Tuesday, March 07, 2006

Profile: Skybus


Background:
Skybus was started by John Weikle and Ken Gile. Gile led the development of Heartland Airlines in the late 1990’s. The plan for Heartland was to use 717s to build a traditional hub out of Dayton Airport offering business class comfort at low price points. After bringing on former Piedmont CEO Bill Howard as Hearltand’s CEO and working with JP Morgan, Heartland came very close to raising the capital it needed to get up and running. Ultimately, however, the venture failed before getting off the ground. We think they were better off having it turn out that way as we never believed in the viability of the business plan.

A few years later Weikle and Gile regrouped and came up with the Skybus concept. This time it would be a low cost offering. They tried to take advantage of the Columbus’ Mayor’s damaged ego after the America West pullout of Columbus and built a solid relationship with him. That led to the widely known investment into Skybus by local businesses including the town’s newspaper. For a while they were toying with a single route concept of flying only between Columbus and Chicago for a very low fare priced at $29 per seat. Well, that concept went by the way-side. They started pinging contacts at Morgan Stanley and a plan to serve many destinations out of Columbus was developed.

While they were dealing with Morgan Stanley in an unofficial capacity they filed for DOT certification in January of 2005. In our opinion, this was a mistake. Without significant capital, without a formal banking relationship, and without a CEO or CFO they decided to put themselves through the scrutiny of the DOT and the press. One lesson startups rarely understand is that you cannot raise capital through the press. All you do is haphazardly raise expectations and let competitors know what you are up to. At the stage Skybus was in at that time, no press was good press. Unsurprisingly, the DOT application attracted attention from the press and from the DOT. It did not take long for Bill Bertrand's team at the Financial Fitness Division of the DOT to start asking for some detailed answers to questions that arose from their read of Skybus’ application. Of course the whole world got to read about in the DOT dockets. We thought Skybus was near death at that point.

Eventually their string of relationships at Morgan Stanley led them to the right people at the bank. Investment banker Nelson Walsh is widely regarded as the most industry savvy of his peers. One of the people under him, Eli Gross, also has a strong understanding of the industry. From what we can gather, Walsh and his team helped refine Skybus’ models to a viable state. More importantly, they introduced them to the right people. Between the help of Morgan Stanley and a previously built relationship with Ann Rhoades of Peopleink (formerly of Southwest and Jetblue), Skybus went out and found a CEO named Bill Diffenderfer, and other team members with experience at Ryan Air. Most importantly, in our opinion, they got Nelson to sign on the dotted line to have Morgan Stanley officially represent Skybus in their equity raise. All the pieces are in place from the team standpoint.

The Skybus Business Plan:

Put simply, Skybus wants to be the Ryan Air of the US. As noted in the primer to the series on startups, there is a strong case to be made for new entrants in this country based on the fact that the lowest cost providers of air transport in the US have relatively high costs versus the low cost leaders in the rest of the world.

Skybus touts a number of factors that will drive their costs more than 25% lower than Southwest. The unimpressive list of Skybus’ cost “innovations” include that they plan to fly only point to point so there would be no baggage transfer or interlining. They also tout technology innovation including 100% internet distribution, 100% automated check-in and wireless flight ops. They expect to rely heavily on outsourcing including maintenance, the HR function, and all ground operations. They plan to have the highest block hour utilization and highest productivity. All of these items are well and good for a startup low-cost airline, but it only shows a mild understanding of why a low cost airline is a low cost airline. The only one that interests us is their claim of having the highest productivity. To this point in time, Skybus has done little to show us that they understand how to achieve that level of productivity. High aircraft block hour utilization does not drive employee productivity. High aircraft block hour utilization is a possible output (not an input) of making networking decisions that drive high productivity. Ryan Air’s secret to its success is not only its legendary tenacity to go after every cost in the system like some of the items listed by Skybus, but its:

-Ability to fly very low stage lengths which enable high levels of productivity of aircraft and people measured by the potential revenue generated per unit.

-Leveraging of the scalability of its network by either creating more revenue opportunities per airport per day than other carriers and/or arranging for near zero (or even positive) cost at outstation airports that they use sparsely.

To this point Skybus has not acknowledged those factors to our satisfaction, but some of their hiring decisions hint to us that they understand a little more than they let on.

Skybus plans to have their low costs be the enabler to their motto, which is “America’s Ultra Low Fare Airline”. Any of you who have had exposure to Michael O’Leary know that he is seemingly programmed to answer any question about the marketability of his product by saying that Ryanair has the lowest fare and that makes his product the best. He is also throws in that they have a great ontime performance and low baggage loss rate. Skybus is using the same marketing justification. What does that really mean for those who would fly Skybus? Well, the onboard product will probably be fairly painful, you won’t pay much for the ticket, and you will be nickled and dimed as Skybus tries to generate high levels of ancillary revenue. We often hear from airline marketers in the US who say that this country is not ready for a Ryan Air-type product. We disagree. Although we think an easyJet-like product would be more acceptable to Americans at this point in time, we do not feel that a Ryan Air-like product will be rejected. If average fares can stay in the $60-$80 range, then there will be a large market that will be willing to consider flying Skybus.

