JBM First Gen Boutiques - Appendix Draft

MARKS AVIATION LLC

PREMIUM AIRLINE SYNOPSES

REVISED SEPTEMBER 2008

First Generation Regional Independent Boutiques

The first pioneers in the boutique segment were Air One and Midway Metrolink. Both started service in

1983 and introduced the concept of affordable premium service that appealed to cost-‐conscious

business and affluent leisure passengers. Both were ultimately unsuccessful but lay the foundation for

Midwest Express, the boutique airline that started operations in 1984 and continues today.

Air One (1983-‐1984)

Air One pioneered the boutique model of first-‐class service for coach prices. Its Boeing 727-‐100 aircraft were configured with 76 seats instead of the 119 typically found on the aircraft type, offering wide seats but not significantly more legroom than coach on other airlines. Air One emphasized cabin service, with four flight attendants serving hot meals.

Air One started operations on April 1, 1983 with service from St. Louis, using a fleet of four aircraft to serve Newark, Washington, Dallas and Kansas City. Because Air One started its operation with service from St. Louis, a critical hub for TWA, competitive response was immediate. TWA cut its First Class fares from $385 to $202 and its Economy Class fare from $242 to $182 round-‐trip. While Air One reported requiring a 42% load factor to break even, the airline struggled to achieve both yield and load factor targets. In the first months of service the airline averaged 30% occupancy. Unlike TWA, Air One offered limited flight frequency, a factor that impacted its ability to capture business traffic.

Air One's operational strategy previewed later entrants in the boutique segment. In addition to the high cabin service model, Air One was able to take advantage of second-‐hand excess aircraft to commence service. The airline leased its fleet of Boeing 727s during an economic downturn in 1982 from Pan

American and Piedmont for an average of $44,000 per month. As aircraft values rose in 1983 and 1984

(driven by an economic and traffic recovery) the airline enjoyed a significant cost advantage. Second, Air

One was aggressive in finding low-‐cost labor. Air One paid pilots an average of $30,000 in their first year versus the $70,000 or more paid to unionized labor at other airlines.

Air One completed a public offering in November 1983, trading over the counter in the United

States. Continuing to grow, the airline sourced additional Boeing 727 aircraft, reaching a fleet of nine by

October 1984 and 450 employees. By that time, however, competition on key routes had driven losses of over $40 million since inception. On October 24, 1984, Air One announced that it had reached an agreement to be acquired by a young Texan, Scott Spencer, in exchange for a cash infusion. The deal fell

through and Air One ceased operations on October 27, 1984.

Table: Air One Summary

Air One

Years Operated

Aircraft Utilized

Seating Configuration

Value Proposition

Cost Structure

Competitive Response

Key points

April 1983 -‐ October 1984

Boeing 727-‐100

76 passengers

2x2 (no middle seats)

38” pitch

Domestic first class for full coach fares; network of destinations from

St. Louis

Low labor and aircraft cost

Strong; TWA matched fares on

Air One routes from St. Louis

Importance

First generation boutique

Second-‐hand equipment

Regional capability

Equivalent to domestic

First Class product

Product targeted at traffic that

valued both product and price

Achieved lower labor costs than

incumbent competition

Incumbent carriers took the economic “pain” to pressure Air One

Air One originated the sector, offering wide seats for business and affluent leisure customers in a single low-‐density configuration. Their full-‐coach fare price point previewed future models, and their lower labor costs illustrated how cost advantages could be obtained by boutique airlines in addition to Budget models.

Table: Air One Fleet Summary

Aircraft Registration Type Serial Inducted

1 N4612 727-‐35 18813 Jan-‐83

2 N4616 727-‐35 18817 Jan-‐83

6

7

8

3

4

5

9

10

11

N4619

N834N

N836N

N837N

N841N

N189CB

727-‐35

727-‐95

727-‐95

727-‐51

727-‐22

727-‐2H3

18847

18858

18850

18802

18324

20739

N191CB

N407BN

727-‐2H3

727-‐291

20822

19992

N545PS 727-‐214 20169 http://www.geocities.com/~aeromoe/fleets/

May-‐83

Mar-‐83

Mar-‐83

Apr-‐83

Feb-‐83

Mar-‐84

Apr-‐84

Dec-‐83

Mar-‐84

Midway Airlines (1983-‐1985)

Midway Airlines was the first Budget carrier to initiate operations after the Airline Deregulation Act of

1978 in the United States. The airline started service on November 1, 1979, serving Cleveland, Detroit and Kansas City from its namesake base at underutilized but convenient Midway Airport in Chicago.

While the core of Midway's flight operations from 1978 through 1991 was a Budget model of high-‐ density Economy seating, the airline introduced its Boutique Metrolink in 1983. Metrolink was a business-‐focused product that paralleled the model introduced by Air One.

Two factors drove this significant change in strategy. By 1983 changing economic conditions and a recovery among major carriers in the United States had generated significant competitive responses against Midway's Budget model. Other airlines discounted their more upscale product to the same low fares as Midway's no-‐frills service. In 1983 Midway lost $15 million and had to cancel a major new aircraft order.

Midway's management team pioneered the concept of compartmentalizing its network and splitting the company’s operations into two brands. They knew that higher-‐density aircraft were important on leisure routes where price stimulation made markets viable. Midway’s leisure markets could be served by the same high-‐discount, no-‐frills coach service that had defined the airline to date. But for business routes, to capture market share in highly competitive markets, they would need to improve their value proposition. Management did this by upgrading the product on aircraft flying business routes making seat comfort and cabin service the key selling points. Metrolink was deployed in business markets, offering a Boutique proposition: high-‐quality domestic First Class service for fares 20% below the full coach fares of major airlines.

