Martin Shugrue is being self-effacing these days. 'Hey, if it was just me calling up people and telling them about Air Marty Start-up Airlines, that would not get us anywhere,' he admits. What is attracting attention within the industry, he maintains, is the fact that his new airline is called Pan American World Airways.
Few would argue with the power of that name. But it remains to be seen whether a name, however strong, is sufficient to carry an airline over the forbidding hurdles that now face any startup carrier, especially in the US.
The rebirth of Pan Am occurred at the end of September 1996, some nine months after Shugrue's team announced their intentions. It was a troublesome period for any US startup and it is probably fair to say that it was largely the name that carried it to launch.
When Shugrue was formulating his plans for the new Pan Am, low-cost, low-fare airlines were still in vogue in the US. Then a ValuJet aircraft crashed into a Florida swamp and the mood changed almost overnight. One direct result was that the certification process for any new US airline became much more laborious, pushing back Pan Am's launch by a couple of months and slowing down the expansion of its fleet.
However, being able to brandish the Pan Am name still provided an advantage over other startups. 'It's a very powerful name. We are not treated as a new entrant - we have been able to avoid that stigma,' says Shugrue.
Shugrue's own name is also a familiar one, and one which is closely linked with the original Pan Am. After two years on the flight deck with the New York based carrier, he moved to management in 1970. Five years later, he became chief operating officer of the airline and vice-chairman of Pan Am Corporation, the parent company. He has since served as president of Houston-based Continental Airlines and trustee of Eastern Airlines.
As the man who was in place to see the bankruptcies of both Pan Am and Eastern, it seems reasonable to wonder why Shugrue still finds the idea of running an airline an attractive proposition. 'Some of us don't know any better,' is his straightforward answer. 'After I had finished my duties as trustee of Eastern, we were trying to work out what we would get involved in next. We are airline people, so we looked at airline opportunities around the US and tried to search out where there would be opportunities where carriers with a particular niche could be successful.'
Shugrue's 'we' is a team of executives, most of whom have worked together previously at either Pan Am or Eastern. Among the familiar faces joining Shugrue at Pan Am's Miami headquarters are James Arpey as chief operating officer, Donal McSullivan as vice-president sales, and John Ogilby as general counsel and chief financial officer. Shugrue's title is president and chief executive officer.
Shugrue's research led him to the opinion that there were ample low-cost, low-frills, short-haul carriers serving the US. He therefore shifted his attention towards the low-cost, full-service, longer-haul market, where he found almost no competition and, in particular, no name-brand competition. 'We saw this as a unique opportunity,' says Shugrue. It was at this point that discussions began with Charles Cobb, owner of the Pan Am logo and trademarks. 'When people think Pan Am, they think high quality, big aircraft, long-haul. A light bulb went off,' says Shugrue.
That light bulb now illuminates an airline that uses leased Airbus A300s to serve high-volume market segments on north-south and east-west long-haul domestic routes, from New York to Chicago, Los Angeles, Miami and San Juan, Puerto Rico; and from Los Angeles to Miami. The airline plans to have its fifth A300 in service by early April, a sixth by June, and is working on lease arrangements for two more aircraft to complete its first phase of operations by the end of the year.
The new Pan Am offers a simplified fare structure, with no minimum, maximum or Saturday night stay-over required, and while the ticket is non-refundable, it can be changed without a fee. Fares are low - as little as $199 for a round-trip transcontinental ticket - and first class seats typically cost no more than the full fare economy seat of any competing major carrier. A full meal service is provided on every flight, which in itself marks the new Pan Am as unusual among US carriers.
Another aspect of Pan Am that sets it apart from a typical low cost carrier is its generous frequent flyer programme. Shugrue understands the power of such programmes among the US travelling public, especially the business traveller, and is keen to make it easy for people to be loyal to his airline.
He has resurrected the old Pan Am's WorldPass frequent flyer name and made it one of the most generous in the industry, with a 125 per cent bonus on economy travel and 175 per cent bonus on first class travel. The miles earned can also be pooled by up to three people - an industry first. 'You have got to give people a reason to sign up and the best reason you can give them is to make it easy to build up miles from the first flight. This programme is designed to be generous,' says Shugrue. Pan Am is similarly bounteous to its travel agents in that it does not follow the common policy of capping commissions.
Of course, neither generous frequent flyer programmes nor uncapped agent commissions add up to much when the service is relatively infrequent to a limited number of destinations, and the fares are routinely so low that an agent is unlikely to earn more than the maximum of $50 it earns under most capped systems. These are more goodwill offers which Shugrue hopes will help the airline to establish itself.
It will be a tough call - Shugrue prefers to describe it as 'an adventure with no guarantees' - because the new Pan Am is pitting itself against today's US majors, particularly American Airlines and United Airlines, with their firmly established hub operations and powerful frequent flyer programmes. Glenn Engel, vice president of investment research at Goldman Sachs, points out that the three most important things to the business traveller are 'schedule, schedule and schedule', something that Pan Am will be unable to offer in the short term despite its cheap fares, elaborate first class meals and WorldPass programme.