Because of its Ohio roots and the departure of America West from the airport, Skybus’ team has concentrated their efforts in Columbus, Ohio. As we mentioned above, they have strong political support that has led to local financial support. It seems as if they are tied to Columbus tightly and they have no other choice but to make Columbus their focus city. We fully expected Skybus to say that they would not be flying from Columbus’s main airport, Port Columbus (CMH), but instead from Rickenbacker where we assumed they could maximize their incentives and keep airport costs the lowest. Initial reports suggested that they will from CMH, but subsequent reports say they have not yet decided which Columbus airport they will fly from. Either way, we do not like the choice of Coloumbus as Skybus’ first focus city. There is far too much competition there and if any of the airlines decide to fight, then Skybus’ investors will likely be forced to wait an extended period for an IPO…if that ever comes. Last time we checked Columbus' flight schedule, it said that Delta flys non-stop to 13 destinations and Southwest flys non-stop to 8 destinations. In total, there are non-stop flights to 35 destinations. CMH is hardly an underserved airport. As weak as Delta may be, they are equally irrational. They could match Skybus’ fares to all of their destinations out of CMH or Rickenbacker, increase capacity, and/or start various SkyMiles promotions…all in less than 10 minutes time from the comfort of their headquarters in Atlanta. Will they do it or won’t they? Our opinion is that opinions on the answer to that question are irrelevant. If Skybus has to answer that question at all, then they are putting themselves in a perilous position. If I were an investor in Skybus I would want to minimize the reliance on the actions (or inaction) of an irrational competitor to determine the fate of my investment. They must seek airports where they can develop a sufficient passenger base whose first choice would be flying on Skybus, thus mitigating the impact of the worst case scenario response from irrational competitors. From what we can tell, Skybus is working on this very important aspect of their plan, but only with the objective of finding suitable focus cities after Columbus is fully developed.

They have hired Ryan Air employees on short-term contracts to gallivant around the country with Skybus executives in search of underused airports that would provide them a discrete passenger base and would give them large incentives. Among many other airports, they have been looking closely at Barnes Airport outside of Springfield, MA. Now…we like the concept of looking at underserved airports, but we do not like Barnes. The demographics are not strong and the first choice flying population would be dissected between Barnes and Bradley, which is closer to Springfield than it is to Hartford. It seems that the Ryan Air people who have been hired for this assignment believe that the fact that the fares will be so low will draw customers into relatively sparsely populated airports like Barnes. Other than the fact that the outlying airports generally have longer runways, we cannot figure out why they would take that chance. There are airports closer to stronger population bases without competition that could be tapped.

Perhaps even more important than what appears to be a spotty record of focus city airport selection is the approach that Skybus representatives have made to these airports. All that we hear indicates that they are turning off local governments up and down the eastern seaboard with their arrogant demands for incentives and airport improvements. We hear that many of these airports that happen to be desperate for new service very quickly came to a conclusion that they simply did not want to do business with such a smug set of people. That is a bad sign. We hope to hear of improvement in that area soon. There is no reason for that kind of approach and if they keep it up, it will come back to haunt them sooner rather than later. Just because Ryan Air is the king of Europe does not mean that Skybus automatically inherits the throne in the U.S.

Financing Status:
With Morgan Stanley onboard, Skybus has a good chance of putting together the $70+ million they need to operate. They have been hiring executives and putting people on contract from Ryan Air at a brisk pace. That spending spree was made possible by the investments from the local Columbus community and, from what we hear, a commitment of $5 million in capital from Declan Ryan of the Ryan family. Morgan Stanley has brought the plan before various private equity firms and we hear that they have been successful so far. We will let you know as soon as we hear confirmation of that report.

15 Comments:

At 2:48 PM, Anonymous Anonymous said...

Skybus = dummies.

 
At 10:37 AM, Anonymous Anonymous said...

Done within 30 months...

 
At 7:09 PM, Anonymous Anonymous said...

More like 30 weeks......

 
At 8:15 PM, Anonymous Anonymous said...

dont hate the player...hate the game...do YOU have an airline...or do you work for one

 
At 3:55 PM, Anonymous Anonymous said...

I think Skybus has a chance. The American public are fed up with the Majors, not to mention Americans have developed a WAL-MART mentality.

 
At 3:57 PM, Anonymous Anonymous said...

If they're so concerned about low fares, why don't they try things like flying 737s instead of the heavier airbus family saving on fuel and landing fees and develop a paint scheme that doesn't require the entire plane to be painted (paint is on average 250lbs on a boeing 737. Alaska Airlines calculated that if 5 magazines were removed from each of their flights, they would save $10,000/year on fuel costs. 250lbs per plane could have an outstanding impact)!