In June 1983 Metrolink service commenced, featuring an all-‐premium configuration with one-‐class, four-‐ abreast seating. The reported investment required in aircraft reconfiguration and marketing was

$3.4 million. Seat count on the DC-‐9 fleet was reduced from 83 to 60 seats. By early 1985, Midway operated MetroLink from Chicago (Midway) to Minneapolis, Kansas City, Dallas/Fort Worth, Detroit,

Cleveland, Boston, White Plains, New York LaGuardia, Philadelphia and Washington. These were core business markets from Chicago and all were highly competitive with at least two other carriers serving the route. In contrast, Express service was focused on Orlando, Tampa, West Palm Beach, Fort

Lauderdale, Miami, St. Thomas and St. Croix with point-‐to-‐point service from Chicago, Cincinnati,

Detroit, and Cleveland.

Midway's management reasoned that the combination of lower fares and the uncongestion of Midway

Airport would be key factors in driving high-‐yield traffic away from United, American and other airlines.

Midway Airport was attractive for business travelers -‐ it was uncongested and only 11 miles from downtown, compared to 22 miles for O'Hare.

The competitive response was significant and immediate -‐ routes to Chicago were among the most profitable and strategically critical for major airlines. Major airlines cut fares to match Midway's discounts and increased frequencies, which were critical for business traffic on short-‐haul flights. In

1984 the Metrolink operation lost $22 million and new management quickly reversed the venture, adding seats back to the DC-‐9 fleet, reverting to a two-‐cabin model and focusing on a balanced mix of leisure and business traffic.

While the Metrolink experiment was brief, it did preview several concepts popularized by later generations of boutique airlines. Midway proved that operations from a more convenient secondary airport could divert significant business traffic from more congested facilities. Midway also recognized that all Business configurations have limited market applicability, and segregated their fleet to tailor capacity to the characteristics of each route.

Table: Midway Metrolink Summary

Midway Metrolink

Years Operated

Aircraft Utilized


Value Proposition

Cost Structure


Key points

June 1983 – June 1985

DC-‐9-‐32

60 seats

2x2 (no middle seats)

36” pitch

Domestic first class for full coach fares; business destinations from

Midway

Subsidiary brand of operating low-‐cost carrier; secondary airport cost advantages

Strong; United, American and others reduced fares from O’Hare

Importance



Regional capability

Equivalent to domestic

First Class product



Achieved lower labor costs than incumbent competition; lower cost base through secondary airport

Key business routes were important to major carriers; they defended by cutting fares in Premium cabins.

Midway demonstrated that attacking major airlines directly -‐ on key routes, with similar products and with aggressive pricing -‐ facilitated a rapid and severe competitive response. There was little to stop major airlines from discounting their existing service from major northeastern cities to Chicago to match

Midway's fares, and major carriers had corporate accounts and burgeoning loyalty programs as weapons. These lessons would prove important for the next generation of boutique startups.

Midwest Express (1984-‐Present)

Midwest Express (now Midwest Airlines) was for two decades the only regional premium carrier with scale and long-‐term viability. Born from the corporate flight division of Wisconsin-‐based industrial conglomerate Kimberly-‐Clark, Midwest Express used a similar value proposition as Air One and Midway

Metrolink: wide seats, good food and full coach fares. The airline was best known in the United States for its upscale meal services, served on signature china with freshly baked cookies on each flight.

Midwest installed four-‐abreast seating at 36” pitch on a fleet of second-‐hand DC-‐9 aircraft normally configured with five-‐abreast seating. Like Metrolink and Air One, Midwest developed a basic hub-‐and-‐ spoke network focused on its base at Milwaukee, Wisconsin, with routes to the central United States and the Northeast.

Like its contemporaries, Midwest’s pricing mirrored competitors’ full economy fares. But unlike Air One and Midway, Midwest established a base of operations in a second-‐tier market where they could dominate traffic. As a spoke city for other airlines, Milwaukee was not a strategic priority and Midwest

Express therefore did not face the brutal competitive responses that Air One and Midway Metrolink faced.

That dependence created challenges for Midwest as service into Milwaukee increased through the

1980s and 1990s. Midwest proved the viability of new routes, especially to the east coast. Their network was dependent on the Milwaukee area and especially on the city’s local business traffic. Price-‐ sensitive leisure traffic had lower-‐fare options from Chicago's airports (especially Midway, which was rapidly developing low-‐fare service to points across the United States) and as hub structures intensified in Detroit, Minneapolis, Cincinnati, Atlanta and other points, mainstream airlines offered discounted connecting itineraries that attracted price-‐sensitive traffic.

The airline was impacted by the drop in business traffic after 2000 and the terrorist events of 2001 and realigned its services. Midwest accelerated the replacement of its aging DC-‐9 fleet with fuel-‐efficient

Boeing 717 aircraft. It reconfigured its larger MD-‐80 aircraft into a traditional five-‐abreast configuration to match competitive leisure fares. The airline also diversified its route network, building its operation at Kansas City (from where the shorter-‐range 717 could reach California markets nonstop).

Midwest's impact on the boutique sector is best seen in three areas. First, Midwest proved the long-‐ term viability of an exclusively premium cabin configuration. On key business routes the perceived luxury of a premium cabin aircraft, along with upscale meals and high-‐touch cabin service,

demonstrated that business traffic could be captured from major carriers with the right product at a reasonable price point.

