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FORT WORTH - U.S. airlines have lost more than
$30 billion since 2000, so Ash Huzenlaub understands the "Are
you crazy?" looks when he tells friends he's trying to
start a new one from scratch.
Nonetheless, the 28-year-old entrepreneur from Fort Worth
says, "All the turmoil that the big legacy carriers are
going through just shows what a great opportunity exists right
now for start-up carriers." Huzenlaub's plan to create
Mexus, a low-cost carrier between destinations in Mexico and
cities in the USA with large Mexican immigrant populations,
places him among about a half dozen would-be airline founders
chafing to get into the cut-throat competition of airlines.
They're driven by visions of becoming - against all odds
- the next Southwest, the USA's only consistently profitable
airline over a long period, though most would settle for something
short of that kind of success.
In each case, the start-ups believe they've identified a
sliver of the air travel market where opportunity exists and
where they can gain a foothold. They also believe they can
operate more cheaply than the handful of low-cost carriers
now eking out a profit. Perhaps most surprising, the start-ups
are having some success in lining up sober, serious investors
willing to risk millions to help accomplish their visions.
The risks are enormous. The airline business is an industry
in never-ceasing turmoil. Big-name competitors are operating
in - or teetering on the edge of - bankruptcy. Tens
of thousands of workers have been laid off, and most who remain
have seen their pay and benefits cut. There's chronic overcapacity
and unending price wars. Profitability is a vague, distant
hope for most of the big carriers.
Airline attrition since industry deregulation in 1978 provides
a glimpse of the long odds.
According to the U.S. Department of Transportation, 13 airlines
were flying at the dawn of deregulation, and 269 have been
authorized to do so in the years since. Total: 282. Today,
the USA has just 84. The rest have shut down, or never actually
flew. And that low survival rate ignores the hundreds of "paper
airlines" that never made it even as far as DOT authorization.
Huzenlaub runs a small technology firm that sells patient-management
software to hospital emergency rooms. He has never worked
a day in the airline industry. But he and others behind the
pending start-ups believe they've identified niches in the
market that are underserved, overpriced or both.
Huzenlaub's Mexus Airlines aims to provide low fares from
U.S. cities such as Los Angeles, Houston, San Antonio and
Dallas/Fort Worth - places with strong business and cultural
ties to Mexico. He says his proposed airline can attract plenty
of capital and plenty of customers. "And I believe it
can make money," he says.
Huzenlaub's entrepreneurial bent seemingly is in his blood.
His grandfather, who left Germany before the start of World
War II and settled in Houston, invented the milling process
used for Uncle Ben's Converted Rice.
As a youngster in Houston, Ash Huzenlaub sold fire extinguishers
from a little red wagon after his father lost a job in the
oil business.
As a student at Texas Christian University, he set up a self-directed
study program that took him across the nation interviewing
famous entrepreneurs ranging from Starbucks' Howard Schultz
to junk-bond creator Michael Milken.
Preparing for takeoff
Not even high fuel prices and rising competition - factors
suppressing current low-cost carriers' profits - seem
to faze those pushing today's start-ups.
Joshua Marks, a 29-year-old Harvard Business School grad,
technologist and airline consultant, is teaming with airline-industry
veteran Ken Carlson on a start-up called, for now, SkyLink
Airways. Its plan: low-fare international service, beginning
with a route between the Baltimore/Washington airport and
London's No. 3 airport, Stansted. The new carrier, which expects
to get its government operating certificate this spring, will
announce a new name to avoid confusion with another company.
Marks acknowledges that deep cost cutting by the big airlines
has made them more competitive. "But, if you start from
scratch with the latest technology and can hire some of the
great people who are coming out of the airline business these
days, you can put together a really great airline," he
says.
A proposed airline called Skybus aims to improve air service
for Columbus, Ohio, the USA's 15th-largest city. Skybus founder
and Chairman John Weikle, a longtime executive at cargo and
regional airlines, tried unsuccessfully to launch Heartland
Airlines at Dayton, Ohio, a few years ago. But after America
West shut down its small hub in Columbus in 2003, Weikle dusted
off his plan and took it to Columbus business leaders. The
airline will be run by President Kenneth Gile, former chief
pilot and director of flight operations at Southwest, and
a yet-to-be-named CEO.
Bob Milbourne, a board member at Skybus, says the business
plan calls for operating with unit costs lower than established
discounters such as Southwest and JetBlue. "We've been
working on this business plan for about two years now, and
we think we've got a little better mousetrap," says Milbourne,
who is also president of The Columbus Partnership, an economic-development
group backing Skybus' creation.
Other airline plans in the works:
. Atlantic Express is aiming to offer low-fare international
service, initially from New York's John F. Kennedy airport
to Europe. It's led by David Spurlock, who was British Airways'
No. 3 executive.
. Las Vegas-based Primaris Airlines plans to offer all-first-class
service at prices roughly equal to the big carriers' unrestricted
coach prices. Its board includes former U.S. senator and shuttle
astronaut Jake Garn, and it is led by CEO Mark Morris, former
head of DHL Air Group. In the early 1980s, Morris led a similar
effort to make a go of it offering premium service at coach
prices. But St. Louis-based Air One was short-lived, in large
part because of intense competition from TWA.
