Last week, Aspire Aviation spoke with Brent James, vice president (VP) of operations of new US startup PEOPLExpress. Aspire Aviation has transcribed the interview, as well as following it up with a brief analysis of the carrier’s prospects.
Aspire Aviation: What prompted the choice of Newport News as your hub? Is 25 flights an optimal level for this operation moving forward?
Brent James: The Newport News hub, we looked at many cities up and down the east coast, but the mid-Atlantic location here is very convenient to go either north or south, you’ve got a metropolitan area of slightly under 2 million people here when you include everything within 50 miles of Newport News, so it’s a fairly large demographic. Not particularly well served except out of Norfolk International. When we started working, we talked to all of the various airports from Philadelphia down to Atlanta, and this is the one that jumped out at us as the best fit. And the fact that AirTran is pulling out after Southwest bought them has left a pretty big void on the Atlantic sea area and there’s something that made sense in Newport News, something that had a lot of logic to it.
Aspire Aviation: Will your carrier adopt a point-to-point or hub-and-spoke network model?
Brent James: Probably the direct destination type flights. We’re really not looking to put together a hub-and-spoke type operation at this point. That’s part of the reason that we think there’s a tremendous potential here, is because you pretty much have to go through a hub from here to get to just about anywhere. And one of our first city pairs that we examined was Pittsburgh. Used to be that US Airways flew several times a day, but now there are no direct flights. You either go through Charlotte, Philadelphia, or LaGuardia to get to Pittsburgh and fares are up in the US$500-plus range, and we can do it for a whole lot less than that, and we can do direct service. And that’s sort of an example of how we’ve looked at the various routes and various city pairs for places that are underserved or where the majors have pulled out or reduced service, where it makes sense for us to fill the void.
Aspire Aviation: Can you fill 25 flights per day profitably? Aspire Aviation has reviewed US Department of Transportation (DOT) data for the Hampton Roads Area (Newport News, Virginia Beach, Norfolk) and the data doesn’t indicate a lot of high yielding origin and destination (O&D) or markets that can be stimulated?
Brent James: When you look at what AirTran has done, they carry somewhere between 50-66% of the passengers out of here, and that’s around 600,000 passengers a year. And 25 flights, I wouldn’t get hung up on that number. Obviously we’re not going to start with 25 flights a day, we’re not going to start with a huge fleet. We’re going to build. But it will be highly iterative as we go through it. If we find that 15 flights is the right number, or 20, or 30; we’ll see how the commercial demand goes. But we think that we’ll be able to stimulate the market beyond because of the low fares and the direct service and the level of in-flight service that we plan on providing. We are very hopeful and confident that we can stimulate the market to the point where those kind of numbers will make sense eventually. We’ve all looked at those numbers too and on the one hand you think it’s a little sobering, but on the other hand you think is that possible? The answer is yes, 25 flights a day… that’s not a huge number… if we move 3 or 4 thousand people a day out of Newport News to various places. And that 25 flights a day is a number we are going to build to, certainly not a start-up.
Aspire Aviation: How transferable would you say your model is to cities beyond Newport News?
Brent James: We’re going to build it out of here [Newport News]. I think that if you look back at how Southwest started their entire empire, it was doing essentially what we’re going to do here. They’ve lost their way in certain regards, they’re now going to go into Atlanta, but I mean instead of going into O’hare they went to Midway, instead of going into Bush they went into Hobby, instead of going into DFW [Dallas Fort-Worth] they went into Love. Same area, but different airports. So in terms of transferability, I think the concept works in many areas. We know this area well, we know the people, we have a highly receptive airport environment here at Patrick Henry (PHF), so we’re pretty comfortable starting up here. But yeah, I think it’s definitely transferable, and we may do direct point-to-point services from other airports, not in a hub-and-spoke manner, but just point-to-point.
Aspire Aviation: A recent news article about your carrier mentioned Pittsburgh as a potential destination. Does the model of going in to replace service in former legacy strongholds appeal to you?
Brent James: Yes it does, because when you look at cities like Pittsburgh, they used to be just a hubbub, a beehive of activity when US Airways was headquartered there, but since then, they’ve got an entire concourse that they hardly even turn the lights on. And the same thing in Cincinnati, Delta has drawn way down there. St. Louis, TWA/American has drawn way down there. There’s any number of cities that are representative examples, and any number of places as you see the majors consolidating and shrinking their service, they’re leaving a lot of cities either behind entirely, like Southwest/AirTran is doing here at Patrick Henry [Newport News], or they’re reducing their service to the point where there may be some opening there. So we think that as we see the consolidation in the industry consolidating, and as we see everybody “hubbing and spoking,” we definitely see some opportunity there.
