Reno Air’s Risky Flight Plan : Transit: The smaller carrier hopes to inherit American’s O.C. route castoffs, but competition may prove too much.
The name is Reno Air, but it could just as easily be called American Airlines Jr.
Each day, Reno Air grows closer to the troubled Texas-based behemoth, which is retreating from money-losing short flights to concentrate on more profitable, cross-country routes.
American has been handing off many of its West Coast runs to 17-plane Reno Air rather than try to compete with discount carrier Southwest Airlines. Though American consequently loses ticket revenue, it hopes to at least maintain passenger loyalty.
To ensure former customers understand the connection, low-cost Reno Air shares ground crews and reservations counter space with American in many of the 11 cities it serves. It also offers miles in American’s frequent flier program and summer travel programs.
A beneficial relationship?
Not as beneficial as one might think.
Barely aloft two years, Reno Air has suffered two consecutive quarters of losses as it has realigned itself to take advantage of a “strategic relationship” with American and cut non-productive routes. The changeover has also brought Reno Air into direct competition with industry leader Southwest, which began 15 daily flights from Orange County last month.
One airline forecaster now considers Reno Air at high risk for financial trouble.
“They have gradually moved out of their niche,” said Steve Lowry, president of Aviation Forecasting & Economics in Arlington, Va. “They really stepped onto some competitive routes that the incumbents are not going to let them penetrate.”
Reno Air is facing some resistance as it attempts to begin service at Orange County’s John Wayne Airport later this month. It would become the only low-cost, low-fare airline at John Wayne besides Southwest. As such, it has the backing of airport staff in trying to take over American’s six daily flights to San Jose.
“We are excited about the possibility,” said Reno Air President Robert W. Reding.
Other airlines are objecting, however, saying that they, and not the smaller, Nevada-based carrier, are entitled to American’s castoffs.
“If the American-Reno proposal were approved, the county would be denying to United an opportunity to grow at the airport,” a United Airlines lawyer wrote to the County Board of Supervisors last week.
The board is scheduled Tuesday to decide on whether to allow Reno Air temporary use of the American routes through September.
*
Reno Air’s link with American is prompting a metamorphosis for an airline that began by trying to reach those travelers who have been left in a void between airlines that charged a premium for tickets while offering lots of service or the carriers that offered lower ticket prices and no-frills.
The goal was to create an airline that matched the service of the long-haul carriers while offering the fares of the short-haul fliers, notably Southwest.
“The monsters’ costs were too high and the new entrants were offering a cheapie product,” said Reno Air’s colorful chairman, Lee Hydeman. “My view was you could offer a good product at a good price.”
So Reno Air keeps costs relatively low--8 cents to fly a single passenger a mile compared to Southwest’s 7.2 cents--while offering assigned seating, snacks and meals and first-class sections. Southwest eschews such perks.
Reno Air charges the same or a couple of dollars more than Southwest on most routes. The one-way anytime fare from Los Angeles to San Jose, for instance, is $69 for Southwest and $72 for Reno Air.
To hold down its costs, Reno Air has taken advantage of the fire-sale bargains created in the recession-ravaged airline industry.
Reno Air bought leftover equipment from defunct airlines like Chicago-based Midway for as little as 10 cents on the dollar. An aircraft glut allowed it to lease several new MD-80 jetliners at cut rates. Its work force largely came from those displaced by Midway Airlines and other carriers, many of whom are earning less pay than in their old jobs.
Reno Air is also borrowing a few ideas from Southwest. It flies only a single brand and type of plane, which lowers maintenance and repair costs, and it keeps its ground time to a minimum.
Is Southwest worried? “I’m sure we can compete against any carrier,” said spokesman Ed Stewart. “Our market share in California has been growing and still is growing. We think that’s a testament to what the customer is after.”
Reno Air’s Hydeman thinks he knows. That’s why he helped start the airline.
The 65-year-old veteran airline executive who thought he had retired to ranch in Arizona, recalls seeing a small story in the newspaper a few years ago about an old friend from Continental Airlines who was looking into a venture called Tucson Airlines.
Hydeman called his friend, former Midway Airlines executive Joseph A. Lorenzo, and soon was sold on the idea of an airline that could serve medium-sized cities in the West. It would operate from a base city that was either a desirable, yet underserved, vacation destination, or a good place to connect to other flights. It would attempt to fill the gap caused by the demise of regional airlines PSA and Air Cal.
*
The pair couldn’t generate much interest in their idea in Tucson. So Lorenzo--now a consultant to the carrier and no relation to former Texas Air Corp. Chairman Frank Lorenzo--went looking for another city and selected Reno. Here was a four-season city that had the draw of gambling and skiing at Lake Tahoe that could use better airline service.
Hydeman said he had no illusions about the difficulty of the endeavor. “I told the front-end investors that they had an 80% chance of going down the tubes,” he said.
But Reno Air began to turn a profit within months after it started flying in 1992.