Second, Midwest showed that for short-‐ and medium-‐haul routes, there is a finite pool of markets that can support the Boutique model. Competitors drove down fares in Midwest’s leisure markets, making the services difficult to maintain. Leisure markets depend on product-‐sensitive vacationers, and on short-‐haul routes Midwest could not sustain enough high-‐end leisure traffic to justify the lower seat density. While business strength on Midwest’s key northeast routes were enough to carry the company, after 2001 the increasing price sensitivity of business passengers on short-‐haul routes forced the airline to realign.

Third, Midwest demonstrated that all Premium configurations work efficiently in specific aircraft types.

Core to the Boutique offering was four-‐abreast seating with no middle seats. The cabin cross-‐section of the DC-‐9/MD-‐80 and Boeing 717 was well suited to this Boutique setup – five-‐abreast Economy seating could be converted to four-‐abreast with a 20% capacity loss. On a six-‐abreast Boeing 737, four-‐abreast seating translates to a 33% capacity loss. This is similar to the advantage of the Boeing 767 over the

Airbus 330 or Boeing 777, where seven-‐abreast seating can be converted to six-‐abreast Boutique seating with a 14% capacity loss. The same configuration on an Airbus 330 results in a 25% capacity loss.

Table: Midwest Express Summary

Midwest Express

Years Operated

Aircraft Utilized

Seating Configuration 2x2 (no middle seats)

34” pitch

Value Proposition

Key points

1984 -‐ Present

DC-‐9-‐32, 60 seats

MD-‐83, 88 seats

Boeing 717, 88 seats

Premium service for upper end of coach; business and leisure destinations

Cost Structure Reached economies of scale through growth at MKE hub. Added second hub operation at MCI after 2000.

Competitive Response Increased over time; Milwaukee was low-‐priority in 1980s but became strategically important over time

Importance

First generation boutique; only survivor

Started with used aircraft

Upgraded to new aircraft

Regional capability

Width equivalent to domestic

First Class product; legroom 4” less

Product targeted at traffic that valued both product and price

As Midwest matured its crews became more senior, fleet aging

drove change to new aircraft type

Midwest was most impacted by low-‐ fare connecting itineraries over

competitor’s hub airports

Midwest WAS limited by the range of its Boeing 717 and MD-‐80 fleet, which effectively prevents intercontinental and deep Caribbean operations. While Midwest has extensive code-‐sharing agreements with international carriers, the airline does not market international destinations on its Website and continues to focus on its domestic routes. In August 2007, TPG Capital (in affiliation with Northwest

Airlines) purchased Midwest. Strategic changes announced since the buyout include a closer affiliation with Northwest Airlines which reaffirms Midwest's role as a niche, Milwaukee-‐based domestic airline.

Air Atlanta (1984-‐1987)

Air Atlanta operated Boeing 727-‐100s in an all Business Class configuration from 1984 to 1987. Founded by local attorneys in Atlanta, the airline raised a total of $83 million in financing from major corporations in the Atlanta area, including Aetna, CSX and General Electric Credit. Like its contemporaries, Air Atlanta targeted business customers with domestic First Class service for full coach fares.

The airline started operations on February 4, 1984. Its model was nearly identical to Air One's, with four abreast seating and upscale food served on signature china. Air Atlanta added airport lounges, telephones and other amenities. Like other startups, Air One had low labor costs, with pilots paid

$44,000 per year (against $70-‐100,000 at other airlines). Flight attendants earned $11,000 per year.

Load factors built steadily, averaging in the low 60% range during most of 1987. By then the airline served nine cities from its base at Atlanta Hartsfield Airport with a fleet of seven aircraft, down from a peak of 12 cities. The company had 600 employees. Its network spanned key urban markets including

Washington, New York, Detroit, and points across Florida.

Air Atlanta struggled to maintain sufficient capital to support its operations. The airline started with $25 million but had to return to investors several times over the three years of operations. By early 1987, the airline's principal backers refused to invest further in the concept and the airline filed for Chapter 11 bankruptcy protection. It ceased operations in April 1987.

Table: Air Atlanta Summary

Air Atlanta

Years Operated

Key points

February 1984 – April 1987

Aircraft Utilized

Boeing 727-‐100, 60 seats

Seating Configuration 2x2 (no middle seats)

34” pitch

Value Proposition

Cost Structure


Domestic first class for full economy fare, business and leisure destinations

Low labor costs, leased second-‐ hand aircraft

Delta and Eastern matched fares on key routes from Atlanta

Importance


Used aircraft; grew to seven aircraft

Similar to Midwest Express but with wider seat.



Limited working capital throughout operational period; labor costs

mirrored other startup airlines

Directly competed with major airlines in their major hub; drew competitive

response but ultimately could not generate sufficient traffic base

Air Atlanta, Midway Metrolink, and Air One reflected different executions of the same business model, but with the same ultimate outcome. Both carriers suffered from undercapitalization, which distracted

senior executives from day-‐to-‐day management of the business. But all three also concentrated their operations in hub cities of major mainstream airlines, which invited competitive response. Delta defended their Atlanta operation against Air Atlanta, United and American defended Chicago against

Midway and TWA defended St. Louis against Air One. Only Midwest Express survived, primarily because

its Milwaukee base was fragmented among many airlines and therefore the new Midwest operation did not represent a critical threat against any one or two airlines.

Table: Air Atlanta Fleet


1 N1187Z 727-‐22 18323 May-‐86

8

9

6

7

2

3

4

5

10

11

N154FN

N7067U

N7073U

N7074U

727-‐35 18815

727-‐22 19080

727-‐22 19086

727-‐22 19087

N7077U

N7083U

727-‐22 19141

727-‐22 19147

N94GS 727-‐44 18892

N407BN 727-‐291 19992

N408BN 727-‐291 19993

N545PS 727-‐214 20169 http://www.geocities.com/~aeromoe/fleets/

Nov-‐86

Jan-‐84

Dec-‐83

Dec-‐83

Dec-‐83

Dec-‐83

Aug-‐86

Nov-‐86

Nov-‐86

N/A

McClain Airlines (1986-‐1987)

Thomas McClain, a former TWA pilot, started a six-‐aircraft operation with Boeing 727 aircraft.