As for their success, they'll either sink or float. The buy on board method is working well for Allegiant air which is having a much slower growth than it appears skybus will. Skybus will also have much newer planes than Allegiant. I also think that these smaller, off the beaten path airports may be the wave of the future in air travel. I could be wrong but it's something that is currently being experimented with by airlines like Allegiant air, will be experimented soon by express jet and now skybus. We'll see how they do.

 
At 11:16 AM, Anonymous Anonymous said...

Everyone needs to give Skybus a chance. My father has been hired by Skybus for maintenance management. He has been a mechanic for airlines since 1982, notably working for USAirways from 1987 until 2005. He has worked for Mohican, USAirways, Mesaba, and now Skybus. Talking with him about all his experience with companies all he has to say is that Skybus is the company that has it the most together. Every company he worked for is trying to hold onto pre-9/11 mentality and values and are trying to make them work but are creating nothing but headaches, mistakes, and higher costs. He says that Skybus is trying to avoid all that to create highly efficient maintenance and turnaround times, and are doing a good job of it. One of the things he has told me is that Skybus will not use the gates. This allows for faster turnaround and they avoid the costs of taxiing to the gate in both fuel and fees. Maybe all their plans for saving fuel is why they are going with the heavier, more colorful paint. Plus the paint will attract more attention from the public. And for the nickel and diming part, yes Skybus will do that, but if you are trying to go somewhere for cheap, your trying to do it for cheap. If you have the money to fly in style and want to be pampered, then there are plenty of airlines out there that cost more that will be more than happy to serve. I have flown for free my entire life until recently with all the changing of jobs my dad has had since 9/11, and me getting too old for free fare, only recently have I noticed how expensive plane tickets are. If Skybus can hold through with their promise of being cheaper than the gas to drive there, I know for sure I will save my money and fly an airline like Skybus.

Just give the new guys a chance....

 
At 11:51 PM, Anonymous Anonymous said...

It's not like Delta, US Airways, and the others are falling all over each other trying to pamper their passengers, either. I suspect the flying public has severely lowered their general expections in the past few years - and that the shock of a "charge for the soft drinks" flight won't be as great as it was previously.

 
At 8:01 AM, Anonymous Anonymous said...

The reason they are not using the gates are not for turn around times, but because they do not want to pay the fees associated with using those gates. Its not like they taxi off the runway and just stop to load and unload. It really depends on what airports they fly to. CMH is very well represented to the east coast. They need more direct flights to the Midwest and West coast. This is where the demand is. The problem is that Skybus wants the short haul flights. If Skybus does take off here, the pax out of CMH will be the winners until one of the low cost carriers pull out or stumble.

 
At 7:55 PM, Anonymous schneima23@hotmail.com said...

Skybus come to STL! 1/2 of lambert is available and shoot there's a brand new airport just across the river BVL that could be ALL yours for a new hub ~ snatch it up before Virgin America does STL so needs another low fare carrier besides Southwest.

 
At 10:29 AM, Anonymous Anonymous said...

Columbus has offered it's support but may take it back if Skybus goes to Rickenbacker enstead of Port Columbus Airport.

I agree that St.Louis MidAmerica Airport (www.FlyMidAmerica.com)would be a great airport for Skybus.

Flights to gambling destinations like Tunica, Mississippi or Biloxi, Mississippi might work if the airline works with casino/tour operators.

 
At 12:10 AM, Anonymous Anonymous said...

I think they should consider flying to Wichita, largely because it has a strong market, and the community has proven that it will support low cost carriers. I heard that Wichita has provided financial subsidies for AirTran for over 5 years that cost reportedly about $7 million a year just to help them keep the other airlines honest with low fares all around. What more could a start up airline want than an airport that guarantees its financial success?

 
At 4:45 PM, Anonymous Anonymous said...

Interesting "anonymous" comment about Wichita. Word on the street is it's not that strong a market, and they're not willing to offer anyone anything since they have Airtran, Allegient and Ryan

 
At 8:48 PM, Anonymous Anonymous said...

Skybus will not last if they do not live up to their word. They advertise $31,000-$48,000 for first year flight attendants. Yet only pay $623 every two weeks. Flight attendants are being worked to death. How does the mayor feel about tax credits and tax dollar being given to a company that does not pay liveable wages. Some flight attendants are on FOOD STAMPS!!!! I predict a sick out soon. No union option or else the flight attendant stock options are revoked would you like a soda with that? $2 please.

 
At 11:40 PM, Anonymous potential skybus pilot said...

I am sure every pilot and some of the F/A's at Skybus are there with low wages because they have high expectations that it will grow fast and turn profits which will translate to better (possibly the best of the low cost carriers) wages. I'm equally sure that if that doesn't happen, they'll have turn over on their hands like has never been seen in airline history for a start up... that or a union to contend with like ALPA, or some in-house creation.

 

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