Engel says he is baffled by Shugrue's strategy of taking on the majors on routes where it will be much more difficult to be cost effective. 'If you look at the big carriers, the inefficiency is in turning around the airplane. Once in the air, everyone's costs are about the same, so their cost advantage is in long haul. The power of hubs is much more important on a long haul operation than on short haul, and the longer the flight the more you need hubs and the less inconvenient they are for the passenger. In addition, three of the markets that Pan Am is going for - Miami, Los Angeles and New York - are too good for the major carriers to let them go,' says Engel. 'I don't see where the edge is.'
Shugrue argues that his 'edge' is in being able to keep down costs, even on long haul, point-to-point routes, to a level not attainable by the majors. His target is unit costs of 6 cents per available seat mile, well below those of any of the majors, and he intends to achieve it by the end of this year.
'Our cost structure is low not because we are geniuses, but because we designed it that way. The A300 is uniquely suited to our operations and is fuel efficient. We are getting between nine and 12 hours of utilisation out of our planes and our point-to-point route system means there is no need for horrific infrastructure build-up. In addition, we are all first year employees - including me.'
Shugrue says that the Pan Am name has enabled him to attract senior flight and cabin crew who are willing to accept relatively low wages because they like the idea of being on the Pan Am team. At its launch, Pan Am had eight former Pan Am captains and eight former Eastern captains among its flight crew. A captain's salary at the new Pan Am is around $55,000, a figure that seems to surprise even Shugrue. 'Pilots have left higher paying jobs to come to Pan Am - that's the pride that this name instills,' says Shugrue, who adds that employees also enjoy the team spirit that is encouraged. 'There is not a lot of hierarchy around here. I don't run this airline. If I have dedicated, motivated people I don't have to have a lot of managers around watching them. Eventually, we will bring in new kids with good onboard supervision already in place.'
Shugrue also keeps costs down by outsourcing maintenance. However, in view of the current sensitivity in the US about outsourcing post-ValuJet, he insists that it is 'outsourcing with a difference'. The airline has its own engineering department and a Pan Am mechanic oversees work at every line station. 'We made a decision here predating the ValuJet crash that we would not outsource responsibility for maintenance,' says Shugrue.
Perhaps the least typical move for a US startup is Pan Am's international alliance programme. From the beginning, Shugrue saw an opportunity in forging partnerships with small and medium sized overseas carriers that serve Miami or New York.
'According to the Shugrue theory,' explains the theoriser, 'there are two categories of international airlines - the haves and the have-nots. The haves, such as British Airways and Lufthansa, have a sufficient home population to support the home carrier. Then there are the have-nots, which do not have a sufficient home population, but they also break down into two categories. There are airlines like KLM and SAS which have forged relationships with US carriers that have worked very well. They are the have-nots who do have a US partner. We are focusing on the have-nots who do not yet have a US partner.'
This theory has led to Shugrue drawing up a colourful and varied list of prospects. A codeshare agreement has been forged with AeroPeru, another is being made with Air Ukraine, and some 20 other airlines are now Pan Am Alliance members. They include Cayman Airways, Egyptair, Icelandair and Royal Jordanian. Shugrue believes that the Pan Am Alliance could eventually account for up to 30 per cent of the carrier's traffic. 'It's a market segment that no-one else has gone into. In the first month of our operation, almost 4 per cent of our traffic was Alliance traffic and that was before we had formalised any alliances. That is the power of the Pan Am name. That is pure magic.'
Even the most sceptical analysts are agreed that the name has power, but they cannot quantify its worth. Helane Becker, vice-president of equity research at Smith Barney, will not predict whether the new company has a long term future, but states: 'They probably have a better shot at it than most other airline companies would have, owing to the fact that the Pan Am name is very well respected. The name absolutely carries the day.' The jury is still out on whether the Alliance programme will work, she says.
Kevin Lydon, associate director at Fitch Investors, agrees that the name is a valuable asset, but feels there must be more. 'I think the concept itself is pretty good, but it is a startup like any other, even with the Pan Am name, and there are a lot of inherent risks with that,' he says. 'The large competitors could easily knock them out of business.'
Like Goldman Sachs' Engel, Lydon believes the Pan Am name provides a 'comfort level' to passengers because of its familiarity, but neither is able to guess whether that will keep the company in business. 'The good news is that you have the power of a brand,' says Engel. 'The problem is that there is a difference between a well recognised brand and a well regarded one. However, it is still better to have a brand name than not.'
Shugrue himself is unconcerned about such scepticism. His airline began operations without debt, thanks to $40 million raised at the outset by the founding partners, private placements and the Frost Hanna Mergers Group. The airline claims it has been achieving load factors of 75 per cent or better recently, with at least 50 per cent of first-class seats sold at full price. He says his roadmap is to make profits through modest growth. 'I have been characterised as a big carrier guy. But you can put a big idea into modest, affordable products,' he says.
That modesty has, to some extent, been forced upon Shugrue by the new regulatory environment concerning US startups, and also because the planned purchase of Florida-based Carnival Airlines fell apart at the last moment. Shugrue describes the failure to complete a deal with Carnival as a mutual decision. 'The fit was nice, but we could not make the numbers work,' he says.
It is clear that Shugrue would like to cement a similar deal elsewhere to help Pan Am build up a larger network, and he confirms that the airline is watching for other opportunities, but his emphasis is on restraint. 'I believe in teamwork and it is much easier to do in a small environment,' says Shugrue. 'You can keep an entrepreneurial environment in a modest company.'
Source: Airline Business