1 The airline started service on October 13, 1986 with one B727-‐27, added two aircraft in October, one in

December and two in January 1987. McClain served Los Angeles and Chicago O’Hare from its Phoenix base with a 73 seat configuration (four-‐abreast seating, 36” seat pitch). The service operated through

February 23, 1987 when McClain filed for Chapter 11 protection.

McClain’s model was similar to Air One and its peers, but McClain offered enclosed lounges to all passengers. Other than lounges, the model was the familiar wide seat, legroom, fresh gourmet food and carry-‐on baggage racks for the price of coach.

McClain Airlines B727-‐100 (1987)

Ellis Chernoff; http://www.airliners.net/photo/McClain-‐Airlines/Boeing-‐727-‐95/0854117/L/

Table: McClain Airlines Fleet

McClain Advertisement http://www.airtimes.com/cgat/usb/mcclain.htm

Aircraft Registration Type

1 N100MU 727-‐27

Serial

19534

Inducted

Sep-‐86

2 N101MU 727-‐95 18858 Oct-‐86

5

6

3

4

N102MU 727-‐25 18255 Jan-‐87

N103MU 727-‐22 18324 Dec-‐86

N8101N

N8104N

727-‐25

727-‐25

18252

18255

Oct-‐86

Jan-‐87 http://www.geocities.com/~aeromoe/fleets/

1 McClain operated six B727 aircraft: N100MU (19534), N101MU (18858), N102MU (18255), N103MU (18324), N8101N (18252), and N8104N (18255). http://www.geocities.com/~aeromoe/fleets/mcclain.html

Regent Air (1983-‐1985) and MGM Grand (1987-‐1994)

Midwest, Midway, Air One, and Air Atlanta pioneered the price-‐focused Boutique model. Their target market was the everyday business traveler and discriminating leisure passenger who were willing to buy up to more comfort. All four offered a range of routes and offered four-‐abreast seating with comparable legroom to domestic First Class cabins.

Regent Air, McClain and MGM Grand pioneered a different segment of the Boutique sector. Their model was designed for passengers who valued product over price. Most of their service was on one

key route: New York to Los Angeles, where they catered to the entertainment, legal, corporate and VIP leisure markets with extravagant aircraft configurations.

Regent Air B727-‐100 (1985)

Frank Duarte; http://www.airliners.net/photo/Regent-‐Air/Boeing-‐727-‐191/0952946/L/

Regent Air invented the product-‐focused boutique sector with its charter service (1983-‐1985) and subsequent scheduled service (1985-‐1986) between Los Angeles and New York. Regent had an extravagant service model and charged twice the standard First Class fare on its only route. Regent provided limousine service to and from the airport, in-‐flight secretaries and hair stylists. Fares ranged

from $1,620 (for a seat) to $4,320 (for a stateroom) each way, in comparison to First Class fares in the

1985-‐1986 period of $650 each way.

Table: Regent Air Fleet


1 N502RA 727

Serial Inducted

19391 Feb-‐87

2

3

N503RA

N504RA

727

727

19392

19395

Oct-‐85

Nov-‐86 http://www.geocities.com/~aeromoe/fleets/

Regent was unsuccessful at building a long-‐term customer base. It sold its three aircraft to MGM Grand

Air, a new operation from the MGM Group.

2 Like Regent, MGM Grand planned to focus on a single transcontinental route with a luxurious on-‐board product. MGM had more ambitious marketing plans, positioning its service as an alternative to private jets. In fact, during the late 1980s few business jets were capable of nonstop transatlantic flights. So as an alternative, MGM Grand offered passengers an exclusive check-‐in experience in a private terminal, 33 seats on three Boeing 727 aircraft and inflight service comparable to First Class cabins on international flights.

MGM's product was more elaborate and personal than the mass-‐market First Class offered on United,

American and TWA's routes. Each aircraft featured a stand-‐up bar area and four staterooms with full beds (staterooms sold for $3,600 and could accommodate up to four passengers each). Meals were prepared by an on-‐board chef, included caviar service and were served on signature china by attendants wearing tuxedos. MGM Grand used the West Imperial terminal at LAX, with fast transit from limousine to aircraft and the feel of a private jet facility. With better scale than Regent, MGM Grand's fares were comparable to those charged by other airlines for First Class tickets, approximately $949 in mid-‐1989.

MGM pioneered several Boutique trends that continue today. First, MGM Grand’s West Imperial

Terminal (MGM invested $4 million in the conversion) significantly improved the airport experience and offered a real alternative to the congested main terminals at LAX. Second, as Air One and its peers defined a price-‐focused boutique segment as a luxury alternative to Coach travel, MGM Grand defined a product-‐focused boutique model priced alongside First travel. For high-‐end passengers – corporate

officers, entertainment, and VIPs – the MGM Model was a welcome alternative.

After early success in its transcontinental operation, in 1988 MGM Grand's owners spent $35 million to acquire three long-‐range DC-‐8-‐62 aircraft. Management sought to introduce additional routes, including service from New York to London, but opportunities to deploy the DC-‐8-‐62 profitably were extremely limited. Even with the Boeing 727-‐100, there were few routes in the United States with enough high-‐end business and leisure travelers to expand the service. Further complicating expansion, the DC-‐8-‐62 aircraft did not meet California noise standards when acquired, and developing and retrofitting hush kits took two years. Unfortunately for MGM Grand, efforts by British carriers to block their entry into London (MGM had sought permission to access Stansted Airport, which had recently undergone significant expansion with a new terminal facility) were successful and MGM was forced to deploy the large DC-‐8-‐62 aircraft on their New York route.

