His musing could be taken as the catch-phrase of the current wave of new entrant airlines in the US that began in 1992 when Reno Air launched its point-to-point service from Reno, Nevada to what is now a 15-city network in the western US and Canada. At first the start-ups took advantage of favourable aircraft lease rates and a ready source of labour - the likes of former Eastern Air Lines and Pan Am employees supplying the new airlines' ranks.
Now, more than three years and 30 passenger and cargo startups later, aircraft are more expensive and capital costs are higher. But pushing the airline entrepreneurs instead is the notion that low-fare, low-cost service can work just about anywhere. Even with the failure of the concept in the guise of Continental Lite, the overwhelming success of Atlanta's ValuJet Inc, which posted a $21 million net profit in its first full year, is only furthering the belief that low fare operations automatically mean high profits.
But achieving success akin to that of Southwest, on which most of these startups are modelled, has been and will remain difficult for most. 'I can't even imagine how low the odds are that a startup will come in, buy the right equipment, establish the right niche and grow to become the new Southwest,' says Kit Darby, president of Air Inc, which monitors new entrant airlines for pilots seeking employment. The conservative Darby still calls ValuJet 'a flash in the pan.'
Succeed or not, the new entrants are helping to redefine the way airlines do business. Niche-specific, most are attempting to stay out of the way of their larger brethren and convince the incumbents that being a small, point-to-point player does not make a pariah.
Now emerging is an apparent new class of airline based on Southwest's successful formula, but which cannot be replicated easily - or profitably - by established airlines (Shuttle by United may be the exception). If they can survive, new entrants may fill a well defined position: between regional carriers and large, established airlines with international weight.
So far, the record is mixed at best. Reno Air, caught in between Southwest and Shuttle by United on the West Coast, continues its rather consistent money-losing ways, posting net losses of $3 million in the first quarter after $14 million in losses last year. Kiwi International, started in Newark two months after Reno Air's July 1992 launch, has had only two quarters of net profit.
Others facing difficulties include Denver's Frontier Airlines, which launched services last July and returned $8 million in net losses on revenues of $25 million in its first year, which included startup costs.
Air South Inc, the carrier most noted for receiving $17 million in backing from the South Carolina state government, has had so many problems since its startup last August that it has already had a management shakeup. And a bevy of new entrants - Capitol Air Express, Leisure Air, Ultrair and Private Jet (alias National, at least briefly) - have simply gone out of business.
Clearly the impetus for the wave of startup activity is the low-cost, low-fare marketing concept pioneered by Southwest, which introduced such novelties as non-participation in computer reservation systems and open seating for passengers. Michael Boyd, president of analysts Aviation Systems Research, insists that Southwest's success is bound up in its own uniqueness. 'It is almost as if there is an aversion to giving someone a seat assignment. Its like [the startups] are saying, "If we do that, we won't be like Southwest." '
However, there is a significant degree of variation in the most recent batch of startups. While most take Southwest's low-fare, single-aircraft-type strategy to heart, that is pretty much where the emulation stops. ValuJet, for example, is based more on Salt Lake City's Morris Air, itself taken over by Southwest in 1993. Morris copied Southwest except in that, being based at Delta's western US hub, it flew a low-frequency schedule intended not to ruffle Delta's feathers. This provided important lessons for ValuJet's founders, who also followed Morris' lead on ticketless travel.
Air Tran also followed the lead of Southwest, at least sort of. The Orlando-based low-fare carrier, owned by Mesaba Corp, the holding company which controls part of Northwest Airlines' commuter operation, has a fleet of six Boeing 737s. The small carrier offers cheap flights direct to Orlando, from smaller but still significant cities like Albany, Syracuse, Buffalo, Cincinnati, Dayton, Nashville and San Antonio. These non-stop services differentiate the carrier from operations like those of ValuJet.
But it is in Colorado that a mix-and-match imitation of the low-cost, low-fare carriers is best exemplified. Between Frontier at the new Denver International Airport and Western Pacific in Colorado Springs, a contrast of styles has emerged. Both have been inspired by Southwest and ValuJet, for markedly different reasons.
Frontier has attempted, less than successfully, to market itself as the reincarnation of the carrier of the same name, which was taken over in 1986 by People Express. Intrigued by Continental's downsizing of its Denver hub from 150 daily flights to 13, Frontier officials decided to scratch plans for establishing an airline to feed the operations of either Continental or United, or both, at the airport. Instead, says founding member Bob Schulman, the new Frontier, which now flies to 15 cities, would pick up the slack that Continental left behind and undercut United's fares by as much as 60 per cent.
Though Frontier and ValuJet both have a home-market major to deal with, United and Delta respectively, they share few other common strands. Frontier has assigned seating, offers meals and small extras, and is on most computer reservation systems, none of which ValuJet or Southwest do. Still, in the strict sense of new entrants battling the old guard, there are similarities between Frontier and ValuJet. 'We have close to the same niche as ValuJet,' says Schulman. 'We're filling voids in key markets and we have the infrastructure to become a hubbing airline.'
