Small Airlines: Straightened Up And Flying Right

They're giving the majors a run for their money

When Robert J. "Rocky" Spane, a retired Navy admiral, took over Vanguard Airlines Inc. nearly two years ago, he feared the fledgling carrier might last just six months. After all, its route system was in constant flux, and it lacked such basics as budgets and a computer system for managing pricing. In short "it had no strategy," says Spane.

Today, it has one--a sharp focus on cost-conscious business travelers--and maybe even a future. The Kansas City-based airline is turning an operating profit and filling over 70% of its seats. Vanguard's fleet, serving cities like Dallas, Chicago, and Pittsburgh, has grown from seven planes when Spane arrived to 11 and should hit 13 by yearend. "Now, it's ours to lose," crows Spane.

Vanguard's brightening outlook is no longer exceptional among upstart airlines. Almost three years after the deadly ValuJet crash spooked passengers and prompted tougher regulation of new entrants, small players like Frontier Airlines Inc. in Denver and Spirit Airlines Inc. in Detroit appear to be prospering, too. What's more, at least eight new airlines have filed or plan to file applications with the government to begin scheduled passenger-jet operations, notes Darryl Jenkins, director of the Aviation Institute at George Washington University. "Rather than being run out of town, the smaller, niche carriers have established themselves," says Michael K. Lowry, managing director of Portland (Ore.)-based AirWatch Group, which monitors airline finances. "The stronger they get, the more likely they are to maintain some resiliency in the next downturn."

Why are the startups faring better? Certainly, a buoyant U.S. economy and low fuel prices are boosting the fortunes of airlines everywhere. And painful lessons were learned about the need for experienced managers and controlled growth. But the biggest reason for the recent success of startups seems to be customer backlash against the majors. Among business travelers, the real bread-and-butter of the industry, there is growing irritation with skyrocketing fares and inflexible rules that guarantee executives get stuck with the priciest tickets.

Frontier, for example, competes with mighty United Airlines Inc. in Denver by targeting smaller businesses. It offers lower walk-up fares to such business destinations as New York, Chicago, and Atlanta. And Frontier's sales staff now spends 80% of its time focusing on corporate accounts, not travel agencies. As a result, it has signed up 1,600 companies for discount programs. And the business is profitable. For the nine months ended Dec. 31, Frontier posted a net profit of $12.8 million on revenue of $150 million vs. a $15.7 million loss during the same period of 1997.

LOCAL FANS. Pro Air Inc. in Detroit, a hub for Northwest Airlines Corp., is wooing dissatisfied business travelers, too. But it's not just courting the small-fry. After Northwest cut fares on competing routes, Pro Air inked five-year, flat-fee deals with General Motors Corp. and DaimlerChrysler last June. The pacts guarantee a minimum monthly revenue, says Pro Air CEO Kevin Stamper. GM says the deal saves it $4 million to $6 million a year. Another 35 corporate agreements are in the works, says Stamper. The two-year- old airline, which has yet to turn a profit, is now seeking investments from local companies.

Local boosters have helped Des Moines-based AccessAir get off the ground. Caterpillar Inc., Principal Financial Group, and other local businesses and individuals invested $25 million in the carrier, which started in February. "The corporations and the community here in Des Moines had been held hostage by the major carriers," which charged high fares and forced passengers to fly through such hubs as Chicago and St. Louis, says Richard A. Schnoes, assistant director of financial reporting at Principal Financial.

Some small carriers are optimistic that they'll be getting more help soon from Washington, too, where Congress has been considering opening congested airports to new entrants. Vanguard, for instance, just got its own gate in Minneapolis after three years of being at the mercy of other airlines.

"PREDATORY." Meanwhile, the Transportation Dept. is moving ahead with guidelines that would prevent "predatory practices" by entrenched carriers to drive out startups--moves such as slashing fares and adding on new flights on routes the upstarts fly. Although the guidelines, proposed 11 months ago, have been delayed in Congress, DOT Deputy Assistant Secretary Patrick V. Murphy says startups are reporting that "the most extreme behavior by large carriers has stopped."

Even so, the startups still face plenty of hurdles. Edward P. Faberman, executive director of the Air Carrier Assn. of America, which represents startups, notes the big airlines are becoming more formidable as they expand domestic and foreign alliances to snare customers. After all, only one of 58 startups launched between 1978 and 1990--America West Airlines Inc.--survived. And 7-year old Kiwi International Air Lines Inc. just filed for bankruptcy. "It's not a time for celebration," Faberman says. But for now, at least, startups can hope to take wing.

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