Aspire Aviation: Stylistically, do you view yourselves more in the Southwest style high frequency model, or the Allegiant style low-cost carrier model of low frequency flights?
Brent James: Probably more the former than the latter. We want the high frequency, we want the high utilisation of the airplanes. We’re sort of taking a blend of the best of everything and we have our own creative ideas about how we think we can flow into a new model. We don’t plan to directly challenge a Southwest, a United, or a US Airways and someone like that because we’re tiny and they’re huge. But what we think we can do, is to step in at airports that they’ve abandoned or are now underserved. So we see it more in terms of the Southwest-styled model than in terms of a charter-styled model.
Aspire Aviation: How do you reconcile a high utilisation model with the choice of the Boeing 737-400? Isn’t there a trade-off between high utilisation and maintenance costs on airplanes as old as these?
Brent James: Well, we’re looking at several different fleets right now and obviously the maintenance conditions, the number of flight hours and the number of cycles, and what point they are in their service life are all going to come into play. And that’s always a trade-off when you’re not buying a new piece of equipment, and there’s a certain amount of tradeoff even when you are buying new. But we are quite aware of that and we’re going to try and build into the schedule the maintenance time. That’s one of the benefits of a point-to-point operation. We’re planning to, especially early on, having most of our flights return to Patrick Henry in the evening so we can focus on maintenance overnight and have the plane ready to go the next morning. And the -400 offers us a nice blend, it’s not that old. The one’s we’re looking at are for the most part no more than halfway through their service lives, so they’ve got a good number of years ahead of them. And as we go down the road, we’ll start looking at the  -700, -800, -900, whatever makes sense. We are planning on staying with the 737 family though.
Aspire Aviation: And specifically what was the rationale for the 737-400 versus other similar aircraft like the 737-300, the McDonnell Douglas MD-80, or even older Airbus A320s?
Brent James: The -400 is kind of a happy medium in many regards. As we know, it offers you extra seats over the -300, roughly 10 feet in length over the -300, so we can comfortably put a lot of people in there. If you look at the statistics on the -300, even the high density seating only goes up to 150 seats, yet with the -400 we can put a medium density seating arrangement in and still get close to 160. So those extra seats make a difference and the fuel, utilisation and so forth is almost a wash there, so we’re getting a little more bang for our buck in terms of revenue potential. That was really what drove us to the 737-400. I think that availability, cost of acquisition, all of that, plus there’s a lot of them out there. So we’ve got different companies, both airlines and lessors that are working with us and we’ll see who will give us the best deal.
Aspire Aviation: Do you favour purchasing the 737-400s, or leasing them in?
Brent James: Well we’d prefer to buy them. We may not, if we get a better deal on a lease that looks like it makes sense. Some of that, as you are probably well aware, we’re looking at packaged deals that involve parts and maintenance and other various things included. But our preference would be to buy the airplanes.
Aspire Aviation: How are you approaching funding, there hasn’t been much information put out about this on your website or in other forums.
Brent James: We have a Wall Street bank, WR Hambrecht & Co, and they’re providing much of it. They’re the main capital programme and that’s through them. However, we also have private equity investors, which is how we got our start-up seed money, was through private investments. Many of the private investors are local here, but still a lot of them nationwide and even international that are interested in investing in the startup here. The business plan as we have presented it in various forums has almost universally received very high marks, and it’s been refined and refined, and we take everybody’s comments and inputs, and we’re zeroing in on something that’s going to work, and people are agreeing with us and they’re vocal with their pocket books. So we’ve had inquiries come in pretty much daily on investment opportunity here, and we’ve taken many of those people up on their offers.
Aspire Aviation: Can you give us a timeline for your operations?
Brent James: We’re hoping for certification in the early-to-mid summer and then planning to be in the air in mid-to-late summer.
Aspire Aviation: And how is your carrier approaching US Federal Aviation Administration (FAA) certification?