But costs are the key difference between Frontier and ValuJet. Though both startups use single aircraft types (Frontier currently has five B737-200s), and have maintained a significant expansion plan, Frontier's unit costs are well over 2 cents more per available seat mile than ValuJet's. This is largely due to increased gate and landing fees at the new Denver airport, which costs the carrier $11.4 million more than at the old Stapleton International Airport - 1 cent per ASM.
In Colorado Springs, the circumstances are reversed. Marketing initiatives by Western Pacific mimic those of ValuJet, but the carrier's dominant position at a small airport is far from analogous to the Atlanta carrier - or any other startup carrier intent on carrying forward Southwest's legacy.
But like ValuJet and Southwest, Beauvais' airline does not participate in any CRSs, eschews seat assignments, and has instilled a relaxed and jovial mood among employees. Beauvais has gone one step further by selling advertising space on the exteriors of Western Pacific's three 737-300s: Marge Simpson's big blue bouffant currently bedecks the tail of one of the aircraft. The ad revenues will bolster cash reserves while the carrier keeps unit costs at an estimated 6 cents per ASM.
Frontier views the new Denver airport's high costs as a liability. But Western Pacific, based two hours' drive south, views them as an asset with Denver residents searching for the lowest fares. This migration for low-fare jet service has always been a part of Southwest's attraction, but only on a secondary level. Beauvais is betting highly on Interstate 25 between Denver and Colorado Springs to bring new traffic southward. Currently, Colorado Springs produces passenger volumes only 10 per cent of Denver's. 'It will rise to 20 per cent and possibly higher,' Beauvais predicts.
With aircraft values on the increase and capital costs rising, most analysts believe that the three-year spurt of startups has already begun to slow. Yields are going up, pricing remains stable, and the past three years' worth of cost-cutting has produced cheaper operating structures. Profits are rising, and traffic this summer is expected to break historic highs.
It would all seem to point to nirvana for would-be airline entrepreneurs, but the irony of the startup waves in a post-deregulation environment is that good times are bad times to be getting into the airline business. Investors are turning their attention to established carriers as they approach healthy levels of profit, and aircraft values are firming.
Lessors are still providing aircraft to the startups - ValuJet is an exception since it owns its 35 DC-9s through a debt financing deal with McDonnell Douglas - but it is the initial investment capital that is increasingly difficult to come by. 'It's amazing, but with the investment climate and the price of planes, in good times it's more difficult to do these things,' says Air Inc's Darby. 'It's more a function of the cost of money than the startup market itself.'
Still, new entrants that started the application process a year or more ago are on the way: names like Nashville Air, Independence Air (proposing transcontinental A300 services), and Soho Express Sky Lines are in the offing. The latter, whose management is comprised of former TWA executives, has requested a certificate to operate A310s on Chicago-London/ Stansted and New York-Stansted. It would be the second US-based international startup since last year, when USAfrica started and stopped serving Washington-Johannesburg in the space of eight months.
But it is the current crop of new entrants - the ones that started just after Reno, Kiwi and ValuJet - that pique the curiosity of many in the industry. These airlines are at the crucial 'in-between' stage, where the initial startup cost advantage begins to recede and the need for revenue growth means balancing fleet expansion against demand.
Conventional wisdom maintains that to maximise revenues, an airline must have between seven and 12 aircraft to cover its costs and begin to see a profit. 'You have to break a threshold,' says Beauvais, who plans to expand Western Pacific throughout that part of the US. By the end of the first year the carrier will be flying 10 B737-300s, he says. 'You are certainly not an airline with three aircraft.'
Some believe that ValuJet's burgeoning growth and Southwest's long-term success are indicators that there is room for a new tier of airline across the US, and perhaps the world. Lewis Jordan, ValuJet's president, has gone on record as saying that such a new tier exists and should have its own trade association in Washington, independent of either the Regional Airline Association or the larger Air Transport Association.
Who would form the membership of such a grouping? Besides Southwest and ValuJet, it would include Reno, Kiwi International, and, presumably, Western Pacific, Frontier and other startups. The problem is that potential membership could thin out, with more disappearing sooner than later.
But Beauvais remains upbeat. The economy is healthy and interest rates and fuel prices are low. 'The consumer is demanding better prices for airline services. [While] incumbents are doing well, markets are expanding and new entrants are experiencing sufficient traffic to give them a chance for survival.'
But Beauvais remains upbeat. The economy is healthy and interest rates and fuel prices are low. 'The consumer is demanding better prices for airline services. [While] incumbents are doing well, markets are expanding and new entrants are experiencing sufficient traffic to give them a chance for survival.'
Source: Airline Business