With an average fare of $949 -‐ and few discounts offered -‐ the airline reported that it needed a 73% load factor (or 24 passengers) per segment to break even. MGM did turn a profit in 1989. However the Gulf

War of 1991 and subsequent economic recession forced changes in the MGM Grand model. Other airlines -‐ especially American, which dominated traffic on the New York/Los Angeles sector -‐ cut their

First Class advance purchase fares and offered deep discounts to corporate passengers. MGM faced increasing competition for business accounts, higher fuel prices and a weakening economy.

2 N502RA, MSN 19391, N503RA, MSN 19392, and N504RA, MSN 19395 became N502MG, N503MG and N504MG respectively

Table: MGM Grand Air Fleet


1

2

N502MG

N503MG

727-‐95

727-‐95

19391

19392

Apr-‐87

Apr-‐87

5

6

3

4

7

N504MG

N802MG

N803MG

N801MG

N701MG

727-‐95

DC8-‐95

DC8-‐95

DC8-‐95

19395

46098

45910

45986

757-‐200 22197

Sep-‐87

Mar-‐90

Mar-‐90

Aug-‐90

Oct-‐92 http://www.geocities.com/~aeromoe/fleets/

In addition to these uncontrollable factors, MGM’s new aircraft platform was ill-‐suited to the changing environment. MGM Grand responded to weakness in the high-‐end sector by adding a second

“Economy” cabin of service. The DC-‐8-‐62 fleet was reconfigured to 35 Grand Class First Class Seats and

40 Grand Class Economy Class Seats. While the First Class seats ranged from two-‐abreast to four-‐abreast seating and had no equivalent in the US market, the Economy cabin was similar to the product offered by other first-‐generation Boutiques. Seating was four-‐abreast with 38" of seat pitch. In addition to changing the configuration of aircraft, MGM Grand also partnered with United Airlines.

The introduction of a second cabin of service impacted yields. It diluted a core base of traffic. Senior executives and celebrities travelled with entourages; in the single-‐cabin model the entire party had paid the $949 fare. With two cabins of service, the entourages split -‐ the executive or celebrity would take a

First Class seat while the remainder of the party would sit in Economy Class. While traffic volumes

increased (given larger capacity) it was not enough to offset the loss in average yield.

Table: MGM Grand Air Summary

MGM Grand

Years Operated

Key points

1987-‐1992, 1993-‐1994

Aircraft Utilized


DC-‐8-‐62, 35 First + 40 Economy

Seating Configuration Bar and lounge setup

Value Proposition

Cost Structure


Exclusive, ultra-‐luxurious travel for full First Class fare

Low labor costs, leased second-‐ hand aircraft

Delta and Eastern matched fares on key routes from Atlanta

Importance

First Product-‐Focused Boutique

Difficult transition to new aircraft type; fuel inefficiency after 1991

Radically different from other carriers operating during the period

Targeted high-‐end corporate,

entertainment and VIP traffic

Limited working capital throughout operational period; labor costs

mirrored other startup airlines

Directly competed with major airlines in their major hub; drew competitive response but ultimately could not generate sufficient traffic base

UltrAir (1993)

UltrAir operated luxury service from a Houston base from January through July 1993. Founded in 1992 by two Houston travel entrepreneurs, the airline was designed to attract business traffic from

Continental Airlines. The airline originally targeted three routes: Houston to Los Angeles, New York and

Washington, although its short-‐lived service only expanded to Newark and La Guardia. The airline leased

90-‐seat Boeing 727-‐200s (normally configured with 150 seats). Like other boutique airlines, UltrAir

focused on the three tenets: big seats, good food and coach fares.

Table: UltrAir Fleet


1 N12305 727-‐231

Serial

19562

Inducted

Jan-‐93

7

8

5

6

2

3

4

N352PA

N353PA

N354PA

N375PA

N727VA

N728VA

N74318

727-‐225 20616

727-‐225 20622

727-‐225 20624

727-‐214 20875

727-‐221 22536

727-‐221 22537

727-‐231 20051

Oct-‐93

Dec-‐93

Dec-‐92 http://www.geocities.com/~aeromoe/fleets/

Core to UltrAir's strategy was avoiding discounts and concentrating solely on the corporate sector. The airline eschewed vacation and leisure traffic, which its executives claimed negatively impacted the quality of service offered to business clients. The airline offered a single fare, $570, for travel between

Houston and New York, with no discounts. This fare was indexed against the Continental full economy

fare.

UltrAir lasted just six months. A core issue was undercapitalization; each founder contributed just $5 million to the venture. The airline focused on leasing everything, from training to core assets. While this reduced overall cash requirements, it led to inflexibility in month-‐to-‐month operating costs. Most importantly, focusing solely on business traffic with a single fare level ignored a significant portion of the market. A restricted discount fare could have stimulated leisure traffic and reduced the airline’s dependence on high-‐end corporate traffic. In a hub market such as Houston, loyalty to Continental

Airlines was high and UltrAir was unable to gain a foothold.

