"Start-ups risk it all to be next Southwest"

Tuesday, March 1, 2005

Start-ups risk it all to be next Southwest 
By Dan Reed
USA TODAY


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."

Attached Photo:

Startup costs aside, investors think the idea of a low-cost carrier can take
off, bringing success like that seen by Southwest.

in-sw.jpg