Brent James: We have a certification consulting team that is working with us, that is reputed to be the best in the country. We just had a two-hour status meeting yesterday [Wednesday, February 15], and we’re running them ragged. Their tongues are hanging out and so are ours, and we’re moving the ball down the court very quickly. When we look at, for example our manual production, we have several manuals that are basically complete. Many others that are in the 60, 70, 80% range of completion, and so that’s what my primary job is right now, as well as several other people here, is to continue to work those manuals and get them ready for the formal submission. We are hopeful, and I guess everybody is always hopeful that you’ll get a first pass approval, but even if we don’t get a first pass approval, we are pretty confident that when we submit these manuals, they’ll be in such good shape that the FAA will not have a difficult time getting through them quickly, and giving them back if they have comments we can look over the comments quickly, fix them, and get a second pass. But hopefully, in many cases, if not all, the first pass will be all it takes, because we think that we’re doing it that well. We’ll find out, I guess. We’re not necessarily hanging our hat on that, we want to get flying obviously as quickly as possible. And the good news is, we have a wonderful working relationship with our flight standards district office up at Dulles. I came here from Gemini Air Cargo which was headquartered at Dulles and I know everybody in that office from the manager on down. They’re really good hardworking people, and they don’t have anyone else in certification right now, so it’s not like we’re competing for their manpower or time with another 2 or 3 airlines. So when we pass our stuff on to them, they have assured us that they will do a very expeditious turnaround on it, and hopefully it will be a first pass approval, and we’ll turn whatever needs to be re-wickered around very quickly and get it into them for approval.
Aspire Aviation: One of your initial planned destinations is Newark, have you managed to secure slots there or is that just a tentative plan?
Brent James: There’s a programme for new carriers where you are given some slots, not a whole lot necessarily, but some. A few a day, somewhere in the range of 4, 5, 6 a day. Enough for us to get going there. We recognise that United has most of the slots locked up there, but there is a programme in place for new carriers to get slots into Newark specifically, and that’s what we’re going to apply under, and we expect approval under.
Aspire Aviation: Will those slots be new or taken from other carriers?
Brent James: I’m not sure if they’re new or if they’re taken from the existing carriers. I’m not exactly sure where they come from, if they materialise out of thin air, or outer space or something, but I don’t think so. I imagine that since there’s only a finite number of slots into Newark, and they’re already up against that number, so they would probably come out of somebody’s hide, but I honestly don’t know who’s hide that would be.
Aspire Aviation: I believe your initial plan is for 12 flights per day from Newport News?
Brent James: That’s reasonable, what we put out was a best guess at the time and we’ll continue to refine that, but those are reasonable numbers.
Aspire Aviation: How many aircraft will initially be in your fleet?
Brent James: On day 1 in the process, probably we’ll start with 3, but by the end of the calendar year 2012, we expect to have 6 or 7, and then adding one probably every 6 weeks or so for the next couple of years, building to about 30 to 50 airplanes out as far out as we can see at this point.
Aspire Aviation: Can you give us an idea of how far west, north, and south you would ideally fly from Newport News?
Brent James: As we start up, it’ll be primarily a East Coast airline. But as we grow, if we do grow over the next few years to 30-50 airplanes, obviously we’re going to need a whole lot more destinations, and that will drive us further west. As we start up, a reasonable line of demarcation would be the Missisippi River, probably staying east of there. As we grow, that will evolve, and we will see where we end up. And as far as north and south, from Florida to the Canadian border. We’re going to do all domestic initially. At some point who knows? But initially, we’re going to stay domestic, maybe going as far west as the Mississippi.
Aspire Aviation: Now your business model is very similar to that of Southwest, but I do believe you will have assigned seating?
Brent James: Yes, we are going to have assigned seating and we are not going to have bag fees.
Aspire Aviation : And you feel that this type of model will resonate with the travelling public?
Brent James: Absolutely, lots of people are angry right now about all the little nickel and diming things that people are doing. You mentioned one of our potential competitors. But when you have to pay 5 dollars to talk to a human being or 2 dollars to even make a reservation, or 3 dollars to get a boarding pass printed, those are annoyances that people are really getting tired. And we’re going the opposite direction. We’re going to keep our overhead low, our corporate structure lean and mean, and because of that, and though we’re not going to be paying the highest salaries in the world, we’ll be able to make a profit at a lower fare basis, and there’s no mystery to it. It’s all dollars in and dollars out. And as long as our dollars out are contained in the dollars in, we’re all going to pay pretty much the same thing for gas, and then it becomes what other luxury items do you plan to pay for, that’s another reason why we like Patrick Henry because it’s a low-cost area to live, to operate, we can pay good competitive salaries, but they’re not off the page like you have to pay in New York City or somewhere like that. So it gives us a built-in structural advantage that we’d like to capitalise on.
