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The Season Of Upstart Startups


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THE SEASON OF UPSTART STARTUPS

Consolidation, any airline expert will assure you, is the future of aviation. But don't tell that to fledgling Reno Air. Or Kiwi International Air Lines. Or American Dreams, Miami International, Patriot Airlines, Spirit Airlines, Airmark Aviation, or any of the dozen or more tiny new carriers pushing eagerly into the skies these days. Even as the industry continues to shake out, sending weaker airlines toward extinction or into the embrace of powerful competitors, ambitious new players have begun spreading their wings.

Foolhardy? Less adventurous souls might see it that way--and could point to the abysmal record of airline startups over the past decade as apparent proof. But in many ways, the climate for startups is suddenly better than it has been for years. A glut of used aircraft has pushed prices for many models down to historically low levels. With the demise of Pan Am, Eastern, Midway, and several smaller carriers, experienced pilots, flight attendants, and mechanics are fairly begging for work. Airport gates have become available in areas that were abandoned by defunct carriers. Even Congress is moving to help: In mid-August, it approved legislation that would help new carriers gain speedier access to unused gates when existing carriers fail.

SEED MONEY. Such conditions have produced a flood of potential entrants after years of slow activity. George Pearson, a vice-president at aviation consultant Avitas Inc., which advises potential startups and investors, says that over the past three months, "we've been getting an average of one request for advice a week. It's been quite a phenomenal change."

Of course, obstacles to takeoff remain, and not everyone with a dream and an airplane will leave the ground. The investment community soured on startups by the late 1980s, and few banks will go near such risky ventures. Several airline hopefuls, including KC Air of Kansas City and Baltia Air, even lined up planes only to find no one willing to supply the dough. Baltia, which hopes to run direct flights to the former Soviet Union, claims it is finally wrapping up a financial package. And carriers enterprising enough to raise seed money need access to additional capital to keep aloft should the going get rough.

The key to survival is finding the right market. With estimated startup costs of $5 billion to $10 billion, few experts expect to see a new major carrier soar up to compete with the Big Three. If a startup is willing to think small, however, and can find an underserved niche where flights are in demand, it has a healthy shot. Here, then, are three that are trying.

KIWI

Kiwi International is shining proof of labor's desperation. Its employees will work for half what their counterparts at major airlines earn. Its pilots, flight attendants, and mechanics dug into their own pockets for the $7 million Kiwi needed to fly. As the airline goes, so goes their money.

Scheduled to begin flights in September, Kiwi will start with just two leased 727 aircraft, flying from Newark, N.J., to Chicago's Midway Airport, Atlanta, and Orlando. "The name of the game is to match your capital with what you've got," says Chief Executive Robert Iverson, a veteran pilot of Eastern Air Lines Inc. Any expansion, he says, will be funded from operating revenues.

LEGROOM. Kiwi's target is the small-business or leisure traveler eager to save money, but without the flexibility to book in advance. The airline will peg its fares to the lowest prevailing rates in a given market and offer them on an unrestricted basis. So while Delta Air Lines Inc. might advertise Newark to Atlanta for $130 but free up only a dozen seats at that fare and require a 14-day advance purchase, Kiwi would sell all 150 seats on its 727 at that price, even on the day of the trip.

Iverson recognizes the danger in challenging the majors, but says he isn't worried. As long as an upstart doesn't garner more than 10% of the market on any given route, the powerful airlines won't go after it. In fact, as worries mount about the threat of oligopoly, the big airlines will have strong incentive to tolerate upstarts. Says Iverson: "We're more help to them alive than dead."

Kiwi's plan calls for expansion within two years to a half-dozen markets along the Eastern Seaboard. But remembering the mistakes of Midway Airlines Inc., America West Airlines Inc., and others, Kiwi's CEO vows to guard his ambitions. "It is absolutely axiomatic in the smaller airline business that if you stay in your niche, you're successful," says Iverson. "If you get out, you're out of business."