“The biggest little airline in the world,” as it billed itself, was just one of several start-ups being created to try to undercut the major airlines where they were weakest--short distance flights, which produce the least amount of profit because of generally lower fares and planes that spend additional time in terminals instead of in the air making money.
Reno Air gained notoriety when it announced plans to fly from Reno to Northwest Airlines’ home city of Minneapolis. Although Northwest was not flying the route, it considered Reno Air’s expansion to be a turf incursion. It countered by planning more flights not only to Reno but elsewhere on Reno Air’s flight system as well.
Northwest backed down, however, under pressure from federal aviation authorities. The successful faceoff gave credibility to Reno Air, not to mention a windfall of good publicity.
The airline has since added planes and destinations in five states, a growth cycle that executives hope will continue. Their goal: a 50-plane fleet serving the entire West. “We ain’t there yet,” Hydeman said.
Reno Air has had its share of setbacks, too. The company abandoned service from Reno to Minneapolis and Kansas City last year, as well as San Francisco. All the time, it was building its alliance with American.
The changes confused travel agents, the company said. As a result, traffic tumbled in January when available seats were only half-filled, well below the break-even point.
Consequently, Reno Air lost $6.1 million in the first quarter, ended March 31, on operating revenue of $42.4 million. It finished last fiscal year with a net loss of $7.1 million--almost all of it from a fourth-quarter loss--on revenue of $124.6 million.
*
Reno Air stock, which traded as high as $17.75 a share in the last year, closed last week around $6 a share.
President Reding said Reno Air has since bounced back with passenger loads running about even or just above the break-even point. The company also says it expects its fortunes to improve as travel agents and passengers become more familiar with its destinations and schedules.
Industry analysts say that Reno Air should be wary of Southwest, which can pulverize competitors with fare wars. It was just three years ago, for instance, that Southwest drove rivals into a tailspin by pricing its Los Angeles-San Francisco route about $20 each way.
“Southwest has been able to compete in any market they choose to enter,” said Lee Howard, president of Airline Economics International, a consulting company in Washington. “The secret is to steer clear of competitors who can outlast you and out-price you.”
Moreover, Reno Air is in no position to challenge the dominance of Southwest right now, consultant Lowry warned.
“They have eroded most of their equity. They are undercapitalized. They cannot afford a misstep,” he said.
Reno Air has been careful to point up the differences between itself and Southwest. Travel agents, for instance, can book Reno Air flights directly through their reservation computers. Southwest has to be phoned directly because it doesn’t pay to participate in the major reservations systems as a cost-saving measure.
“Travel agents will try to book someone who is easy to deal with. Southwest is not easy,” said Thom Nulty, president of Associated Travel in Santa Ana, a major chain.
Reno Air has received high marks from passengers. Those waiting to board Reno Air flights at LAX last week seemed to agree--at least compared to Southwest.
John York, a lighting technician from Irving, Tex., said he appreciates that Reno Air offers credits in American’s frequent flier program. York, who logs about 50,000 air miles a year, said, too, that he can’t stand Southwest open seating policy.
“I don’t fly Southwest because I have to have an aisle seat,” he said, pointing to a bum knee that prevents him from scooting over.
Added Edward Cortese, a retired aerospace engineer from a Sacramento suburb, on “Southwest, they get you to move quicker. It’s the cattle car approach.” Reno Air, he added, was proving a lot easier.
Most passengers put top priority on low fares which is a plus for Reno Air, said David Stempler, executive director of the International Airline Passengers Assn., a Washington trade group. Convenience comes next, followed by the generosity of a carrier’s frequent-flier program.
Any of those factors, he said, can decide which airline a passenger will select.
Reno Air, and airlines like it, will succeed as long as they “don’t exhaust their ability to perform in their niche or . . . get so impressed with themselves that they think they can do it everywhere.”
Hydeman said he’s aware of the risk and is trying to keep Reno Air focused.
“My job is to prevent ego cancer from coming into play,” he said, “and that has been a problem at every airline.”
Reno Air at a Glance
* Founded: 1992
* Headquarters: Reno, Nev.
* Motto: “Biggest Little Airline in the World”
* President/chief operating officer: Robert W. Reding
* Employees: 1,200
* Type of aircraft: McDonnell Douglas MD-80
* Routes: Discount full-service flights to and from Burbank, Las Vegas, Los Angeles, Ontario, Phoenix, Portland, Reno, San Diego, San Jose, Seattle and Tucson.
* Orange County service: If approved, would pick up six daily flights to San Jose vacated by American Airlines; service would begin in late June.
* Special promotions: Offers miles in American Airline’s AAdvantage frequent-flier program, QQuick Escapes package tours and seasonal packages for skiing and major sporting events.
* 1993 sales: $124.6 million
* 1993 net loss: $7.3 million
Sources: Reno Air; Bloomberg Business News. Researched by JANICE L. JONES / Los Angeles Times
