JBM First Gen Boutiques
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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 Key points Importance Years Operated April 1983 - October 1984 First generation boutique Aircraft Utilized Boeing 727-100 Second-hand equipment 76 passengers Regional capability Seating Configuration 2x2 (no middle seats) Equivalent to domestic 38” pitch First Class product Value Proposition Domestic first class for full coach Product targeted at traffic that fares; network of destinations from valued both product and price St. Louis Cost Structure Low labor and aircraft cost Achieved lower labor costs than incumbent competition Competitive Response Strong; TWA matched fares on Incumbent carriers took the Air One routes from St. Louis 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 3 N4619 727-35 18847 May-83 4 N834N 727-95 18858 Mar-83 5 N836N 727-95 18850 Mar-83 6 N837N 727-51 18802 Apr-83 7 N841N 727-22 18324 Feb-83 8 N189CB 727-2H3 20739 Mar-84 9 N191CB 727-2H3 20822 Apr-84 10 N407BN 727-291 19992 Dec-83 11 N545PS 727-214 20169 Mar-84 http://www.geocities.com/~aeromoe/fleets/ 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 Key points Importance Years Operated June 1983 – June 1985 First generation boutique Aircraft Utilized DC-9-32 Second-hand equipment 60 seats Regional capability Seating Configuration 2x2 (no middle seats) Equivalent to domestic 36” pitch First Class product Value Proposition Domestic first class for full coach Product targeted at traffic that fares; business destinations from valued both product and price Midway Cost Structure Subsidiary brand of operating Achieved lower labor costs than low-cost carrier; secondary airport incumbent competition; lower cost cost advantages base through secondary airport Competitive Response Strong; United, American and others Key business routes were important reduced fares from O’Hare 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.