Table: UltrAir

UltrAir

Years Operated

Aircraft Utilized


Value Proposition

Cost Structure

Key points

1993


2x2 seating, 34” seat pitch

Domestic First Class product for full coach fare; single price point

Relatively high; small fleet, leased space at major airports, large aircraft

Competitive Response Continental matched fare between

Houston and New York but otherwise ignored; model was insufficiently capitalized

Importance

First-‐Generation Value Boutique

Higher capacity aircraft than prior boutique models, higher fuel cost than Boeing 727-‐100 or Boeing 737 models

Same as Air One and Air Atlanta but

on substantially larger aircraft

One fare level designed to target only corporate business; model aimed not to attract leisure passengers

Very limited working capital and difficult revenue model led to short life

Demonstrated that dynamic pricing and different fares to target business and leisure passengers critical to

boutique survival

Second Generation: Regional Independent Boutiques

The first generation boutique airlines emerged with two models: price-‐focused Boutiques such as Air

One, Midwest and Metrolink that offered more comfortable accommodations for the price of coach, and upscale carriers such as Regent and MGM Grand that targeted exclusive corporate and VIP passengers with full First Class fares. Midwest and MGM Grand survived their first ten years – Midwest by virtue of its isolated Milwaukee hub, and MGM Grand because it transitioned back to charter

operations and rebranded as Champion Air.

The second wave of boutique airlines entered a different distribution and competitive environment than their predecessors. The Internet had already revolutionized how consumers interacted with airlines, leading to a dramatic reduction in travel agency sales. Agencies’ influence in steering customers away from new entrants to mainstream competitors had diminished. New airlines could also use the Internet to showcase their product and routes directly to customers.

Competitively, major airlines were riding the crest of business traffic in the late 1990s. Air travel reached all-‐time highs, both in passengers and in revenue. A booming technology industry sparked a significant rise in last-‐minute, high-‐fare transcontinental travel. Mainstream airlines, having built large hub systems in the United States, were linking their international operations with partners in the nascent Star Alliance, SkyTeam and oneworld programs, consolidating their marketing and sales efforts and generating new benefits for frequent flyer affinity programs. This marketing consolidation was an

important driver of Open Skies agreements, which allowed partner carriers to fully coordinate their operations but also opened the door to new international boutiques after 2001.

Budget airlines were growing too, with Southwest Airlines, EasyJet and Ryanair all major forces in their respective regions by 2000. JetBlue completed certification in early 2000 and launched a new Budget

service with amenities that compared favorably against Mainstream airlines.

The second wave of boutique carriers were regional airlines. They built on the business-‐focused models pioneered by Air One and its contemporaries, but applied new technologies to the on-‐board experience, distribution and operations.

Legend Airlines (2000)

Legend Airlines was the first of the "second generation" of boutique luxury carriers in the United States.

Founded in 1996 by Allan McArtor, the former FAA Administrator, Legend fought a multi-‐year court battle to gain rights at Love Field, a secondary airport in Dallas. When the airline finally launched service in April 2000 it was low on capital and American Airlines launched a brutal competitive response. Legend established only three routes to Washington, New York, Los Angeles and Las Vegas before folding in

December 2000.

The example set by Legend Airlines was critical to the development of the transatlantic boutique carriers several years later. McArtor's concept was based on two fundamental observations: that the major US carriers in the late 1990s, driven by strong economic fundamentals, had raised last-‐minute fares (even for coach class) to all-‐time highs, and that an opportunity existed to launch flights from the unique Love

Field under an exemption to the Wright Amendment, a rule that governed operations among Dallas' three airports.

During the design phases of DFW, all airlines serving each of the older airports agreed to move to DFW.

After the agreement was signed among carriers, Southwest Airlines was founded and proposed to continue operating at Love Field even after DFW was opened.

When Dallas/Fort Worth International Airport (DFW) opened in 1974, Southwest Airlines was the only carrier that remained at Love Field. Southwest was restricted to intra-‐Texas service -‐ it was certified as a local airline under the regulated system -‐ and won a series of court battles, terminating at the Supreme

Court, to remain at Love. When airlines were deregulated in 1978, Southwest was no longer restricted to intra-‐Texas operations. They announced new services to points outside of Texas, directly threatening

Braniff Airlines and its Dallas hub. The City of Fort Worth -‐ which had partially subsidized the construction of DFW -‐ appealed to the United States Congress to intervene, fearing that Southwest's interstate service would draw other airlines back from DFW to Love Field.

In 1979, Congress passed the Wright Amendment which stipulated that passenger service on aircraft with more than 56 seats would be restricted from Love Field to only cities in states adjacent to Texas.

Long-‐haul service would be restricted aircraft with fewer than 56 seats. This fit Southwest's objectives after 1979, as the airline was focused on developing routes to New Orleans, Albuquerque, Tulsa, and other regional destinations. The Wright Amendment also protected Braniff from competition at Love

Field on its more profitable, long-‐haul routes to California, the Eastern and Southern United States.

McArtor based his concept on familiar ground. Dallas had been a key market for boutique airlines during the 1980s, with service from all four boutique carriers. The market had proven receptive to the price-‐based boutique model. But the opportunity to launch nonstop, medium-‐haul service from Love

Field – competing against the less convenient operations at DFW – was the differentiator for Legend.

From inception the Legend model was designed to bypass the Wright Amendment with a 56-‐seat configuration. That drove a seating configuration on its DC-‐9 aircraft of 46" pitch, versus the 38” or less on prior Boutiques. Legend would be a true International Business Class product with that configuration.

Legend was also to be the first airline with live television on board, but court delays related to the

Wright Amendment meant JetBlue beat Legend in deploying the technology.

The Legend concept proposed a superior on-‐board product at a comparable full-‐coach fare from a more convenient secondary airport. Because Legend’s service directly attacked its key routes -‐ Dallas to LA,

Washington and New York – American Airlines took an aggressive stance on blocking the new entrant.

