Will Any of These 3 Airline Start-Ups Get Off the Ground?

A number of airline start-ups want to bring more competition to the U.S. airline industry. But will they get off the ground?

Feb 23, 2014 at 11:00AM

Starting a new airline in the U.S. is an extremely difficult proposition. Over the long term, the airline industry has few barriers to entry, but raising capital, securing airplanes, and getting FAA certification can be a daunting process.

Nevertheless, several groups of airline industry veterans and investors are looking to start new airlines. If they are successful, it could be great news for consumers. Industry consolidation has boosted airlines' pricing power, and over time, new start-ups could help keep the other airlines "honest."

It could also be good for smaller aircraft manufacturers such as Embraer (NYSE:ERJ), which are having trouble breaking the Boeing (NYSE:BA)-Airbus duopoly at the top airlines.

A new PEOPLExpress?
PEOPLExpress was a low-cost carrier that operated from a hub at Newark Airport outside New York during the 1980s. It was very successful for a brief period of time, and it represented one of the first no-frills carriers. In early 2012, Michael Morisi -- a former employee of the original PEOPLExpress -- announced a plan to relaunch the brand as a low-cost carrier based in Newport News, Va.

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A new incarnation of PEOPLExpress hopes to take flight. (Photo: PEOPLExpress.)

Not surprisingly, there have been many setbacks since then. Originally, the company wanted to start service in 2012, but that was quickly pushed back to 2013. After having lots of trouble getting an FAA operating certificate, PEOPLExpress bought charter airline Xtra Airways last June. This could theoretically allow the company to fly using Xtra's operating certificate.

However, obtaining sufficient funding to get started has been tricky. The company has had to lay off employees at least twice in the past two years. Additionally, Morisi resigned as president this past December, although he remains as an advisor to the company.

On the bright side, PEOPLExpress was able to hire an experienced CEO, Jeffrey Erickson, back in October. Erickson has led several airlines during his career, most notably TWA. An even better sign came just last week, when the company announced that it was starting to hire pilots. It plans to fly Boeing 737-400s -- an older version of Boeing's most popular jet that was produced between the late 1980s and 2000.

If PEOPLExpress does manage to get its ducks in a row, the carrier is likely to start with a focus on under-served markets in the Northeast, including Newport News and Pittsburgh. This will open up new point-to-point routes for travelers in those cities. PEOPLExpress still has plenty of work to do, but it looks as if it may be ready to start service by sometime later in 2014.

A hometown airline for San Diego
California Pacific Airlines is another proposed airline start-up that has been sitting on the runway even longer than PEOPLExpress. Nearly four years ago, the company already had a business plan, a proposed route map, an aircraft livery, and plans to buy several new and used Embraer E-170s. At that time, the company hoped to start service by late 2010 or early 2011.

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California Pacific has had a proposed route map for four years. (Image: California Pacific Airlines.)

It was not to be. It took until 2012 just to reach the second phase of FAA certification. In July of that year, the company took delivery of its first E-170 in a public launch ceremony, with plans to start service by the end of the year. However, California Pacific's first application with the FAA for air carrier certification was rejected.

The FAA couldn't consider the company's second application for months because of the federal sequester, but it was also eventually rejected. California Pacific is hoping that the third time is the charm, although the government shutdown last October has caused a further round of delays at the FAA. Meanwhile, the airline subleased its first airplane to Honeywell (NYSE:HON) to save on rent payments.

There are some hopeful signs for California Pacific Airlines as well. Back in October, Hawaiian Holdings (NASDAQ:HA) CEO Mark Dunkerley expressed disgust over the lack of progress at the FAA in certifying his company's new turboprop subsidiary. However, that certification process is now complete, and the turboprop flights are scheduled to start next month.

This suggests that California Pacific could get FAA certification this year, if it has fully satisfied regulators' concerns. The company claims to be hiring pilots and other staff, which also points to a potential 2014 launch. Still, until the FAA certification process is 100% complete, lots of question marks will remain.

Return of another legend?
Eastern Air Lines had an even more storied history than PEOPLExpress, with roots going back to the 1920s. It was once the largest airline in the world, before falling victim to low-cost carriers in the 1980s. A massive union strike ultimately brought the company down in 1991.

Five years ago, a group of former Eastern Air Lines employees and investors bought the Eastern name and trademarks. Initially, the group hoped to have the airline up and running in 2009 from a base in Miami, but that did not happen. For several years thereafter, there was radio silence from the group.

Finally, the company announced plans last month to start flights by the end of the year. CEO Ed Wegel stated that the improvement in the airline industry has started to improve investor interest. For now, Eastern has much more modest plans than PEOPLExpress or California Pacific; it hopes to start as a charter airline rather than offering scheduled service.

If Eastern can get off the ground as a charter operator, it will look to expand to scheduled service at some point in the future. Doing so would require an additional $100 million of capital. It looks as if it could still be many years before Eastern Air Lines takes flight again -- if it ever does.

Foolish conclusion
Of the three airline start-ups highlighted here, PEOPLExpress is probably the closest to takeoff. Through its purchase of Xtra Airways, it has already completed the most difficult hurdles of acquiring an operating certificate and airplanes. The company's biggest problem appears to be insufficient capital.

California Pacific seems to be well funded, but it is still wading through the FAA certification process. Eastern Air Lines is just getting started, and scheduled service is at least several years down the road.

Embraer and Bombardier should be rooting for these airlines' success. California Pacific has already committed to Embraer aircraft and could become a significant customer for Embraer if it is able to start service. While the other airlines are starting with used Boeing and Airbus planes, they will eventually need new aircraft. Embraer and Bombardier stand a better chance of winning business from them than from established airlines that are firmly tied to Boeing and/or Airbus.

Consumers should also be rooting for at least one or two of the new airlines to succeed. Big airline mergers have reduced the level of competition in the U.S. airline industry and left some major cities with relatively limited airline service. Adding some new competitors would help keep the industry on its toes.

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Adam Levine-Weinberg owns shares of Hawaiian Holdings. The Motley Fool recommends Embraer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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