. Richard Branson is the biggest name in the start-up
airline game. The brash founder of Britain's Virgin Atlantic
Airways is teaming with former Delta president Fred Reid to
start domestic discounter Virgin America. The tentative launch
date has been pushed back to early 2006.
Virgin America would be Branson's fourth airline start-up.
He also launched Europe's Virgin Express and Australia's Virgin
Blue. The proposed airline would fulfill a longstanding personal
goal to compete in the U.S. domestic market. To meet U.S.
government ownership requirements, Branson, a British citizen,
needs American investors who will hold a majority of the stock
while allowing his team to run the airline.
Weeding out 'the kooks'
JetBlue, the low-cost carrier that began flying from New
York's JFK in 2000 and now goes to 30 destinations, set a
high bar for would-be airlines in search of investors' cash.
It put together a launch bankroll of $130 million, 25% of
it from billionaire investor George Soros. JetBlue founder
and CEO David Neeleman "did everybody a service,"
says consultant Darryl Jenkins of Embry-Riddle Aeronautical
University. "There was a time when all you needed was
an old DC-9 and $1 million, and you could be an airline."
Big money upfront prevents hobbyists and "kooks"
from even attempting to launch airlines, he says. And it forces
serious groups to slow down, put together better plans and
wait patiently while they raise the larger sums now required.
Huzenlaub, who has relatively small start-up aspirations
for Mexus, wants to raise $40 million to $50 million. He says
he won't launch without at least that much. "Sometimes
the best decision is the one you make not to proceed,"
he says.
Milbourne says Skybus' goal is "around $100 million."
Atlantic Express, in DOT filings, says it expects to launch
with more than $90 million in initial investment. SkyLink
got $15 million in seed money and wants to launch with $160
million more.
Those numbers don't seem out of the question, given the big-league
backing already behind many of the start-ups: well-known venture
capitalists, big Wall Street investment firms, and plane and
engine makers. Lehman Bros. is marketing SkyLink as an investment,
for example. Morgan Stanley is squiring Skybus.
Today's crop of start-up airlines has another advantage their
forerunners in the 1980s and early 1990s didn't. The big aircraft
makers and engine makers used to be concerned about the impact
of start-ups on their best customers - the big network
airlines. Now, with the big airlines severely hobbled and
accepting delivery of few planes, the manufacturers have become
increasingly interested in working with fast-growing, low-cost
carriers.
To keep production lines going during the post-Sept. 11 travel
slowdown, and to compete for market share in the low-cost-carrier
segment, Airbus and Boeing have discounted plane prices. The
two plane makers and engine maker General Electric, acting
through its GE Capital finance unit, have shown unprecedented
willingness to set up easy lease- and loan-payback terms.
So manufacturers and financing companies are behaving like
involved stakeholders, not dispassionate creditors. And that
could make it easier for start-ups to stay in the air once
they get there, says Nicole Piasecki, Boeing's vice president
for marketing and business strategies. "It's easier to
enter the business than it is to exit," she says.
Turbulent path
Veteran airline consultant Julius Maldutisis skeptical about
the chances of the start-ups to establish themselves. Even
recent start-ups that have met with some success "are
likely to turn out to be just short-term success stories,"
says Maldutis, who for three decades was one of Wall Street's
leading airline analysts.
The discounters' fuel costs are high, their labor and equipment
costs are rising, and the big, established airlines appear
intent to battle them to the death. No. 1 American is pressuring
discounter AirTran at Dallas/Fort Worth, for example. And
American is putting heat on one-time Wall Street darling JetBlue
in South Florida. No. 3 Delta forced JetBlue to shut down
in Atlanta.
America West, which has earned industry admiration for losing
less money than its competitors, needed post-Sept. 11 government
aid to sidestep a second bankruptcy filing. Only discount
king Southwest, with 32 consecutive profitable years, is an
unqualified success among airlines since deregulation, Maldutis
says. Jenkins, of Embry-Riddle, agrees that start-up carriers'
chances are never good. But for savvy operators with enough
capital to survive the tough early days, it should be possible
not only to survive, but eventually to thrive.
Jenkins estimates that since the Sept. 11 terrorist attacks,
about 200 groups have approached him with their ideas about
starting new airlines. "Around 180 of them I sent packing
right away," he said.
But Maldutis, looking down the road, warns that even the
best of the start-ups may be in for a much tougher fight than
any of them suspect. If United, the industry's No. 2 carrier,
emerges from Chapter 11 bankruptcy-court protection with significantly
lower costs, he says, the other big network carriers will
be compelled to cut their costs further to remain competitive.
Some will do it via the Chapter 11 process, and some may be
able to do it outside the courts. But the result will be the
same, he says: They eventually will have costs low enough
to compete profitably against the discounters.
"You'd better have a very unique business plan,"
Maldutis says, "that will give you sufficient financial
leverage to survive the Armageddon that is already underway
in the airline business."
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