The first phase of competitive response was legal challenge. From 1997 to 2000, American Airlines engaged in court actions to block interstate flying from Love Field, contesting the spirit of the Wright

Amendment and maintaining the aviation jurisdiction of the cooperative DFW authority over the City of

Dallas. American was joined by the DFW Airport Authority (which had a lot to lose if Love Field grew in importance) and the City of Fort Worth. In late March 2000 the Supreme Court ruled that Legend could initiate service as long as Love Field remained open to commercial traffic. Given the importance of

Love Field for regional flights (dominated by Southwest Airlines) it was assured that the airport would indeed be kept open, and Legend had a green light.

In parallel to its draining legal battle Legend embarked on a brutally expensive capital expenditure campaign. It spent $21 million to reconfigure and outfit a six-‐gate private terminal at Love Field. It spent

$7 million on legal fees. It spend an additional [$4 million] per aircraft acquired to outfit with custom two-‐by-‐two leather seats, television and in-‐seat power. Legend had started with $62 million of financing but by the commencement of operations it had less than $25 million in liquid funds remaining.

On April 5, 2000, Legend commenced flight operations with their DC-‐9 aircraft. Service operated to Los

Angeles five times daily and Washington Dulles four times daily. Two days later, service began to Las

Vegas. American's competitive response -‐ a reconfigured 56-‐seat Fokker 100 aircraft with similar First

Class seating -‐ launched on May 1, 2000, with nonstop service to Los Angeles (four times daily) and

Chicago O'Hare (five times daily).

Table: Legend Financial Performance, Q2-‐Q4 2000

Source: DOT DB1B and T-‐100 Data

DAL TO: Q2 Q3 Q4 DAL TO: Q2 Q3 Q4

IAD

1163

LAS

1066

Load Factor

Yield (Rev/RPM)

Departures

Average Fare

Rev/Flight ($)

Load Factor

Yield (Rev/RPM)

Departures

43.9% 57.8% 54.1% LAX

0.211 0.212 0.242 1245

253 323 110

245 247 281

6,033 7,981 8,527

35.1% 42.2% 43.5% LGA

0.176 0.152 0.152 1380

82 92 31

Load Factor

Yield (Rev/RPM)

Departures

Average Fare

Rev/Flight ($)

Load Factor

Yield (Rev/RPM)

Departures

35.1% 46.4% 45.9%

0.186 0.163 0.188

262 350 108

232 203 234

4,552 5,273 6,016

45.1% 53.2%

0.187 0.202

85 113

Average Fare 188 162 162 Average Fare 258 279

Rev/Flight ($) 3,688 3,829 3,947 Rev/Flight ($) 6,518 8,300

The response to Legend's service grew steadily through 2000, reaching a 63% load factor in November

2000. While American continued to compete aggressively on the Los Angeles routes, Legend claimed that yields on its Washington and New York service (introduced later in 2000) were above expectations.

But with so much capital expended prior to operations, the airline had little ability to weather a significant increase in fuel prices during 2000. Furthermore the economic downturn that started in April

2000 was in full effect by December. On December 2, 2000 Legend Airlines ran out of funding and ceased flight operations. It filed for bankruptcy protection on December 3rd and briefly restarted limited operations in January 2001 in expectation of rescue financing. The financing did not materialize and

Legend liquidated.

Table: Legend

Legend Airlines

Years Operated

Aircraft Utilized


Value Proposition

Cost Structure


Key points

2000

DC-‐9-‐30 Aircraft

56 seats


Domestic First Class product for full coach fare; more convenient airport in Dallas (Love Field)

High; capital expenditures and legal fees drained the startup capital

American launched the same model on similar routes with a 56-‐seat

Fokker 100

Importance

Second-‐Generation Value Boutique

Second-‐hand aircraft equipped with satellite television, larger galleys

Artificially large pitch to meet 56 seat

capacity restriction for Love Field

Strong differentiation from mainstream product on same routes; more pitch; better meals; convenient

airport

Shortened planning horizon. Excess investment in non-‐core assets.

Most extreme competitive response;

American could not easily match with mainstream equipment so duplicated

the Legend model and directly competed with the startup

The lessons of Legend were key drivers in the development of the transatlantic boutique models.

Legend demonstrated that the high cost of inducting and configuring older aircraft in an all-‐Business

Class configuration could be a substantial capital drain. Legend also demonstrated that when

threatened on core routes, competitive response could be brutal and swift, if not outright predatory.

Strong initial financing and ongoing working capital reserves would be even more critical on international routes, where each flight represented significantly higher financial risk. Legend sunk millions into ground terminals and drained their accounts of much-‐needed working capital. Their diminished reserves were not sufficient to weather the unexpected competitive response (both legal and operational) and the downturn of business travel after 2000’s stock market turbulence.

Sunair

Sunair was a South African carrier that operated limited premium scheduled service between Cape

Town and Lanseria, Johannesburg's secondary airport close to the key suburban business districts. The airline operated premium service from March 2002 to March 2004. Sunair offered a Business Class product similar to Midwest Express, with two-‐by-‐two red leather seating on its two DC-‐9 aircraft.

Aircraft were configured for 72 seats versus the standard 104-‐seat economy configuration. Unlike OzJet and Midwest, Sunair did offer airport lounges in both Cape Town and Lanseria. At its peak, the airline attracted 500 regular passengers weekly, reaching a 75% load factor during peak weeks. However by late 2003 the airline's loads sank below 50% as the airline struggled to raise capital and pay debts. It liquidated in the spring of 2004.