Aspire Aviation: So you do not subscribe to the a-la-carte business model practised by other US-based airlines?
Brent James: No. At this point we have no intention of going down that path. You can go full a-la-carte like some have, and I read an article about a CEO who’s very proud of that. But you have to pay for a reservation somehow, and when you’re being charged for every step of the process, our marketing and PR research indicates that the flying public is just fed up with that. They want flying to be fun again. And that’s what we plan on giving them, is getting them out of their cars and back into an airplane when they’re coming down here to visit the beach in Virginia Beach, the outer Banks, and we’ll be the carrier of choice to do that, that’s our plan.
Aspire Aviation: The old PEOPLExpress was actually one of the first airlines globally to implement a-la-carte pricing, how does your carrier plan to differentiate itself?
Brent James: There’s been enough timeframe, 24 years since Continental bought PEOPLExpress. There’s a memory in the middle aged, old demographic of that old PEOPLExpress. But what most people remember is the low fares first and foremost. And they’ll think, “Yeah I flew it. It’s pretty bare bones, it’s pretty basic.” We’re going to fluff up the service end so that it’s not such a bench seating kind of experience. We’re going to have a very comfortable cockpit seats, we’re going to have customer service that we’re going to make second to none, in the entire experience, all the way from making a reservation through when you’re picking up your luggage at the end and we’re getting you into a bus or taxi or car or whatever, we’re going to be there every step of the way. And we want the flying portion to be fun again, not something that people have to go and endure to start their vacation, we want their vacation to start when they come to fly with us.
PEOPLExpress faces major risks, viability of business model remains to be seen
When PEOPLExpress first announced their business plan last Monday, the aviation community predictably reacted with derision, dismissing PEOPLExpress as another version of doomed start-ups such as Family Airlines and Baltia. However, upon speaking with Brent James, vice president (VP) of operations of PEOPLExpress, Aspire Aviation feels that PEOPLExpress might be more viable than first thought.
PEOPLExpress’ initial start-up plan may be viewed in terms of replacing the capacity that will be lost when AirTran Airways consolidates its Hampton Roads service to Norfolk under the Southwest brand. In the first 10 months of 2011, AirTran carried roughly 430,031 passengers from Newport News. Meanwhile, PEOPLExpress’ initial plan calls for roughly 1.1 million seats over 10 months with 12 flights per day at 158 seats per flight, or 3,792 seats per day. AirTran’s service served roughly 1400 passengers per day, so filling those seats might not be as difficult as once considered. Furthermore, the initial 6 destinations planned by PEOPLExpress have around 2,200 cumulative daily origin and destination passengers, and more importantly, all have average passenger yields of greater than 22 US cents, leaving significant space for market stimulation. Furthermore, the Hampton Roads area is the closest major transport location for North Carolina’s Outer Banks, an important tourist location that draws close to 5 million visitors each year, many of whom are wealthy clientele who own second houses in that region. Therefore an interesting parallel to what PEOPLExpress could potentially achieve is what Ryanair has done in connecting wealthy clientele from the British Isles to their second homes on the European continent, notwithstanding Ryanair’s oft-criticised customer service.
Make no mistake, PEOPLExpress does not face challenges in its initial start-up plans. It is very difficult for any start-up carrier to gain traction in the current US market, and the East Coast is heavily competitive. Moreover, Aspire Aviation is sceptical of the choice of the Boeing 737-400 which burns much more fuel than comparably-sizes 737 NGs (Next-Generations) or A320s, as well as of its high seat count, which limits route planning flexibility.
Last but not least, Aspire Aviation thinks the new low-cost carrier’s timeline for US Federal Aviation Administration (FAA) certification is achievable but is highly optimistic, and is not fully confident of its ability to its continued functioning. In addition, PEOPLExpress could also have a negative impact on the US airline industry as a whole, which is now beginning to show a capacity discipline that enabled US majors to produce profits amid a challenging economic environment. Aspire Aviation thinks that PEOPLExpress’ business model, which espouses very little ancillary revenues, might not be ideal for a low-cost carrier, especially given that the most profitable US carrier on an earnings before interest and tax, depreciation, amortisation and restructuring (EBITDAR) margin basis is the ultra low-cost carrier Spirit Airlines, who has an a-la-carte product offering with its pricing. That said, should PEOPLExpress manage to commence operations, it believes that it will be exploiting a niche in the marketplace that is underserved, which could potentially lead to success in the longer term.