New Approach Lands Fliers at America West

Other airlines call it first class. America West, hoping to snare business travelers whose belt-tightening employers prohibited them from flying first class, calls its premium passenger class “business class.”

But it is a business gimmick that has backfired. And the evidence of that was clear on a recent America West flight between Chicago and Phoenix: There was only one passenger in the 16-seat front cabin of the big Boeing 757.

Instead of attracting travelers to its new non-stop service from Phoenix and Las Vegas to New York, Chicago and Baltimore, the tactic had scared them off, even though the price was lower than what other airlines charge for first class.

“We found that many major corporations do permit their people to go first class,” said Edward R. Beauvais, chairman and chief executive of the young carrier, which is headquartered in the Phoenix suburb of Tempe.

“We didn’t have first class, so we didn’t show up on the computer, so passengers would book first class on another airline. The business-class philosophy was not working.”

As a result, America West is changing the name of its business class to first class, effective Nov. 15.

That miscalculation, observers say, is about the only strategic error the airline’s entrepreneurial managers have made since they joined in 1981 to incorporate America West.

The airline started flying four years ago with three second-hand aircraft, but has grown to become the nation’s 11th-largest air carrier in terms of revenue passenger miles (one paying passenger carried one mile), with 59 planes serving 44 cities in the United States and Canada.

To finance the carrier initially, the little band of businessmen, which included Beauvais and Michael J. Conway, the president and chief operating officer, scratched up money any way they could.

They took second mortgages on their homes and even used their credit cards to obtain cash advances to help come up with the needed $500,000.

It all appears to have paid off.

America West’s strategy of turning Phoenix into an East-West hub connecting California with the Midwest and the East Coast has been highly successful. Phoenix is not a congested hub like Newark or Dallas that travelers try to shun, yet it is located in a rapidly growing area of the country.

America West, which is the dominant carrier on most of its routes, has the advantage of operating mostly in the Southwest, where the weather is usually good for flying. Thus it has fewer delays than competitors with hubs in such cities as Chicago or Atlanta.

Recently it added Las Vegas as the second part of what it calls a “super-hub,” and all of its shorter flights make stops in both Phoenix and Las Vegas. Its planes, which provide the only non-stop service between New York and Las Vegas, have been flying with 85% of their seats occupied on that route, a very high load factor.

America West has little competition, as well, on the New York-Phoenix route on which there are only two daily non-stop flights by other carriers.

For all of these reasons, even though it expects to report a loss for this year, airline experts generally say that America West has developed the critical mass needed to be a moneymaker.

In the Red

America West “is the pearl of deregulation,” said David Sylvester, airline analyst with the investment firm of Kidder, Peabody & Co. in New York.

But some observers maintain that the airline has expanded too rapidly for its own good.

It expects to double its passenger-carrying capability in 1987, compared to 1986. But Conway said growth will slow next year, with an expansion of only 20% expected.

America West, which was in the red its first two years of operation, showed a profit in 1985 and 1986. It lost $15.8 million in the first six months of this year and is expected to end the year in the loss column.

In the first six months of last year it showed a loss of $3.4 million and then recovered to earn $1.02 million for the full year.

The current losses are temporary, observers predict. “If you are a company and you double the number of manufacturing plants you have in one year,” said Paul Karos, airline analyst with L. F. Rothschild Unterberg Towbin, a New York-based brokerage, “the chances are you will not be as profitable on the new manufacturing plants in the first year of operation as you were with your base business preceding the expansion.”

He said airlines must establish their identity in new markets before profits can be expected.

And despite the recent money-losing quarters, America West itself is convinced that its future is secure.

“We’ve got a strong financial position,” Conway said. “We’ve got $100 million in cash. We’ve got a solid market niche. We’re extremely efficient. These . . . are the ingredients of success.”

Two-Engine Planes

America West also enjoys one of the prime advantages of being a new carrier: It has one of the airline industry’s youngest and most fuel-efficient fleets.

Although it began with the three used planes, the average age of its aircraft is now between seven and eight years, well below the industry average, which, according to Avmark Inc., an Arlington, Va., consulting firm specializing in aircraft sales, is 12.32 years.

With the delivery of 13 more Boeing 737-300s between now and the end of 1988, the average age of America West’s fleet will drop further--to between three and four years.

By comparison, according to Avmark, Continental Airlines’ average 13.08, Trans World Airlines’ planes are an average 13.84 years old and Northwest Airlines’ and United Airlines’ average 13.9.

America West’s new-generation planes have only two engines and need only two people in the cockpit--and that means a dramatic saving in labor and operating costs.

That can be illustrated by comparing the cost of operating a three-engine 727-200 with that of a two-engine 737-200, the type of plane that makes up the bulk of America West’s fleet.

The 727 burns 1,262 gallons of jet fuel an hour, compared to 791 for the 737. Jet fuel prices have risen about 35% since the last half of 1986, and it is fuel that accounts for 26% of America West’s overhead.

Crew salary and expenses for the three members of the 727’s cockpit crew total $447.18 an hour, compared to $337.5 for the 737’s two people in the cockpit.

