New Kerkorian Venture : MGM Grand Air Takes a Flier in Luxury Service
F. Michael Rogers, a retired Air Force general, says he thinks he knows what well-heeled civilians want when it comes to air travel.
He is putting his idea to the test Tuesday when MGM Grand Air, a luxury airline with a glitzy name, begins transcontinental service from Los Angeles. Each of the airline’s three Boeing 727s has just 33 overstuffed seats, their remodeled cabins resemble cocktail lounges and, according to Rogers, the airline’s chief executive, “We offer a service you can’t get anywhere else.”
MGM Grand Air is owned by Kirk Kerkorian, the reclusive financier who once controlled Western Airlines and the MGM Grand Hotel in Las Vegas, since renamed Bally’s after its sale to Bally Manufacturing last year. Kerkorian has committed $20 million in start-up funds for the airline, which so far is the only business operated by his new company, MGM Grand Inc. Kerkorian plans to sell shares in the company this fall.
Since MGM Grand Air was proposed last December, it has faced a number of obstacles. For one thing, the city of El Segundo has filed court papers trying to halt its flights from Los Angeles International Airport’s Imperial terminal because of aircraft noise. On another front, federal regulators told MGM Grand Air to scale down its plans because it lacked financing for a proposed flight to London.
But U.S. airline industry experts say MGM Grand Air’s biggest challenge will be simply to keep flying. Since the industry was deregulated in 1978, every luxury airline started has failed. The most notable failure was Regent Air, which treated passengers to gourmet meals on fine china for $1,620 one-way between Los Angeles and Newark, N.J.. That Los Angeles airline suspended service last spring after five years of losses.
Rogers, president of Regent between 1982 and 1984, said MGM Grand Air is different. The new airline is working closely with travel agents and is charging competitive fares, about $800 one-way between Los Angeles International and John F. Kennedy International Airport in New York.
Besides, Rogers said, Regent was hampered by serious regulatory problems and a severe lack of cash. Federal regulators delayed licensing Regent for two years because its owners, casino operators Stuart and Clifford Perlman, had been linked to alleged organized crime figures by gaming regulators in New Jersey. While Regent awaited its operating certificate, the luxury airline paid millions for a contractor to operate its flights. “Regent was doomed from the start,” Rogers said.
Terry Christensen, an MGM Grand Air director and head of Kerkorian’s private investment company, the Tracinda Corp., said the small luxury airline may eventually be used to link MGM Grand Inc. hotels and casinos with major airports.
According to a preliminary prospectus filed by MGM Grand Inc., stock will be offered to the former shareholders of the company that owned the hotel in Las Vegas. Proceeds would be used to acquire and develop casinos and hotels and to fund the airline. It would also be used to repay Kerkorian for his investment in MGM Grand Air.
Christensen said Kerkorian has not yet picked any locations for the new hotels or casinos. “We’re looking at locations in the United States and in Europe,” he said.
For now, MGM Grand Air is targeting the transcontinental business traveler. Rogers said he believes that the airline can attract travelers from overseas who fly into New York or Los Angeles on a foreign carrier, then switch to a domestic carrier to reach their final destination.
But some industry analysts question MGM Grand Air’s strategy. For one thing, the airline will have a limited flight schedule, with just two departures from Los Angeles daily. “I doubt many people will adjust their schedules to fly on MGM Grand Air,” Morten Beyer, president of the Avmark airline consulting firm in Arlington, Va., said. Besides, he added, most foreign airlines have non-stop flights from Europe to Los Angeles.
Walt Gillfillan, a Berkeley transportation consultant, said MGM Grand Air’s location at Los Angeles International Airport’s remote Imperial terminal will probably discourage travelers who must connect with flights at the main terminal, even though there will be a ground shuttle service. “Passengers who want luxury won’t want the inconvenience,” he said.
MGM Grand Air does not expect to make money anytime soon. According to a filing with the Transportation Department, the airline expects to lose $3.9 million during its first 21 months of operation. It needs to sell 27 of its 33 seats on every flight to break even, Rogers said.
So far, it has spent $10 million for the three Boeing 727s, and another $2 million to remodel the interiors. MGM Grand Air said it spent another $1 million to redesign the Imperial terminal.
A. W. Becker, a spokesman for American Airlines in Dallas, said American is not concerned about MGM Grand Air. American is the largest carrier in the Los Angeles-New York market, Becker said, adding: “We do not see that particular airline as having much impact on American.”
Solid Business Background
Timothy Collins, former president of MGM Grand Air who is now a consultant to the airline, said: “I can understand why the analysts don’t think MGM Grand will succeed. There have been a lot of failures with luxury airlines. But we think there is a need in the marketplace for an airline with a high level of service. I guess we’ll see.”
Probably the biggest thing the airline has going for it is Kerkorian, an experienced airline executive and financier with a talent for making money. He got his start with Trans International Airline, a charter airline that he founded after World War II and sold in 1967 to Transamerica Corp. for $90 million in stock. He was also a major shareholder in Western Airlines until he sold his 17% stake for $30 million in 1976.
“I would think that if anyone can pull it off, Kerkorian can,” consultant Beyer said.
The idea for MGM Grand Air came about last summer after Rogers and Collins, a former Jet America Airlines executive, failed in their bid to buy Jet America. That airline, based in Long Beach, was eventually acquired by Alaska Air.
Shortly after that bid failed, Rogers came to Collins with an idea for an all-first class airline and Collins said he joined MGM Grand Air as president to help get it started. “They wanted someone on-line to do the hiring, but after that was finished, I went back to being a consultant, which is what I want to do,” he said.
Collins was replaced by Charles L. Demony, former chief operating officer for Pioneer Airlines, a Denver commuter airline.
Besides changing presidents, MGM Grand Air also has latered its plans. Its executives decided to fly to New York instead of Newark, N.J. to better attract international travelers. In addition, MGM Grand Air switched from using Lockheed l-1011s to smaller Boeing 727s after government regulators would not approve its use of the larger aircraft.
“We didn’t think they had the financing for the larger planes,” said Stephen Davis, transportation analyst for the Transportation Department in Washington. Davis said the department also refused to approve MGM Grand Air’s plan to fly to London, because such a route would have drained the new airline’s reserves.
