AirCal, Stung by Fare War, Discloses Plans to Diversify
After sustaining losses from a fierce fare war on the San Francisco-San Diego air corridor, AirCal Inc. officials told shareholders Tuesday that the Newport Beach-based airline is reaching for new routes outside the corridor and forming a holding company that may diversify into other businesses.
But a decision on the formation of a holding company--to be known as ACI Holdings Inc.--was postponed until June 19 because not enough preferred shareholders voted on the matter. However, AirCal Chairman William Lyon attributed the shortfall in votes to late notification and said he has no doubt that the reorganization will be approved since 90% of the votes received so far favor the move.
And even if owners of preferred stock vote against the restructuring, Lyon added, the holding company still can be formed, although in that case the preferred shareholders will continue to own shares in AirCal rather than in the new holding firm.
Seeks Greater Flexibility
AirCal wants an umbrella holding company to provide the AirCal organization with “greater flexibility to diversify into similar or other businesses and to form, acquire, finance and conduct other such businesses independently of those of AirCal,” according to the proxy report.
In an interview after the meeting, Lyon said that the holding company will be “looking at opportunities to diversify into other businesses that might have some synergism” with the airline business, such as aircraft leasing, fueling and maintenance companies.
John V. Pincavage, an airline analyst with Paine Webber in New York, said AirCal is riding a trend in the industry toward development of holding companies. “It is clearly the way to go to increase your flexibility,” Pincavage said.
Business diversification, Pincavage said, is especially valuable in the newly deregulated airline environment and for buttressing profits during fare wars such as AirCal recently experienced in the West Coast flight corridor.
AirCal’s record of nine consecutive profitable quarters was shattered last fall when Continental West, a discount airline, entered the market on the West Coast Corridor, triggering a fare war among the competing airlines. As a result, AirCal posted a $4.8-million loss in the last quarter of 1985 and a $4.8-million loss for the first quarter of this year, ended March 31.
Since March, however, fares on the corridor have been rising and AirCal has benefited from a sharp decline in fuel prices and the acquisition of more fuel-efficient aircraft. While Lyon refused to speculate on the company’s second-quarter financial results, Pincavage said AirCal “should go back into profitability this quarter and start making some good money in the summer and fall,” aided by travel to Expo ’86 in Vancouver, one of AirCal’s newest destinations.
Expanding to Other Destinations
Lyon and AirCal President David Banmiller said that because of the severe competition along California’s West Coast, AirCal has begun to expand its operation to other destinations in order to increase its current profits and hedge against any future corridor fare war.
In quest of new markets, AirCal has started flying to Vancouver and Anchorage and this summer will begin service to Chicago. “The yields (revenue per passenger mile) tend to be better outside the corridor,” Banmiller said in an interview.
In other action at the annual meeting Tuesday, shareholders approved proposals that allow AirCal to increase its outstanding common stock from 15 million to 25 million shares and limit the voting power of shareholders who are not U.S. citizens.