The result is that America West’s unit operating expenses are among the industry’s lowest. Its cost per available seat mile was 6.5 cents in the second quarter of 1987, compared to 7.47 cents in the same period for Eastern Airlines, for example.

For all of last year, America West’s cost per seat mile was 6.14 cents; the industry average was 8.1 cents.

Discount Prices

Such a low-cost structure allows America West to charge fares that are lower, on average, than those needed by its larger competitors, helping to discourage forays by the big players into America West’s territory.

Its current break-even load factor (the percentage of seats that must be filled to make a profit) is 59.1%, compared to the industry average of 59.4%.

Break-even load factors of some major carriers are 64.2% for United Airlines, 62.7% for Pan Am, 62.2% for Northwest, 60.2% for TWA and 59.5% for American.

Currently, America West is carrying loads averaging 56.4%--below its break-even load factor. Company officials explain that by pointing to the airline’s rapid expansion and saying that some of its new markets have taken longer than expected to “mature.”

Although the airline sometimes uses low promotional fares in new markets, America West’s regular fares are basically the same as those of its competitors. But its average fares are lower because of the large number of seats it makes available at special discount prices.

Airlines vary the number of low-cost seats they provide depending on the popularity of the route and other factors, a technique called capacity control.

Though they never disclose just how many low-priced seats they have set aside--and the number may change from day to day and flight to flight--America West says that it makes proportionately many more seats available at the low fares than its competitors do.

Rapid Growth

Its low-cost structure also allows it to pay its non-union work force among the highest wages in the industry, a factor that boosts morale and improves service. The airline had 280 employees when its first flights took off and now has more than 5,000, all of whom are shareholders.

Because of its rapid expansion, America West has been compared to the now-defunct People Express. Unlike People Express, however, America West has always consciously avoided stepping on bigger competitors’ toes.

“Despite certain similarities, we do not think America West will meet the same fate as People Express for several reasons,” said Timothy Pettee, airline analyst for the New York investment firm of Bear, Stearns & Co.

“First, (America West’s) capacity has grown rapidly, but it continues to be limited primarily to under-served markets. People Express took on major competitors in large origin and destination markets.”

Addressing the same concerns, Conway said, “People ask us, ‘What happens if you are so successful in Phoenix that United or Texas Air or American might just decide to come in and blow you away?’ We now have 173 departures a day out of Phoenix. In 1988 it is going to be over 200.”

Even if another carrier tried a major invasion of the Phoenix airport, he added, it would find little gate space available. America West, which has nearly 40% of all passenger traffic at Phoenix, and Southwest Airlines, its biggest rival with about 20%, have 30 of the airport’s 59 gates tied up.

Even Dallas-based Southwest has several strikes against it in the competition at Phoenix with America West.

Frequent Flyers

For one thing, said R. Jerry Falkner, of the Houston investment banking firm of Lovett Mitchell Webb & Garrison, “Southwest Airlines has violated an unwritten industry rule: An airline should not try to challenge an established carrier in its primary hub, unless the challenger has a significantly lower cost structure than its competitor.

“Otherwise, the challenger (Southwest, in this case) is likely to be hurt worse than the challengee (America West).” But in the last year Southwest has boosted its flights at Phoenix by about 26%.

For another thing, America West is tied to the Northwest Airlines frequent-flyer plan. Southwest has no such connection. And America West is located in the Phoenix airport’s newest terminal, while Southwest’s facilities are at the less convenient, older terminal.

Perhaps most importantly, America West has interline agreements with all of the other major airlines; Southwest does not.

This means that travel agents can use the big airlines’ computerized reservations systems to make reservations for their clients on America West, but not on Southwest.

The computer systems provide the convenience of a single ticket for multistage trips and of checking baggage through to the final destination.

One would think that, with all of its success and apparent potential, America West would be an ideal target for a takeover by a larger carrier. But the airline’s management says that it has worked too hard to get where it is and insists that it wants to go it alone.

‘Tin Parachutes’

“We’ve been the subject of great speculation on that over the last couple of years,” Conway said. “Every time there is an acquisition, they say, ‘America West must be next.’ (But) every single merger or acquisition of an airline in the last three years has involved two kinds of carriers--ones that had failed or ones that were badly positioned for the competitive marketplace.”

America West says it does not fit that mold. But, just in case, the carrier has taken steps to thwart any takeover attempt.

For one thing, it has adopted a set of what could be labeled “tin parachutes” for its workers, analogous to the “golden parachutes” many companies pay their top executives in the event of an unfriendly takeover.

In such a case, America West employees would get severance pay of between 50% and 250% of their annual salaries, a fact likely to discourage a corporate raider.

Also, in the event of such a takeover, America West shareholders would have the right to acquire stock in the newly merged company for half price.

Additionally, America West employees must purchase stock as a condition of employment.

As a result, employees currently own more than 17% of the voting shares. Management controls another 10% and Ansett Transportation Industries, an Australian company with which the airline has had a long and friendly relationship, owns another 20%.

So it looks as if America West is adequately protected from hostile takeovers and should be around for a while.

And its management hopes that from now on it will be first class all the way.