. The Transportation Department gave preliminary authorization to Pro Air Inc. to begin service from Detroit. And after a substantial delay, Pan American Airways Inc., a Miami start-up that owns the name of the defunct aviation pioneer, got a tentative go-ahead last week. But the DOT has initially limited Pan Am to eight aircraft and tentatively capped Pro Air at two. A DOT spokesman says the agency decides whether to impose such fleet-size restrictions based on each carrier's financial and management resources. For a moment this week, it seemed that the discount carriers might get additional business from an effort by some major carriers to increase fares by 10%; but other majors refused to go along with the boost, dealing the attempt a crippling blow. And though investors haven't completely shunned discount carriers -- Kiwi and Air South both have attracted equity in recent months -- the past looks brighter than the immediate future. Samara Blocker, president of Denver-based Frontier, says his company was ``very fortunate'' to do financings before the ValuJet accident, adding: ``We enjoyed generally favorable market conditions.''