RENO AIR

Reno Air Inc.'s name defines its market. Launched in July after two years of planning, the airline's inexpensive, full-service flights take passengers into Reno from Los Angeles, San Diego, Portland, Ore., and Seattle. "This airline has a clear reason for being here," says Jeff Erickson, a founder and former president of Midway Airlines Inc.

That clear reason is tourism. The Nevada city's year-round population is 140,000, but Erickson notes that 7 million people visit annually, primarily to gamble. Add to that the nearby mountain ski and golf resorts lining Lake Tahoe, and you've got "a four-season resort area," he says. To encourage people to think of Reno Air, Erickson has teamed up with hotels and gaming operations. Beginning in September, the airline's sales staff will offer passengers discounts for hotel rooms and resorts.

Reno, which started with one leased MD-80 and has expanded to four, is also trying to tap into the growing market between Southern California and the Pacific Northwest. Erickson hopes to lure fliers who would normally travel nonstop on major carriers from, say, Los Angeles to Seattle by deeply discounting tickets on his airline, which stops over in Reno. The airline is also offering upgrades to first class. Erickson estimates that Reno's same-day, first-class ticket costs less than half the same-day coach fare charged by four of its five competitors.

Critics caution that Reno may still have trouble unless it can bolster local traffic to fill out its business. That's a pretty weak market now. But local boosters are betting that if the economy improves, Reno will experience the same sort of explosive growth enjoyed in the 1980s by Las Vegas, Phoenix, and other desert Sunbelt meccas.

EASTWARD HO. Reno has the distinction of being the first airline startup in several years to complete a successful initial public offering. Instead of going to such giant investment houses as Kidder, Peabody & Co. or Merrill Lynch & Co., Erickson used a smaller, regional outfit--Paradise Valley Securities of Phoenix--that has a good track record with local investors. Reno raised $2 million initially through the sale of convertible debentures, and $6 million in an equity offering in late spring.

Reno's plan calls for revenues of $47 million and profitability after its first year in the air. If all goes well, Erickson says he'll add service to additional cities, including one on the East Coast. The airline's slogan, "the biggest little airline in the world," is more than just a salute to the motto of its hometown. It's a commitment--with emphasis on the word "little." Says Erickson: "We're not looking to pick any fights."

DSA

Guy Lindley, a founder and president of Destination Sun Airways in Fort Lauderdale, Fla., is on the verge of getting his startup off the ground, but he says he's not frightened by the woes most airlines are suffering: "The time to start is when blood is flowing in the street." Nearly every large carrier is losing big money, but "if you look at niche carriers--Southwest, Atlantic Southeast Airlines, and Alaska Air Group . . . it's hard to find one not making money hand over fist."

Although a hot state for startups, Florida is also known as a killer market. But with the grounding of Eastern, Pan Am, Midway, and now Braniff, Lindley says he sees "tons and tons of business" for new competitors along the Eastern Seaboard. Lindley hopes to begin scheduled service from Long Island's Islip Airport to Fort Lauderdale and West Palm Beach by November and add service to niche markets in Newark, N.J., Boston, and Providence by Christmas.

FEWER BIRDS. Lindley, who was an investor in airline Northeastern International, which failed in 1986 after six years, has an ace up his sleeve: running charter. The airline has already contracted for charter service starting in September from Newark to Aruba and Las Vegas. That market is a big one, Lindley says, because cruise lines and hotel and casino operators help attract tourists by arranging air service. And "there's a real dearth of charter capacity since Eastern, Pan Am, and Midway are out," he says.

With four planes instead of eight, Destination Sun will have to grow slower than originally planned. The airline was unable to secure underwriting for its offering and had to sell equity directly to the public. It has raised only $3.7 million of a hoped-for $16 million.

Yet no matter how tough the financing, Lindley says, "there's never been a project where all the factors for success--retail price, capital equipment, and people--have been better."Andrea Rothman in New York, with Gail DeGeorge in Miami, Eric Schine in Los Angeles, and bureau reports


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