Like Legend Airlines, Sunair chose to exploit a secondary airport with more convenient access to key business districts. Lanseria was a 20 minute drive from Sandton, home to key corporations in South

Africa, and was in the center of high-‐wealth residential districts. But Sunair faced the same core issues that OzJet would face in Australia, and several of the US-‐based boutique carriers faced as well on dom estic routes.

Table: Sunair

Sunair (South Africa) Key points

Years Operated March 2002 – March 2004

Aircraft Utilized


Value Proposition

Cost Structure


DC-‐9-‐60 Aircraft

72 Seats


Domestic First Class product for full coach fare; competed against mainstream national carrier and nascent low-‐cost carriers

Limited fleet size, marketing, route network limited economies of scale

No notable response

Importance

Non-‐US short-‐haul boutique


Wide seats, legroom suitable for 90 minute flights in Johannesburg /

Cape Town sector

Similar model to Air One and its peers: comfort and meals for a full coach fare. Unique in South African market in both product and airport base

No material cost advantage versus

South African Airways or Comair SA

Competitors watched traffic response at Lanseria Airport. After Sunair ceased operations both South African and Comair initiated service at the

airport.

In November 2003, for example, there were 270 flights scheduled each week from Johannesburg to

Cape Town. South African Airways alone operated between 21 and 25 dpeartures in each direction on weekdays, with flights averaging just 30 minutes apart. British Airways' Comair affiliate operated 13 departures in each direction. In comparison, Sunair's two flights were notable only in that they were the sole business services from Lanseria Airport. While Lanseria was attractive for residents and executives who lived nearby, the convenience of alternative flight options -‐ especially in a market that was dominated by day trips -‐ forced Sunair to compete primarily on price, not product. While the airline drove sufficient traffic to continue operations, it never built a strong enough base to expand and be

profitable.

OzJet

OzJet is an Australian charter airline that operated scheduled service for six months from 2005 to 2006.

While its development paralleled those of transatlantic premium airlines, OzJet is notable for its application of the short-‐haul, price-‐sensitive boutique segment in a non-‐United States market.

OzJet was created by Paul Stoddart, an F1 owner and experienced airline entrepreneur, and Peter

Schott, a pilot in Australia. While the original OzJet shell was created in 2002, the airline was certified for scheduled and charter operations in late October 2005. The airline operated scheduled service from

November 2005 through March 2006. After suspending scheduled operations the airline continued to offer VIP charter services. It retained its scheduled authority and as of early 2008 operates one scheduled route in Western Australia.

The OzJet product followed the big seat, good food, low fare model pioneered by Air One and its contemporaries in the United States. The airline offered two-‐by-‐two seating on Boeing 737-‐200

Advanced aircraft with 38" of seat pitch. The aircraft were configured with 60 seats instead of the usual

110. Full meals were offered, although most flights were just 90 minutes. Fares were comparable to fully flexible economy class on QANTAS at about $590 AUS return in the key Sydney-‐Melbourne market, with eight frequencies per day. The airline had liberal carry-‐on bag restrictions given the low-‐density seating configuration.

OzJet management targeted the business, corporate and government markets with their product.

Advertising in late 2005 focused on differentiating OzJet in an Australian market increasingly defined by low-‐cost budget products, pushing short check-‐in times, liberal carry-‐on rules and fast boarding and

deplaning. To keep costs low, Ozjet did not offer airport lounges.

Table: OzJet

OzJet (Australia)

Years Operated

Key points

November 2005 – March 2006

Aircraft Utilized


Value Proposition

Cost Structure

Boeing 737-‐200 Aircraft

60 Seats


Domestic First Class product for full coach fare; competed against mainstream (QANTAS) and Budget

(Virgin Blue) airlines

Low initial costs, branding aided by

Stoddart’s racing legacy

Importance

Off-‐shore short-‐haul boutique


Wide seats, legroom suitable for 90 minute flights in Sydney-‐Melbourne corridor

Similar model to Air One and its peers: comfort and meals for a full coach

fare. Unique product in Australian market that countered Budget trends

No material cost advantage versus

QANTAS or Virgin Blue

Competitive Response Responded with additional frequencies and frequent flyer programs. Little direct price or product competition.

Sufficiently differentiated that competitors took a “wait and see”

attitude – market did not embrace premium product on short-‐haul route

OzJet's short-‐lived scheduled service experiment illustrated the relative difficulty of attracting passengers on short-‐haul segments. Budget low-‐cost carriers have had a significant impact on short-‐haul flying for both leisure and business passengers. Where the majority of leisure passengers have been significantly influenced by price, the advent of business-‐friendly budget services has pressured budget managers at major companies to seek the lowest-‐cost option for corporate travel. On long-‐haul flights, where business passengers must be fresh after overnight travel, buying up to Business Class continues to be common. But on 90 minute flights like those from Sydney to Melbourne, finding the lowest fare and most convenient schedule (and of course giving preference to loyalty programs) drives the bulk of purchasing decisions.

Short-‐haul business flying is frequency driven, and OzJet was dwarfed by its competition. In the Sydney-‐

Melbourne market in December 2005, Virgin Blue offered between 23 and 25 daily departures in each direction and QANTAS offered no fewer than 30 daily departures. Virgin Blue offered service on 144-‐seat

Boeing 737-‐800s while just four of the minimum thirty departures on QANTAS were with narrowbody aircraft -‐ the rest were regional and international widebody aircraft which provided ample opportunities for loyal QANTAS flyers to upgrade.

As a result of these factors OzJet was unable to attract product-‐driven business passengers in sufficient quantity to avoid stimulating the market on price, and discounting price to compete with high-‐density airlines created an unsustainable revenue structure. OzJet recognized its challenge and discontinued its

Business-‐only product, surviving to continue charter and limited scheduled operations.

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