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For Airline Startups, Opportunity and Obstacles

Original Post: For Start-Up Airlines, Opportunity and Obstacles

by JAD MOUAWAD

Published: May 25, 2012

Scores of start-up airlines have failed. Employees in Charleston, S.C. closed the Independence Air ticket counter in 2005, after the carrier filed for bankruptcy.

Where are the start-up airlines?

With the big carriers cutting routes and raising fares, this would seem an ideal time for a new airline to take them on with cut-rate prices and service to smaller airports eager for more flights. That is the path, after all, taken by two of the industry’s success stories — Southwest Airlines, back in 1971, and JetBlue Airways, in 2000.

But getting an airline off the ground has become a lot more treacherous. High oil prices these days mean carriers must fly full planes to turn a profit, and smaller airports just do not provide enough passenger traffic. At the same time, the major domestic carriers are more entrenched than ever in their own hub airports, making it harder for a new entrant to wrangle gates there. And investors have become more cautious about lending to just any airline project.

“Why would you ever want to start a new airline?” asked Michael Boyd, an aviation consultant with the Boyd Group International. “The business is very capital-intensive, the returns are rotten and the track record is terrible. Plus, there’s simply no market for a new carrier today.”

Scores have tried and failed — Skybus Airlines, Independence Air, ATA Airlines and Maxjet Airways among the most recent examples. Even the most successful of the new carriers, Virgin America, has so far failed to turn a profit five years after its first flight.

Warren E. Buffett — who once called an investment in US Airways in the early 1990s one of his biggest mistakes — summed up the industry’s predicament in a letter to shareholders in 2008: “Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”

Losses by the nation’s passenger airlines from 1979, the year the industry was deregulated, to 2000 were twice as large as their combined profits in that period, according to the trade group Airlines for America. In the last decade, domestic airlines lost a combined $60 billion as higher fuel prices forced painful restructuring, bankruptcies and mergers.

With the economy picking up last year, the top domestic airlines reported profits of $1.5 billion with revenue of $192 billion — a measly margin of 0.8 percent. Still, their combined market value is smaller than Starbucks’.

Fuel has become one of the biggest barriers to entry into the business, accounting for 35 to 50 percent of costs as prices almost tripled in 10 years.

Mergers have also created a handful of major carriers that control powerful hub airports in large cities, making it generally tougher for a new airline to break in. The most successful smaller airlines — Spirit Airlines, Allegiant Air, Alaska and Hawaiian Airlines — all carved out specific markets in past decades that allowed them to thrive without competing head-to-head with their larger rivals, analysts said.

“The big guys have gotten bigger and it’s a lot harder to fly under the radar now,” said Jim Hnat, a senior executive at JetBlue. Even so, there are still optimistic entrepreneurs and investors. There are currently 13 companies seeking a Part 121 air carrier certificate from the Federal Aviation Administration, the certificate required to operate a scheduled passenger airline, according to the agency.

“If you have a niche, the rewards are great,” said Ted Vallas, the founder of California Pacific Airlines, one of the prospective carriers, which has been seeking F.A.A. certification since 2009 and plans on serving the small markets shunned by the big carriers in recent years.

California Pacific has produced 32 manuals totaling 40,000 pages detailing all aspects of its operations to gain approval from the F.A.A. And it is not done yet. The carrier said that it expected its first plane — an Embraer 170 jet with about 80 seats — to be delivered next month and that it hoped to begin scheduled service by the fall. It plans to serve a handful of cities, including Oakland and Sacramento, from Carlsbad’s McClellan-Palomar Airport, 35 miles north of San Diego.

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