Pending government approval, Primaris, a new airline based in Las Vegas, may begin operating first-class-only transcontinental and international service as early as this fall.
But will passengers be willing to pay the premium??
“The market will tell us,” says Daniel Kasper, a managing director at LECG, an economic consulting firm that specializes in aviation, who is skeptical but not entirely surprised to hear about the new carrier’s plans. “There are certain times in an economic cycle for this, but this is not one of them. That makes this [venture] more interesting–or more questionable.”
Primaris founder and CEO Mark Morris says his timing is perfect. He plans to market to business travelers not just with the promise of better space and service, but with discounts. The airline will offer its first-class fares for 50 percent to 70 percent less than the so-called “unrestricted fares” many traveling executives now pay. That means a cross-country flight that costs $2,000 on a major airline would be between $800 and $1,000 on Primaris–still more than a vacationer would pay, but far less than a business executive would spend on a regular unrestricted fare. “We’ve tried to come up with a new paradigm,” says Morris.
Actually, it’s not a totally new concept. More than two decades ago, Morris went to work at a first-class-only airline called Air One, eventually rising to become CEO before the carrier disbanded in the mid-1980s. But Morris says Primaris has a more targeted marketing strategy than Air One. Primaris is aimed only at business travelers, who make up about 40 percent of the total air passengers yet account for about two thirds or more of airline revenues, he says. “We are not going after leisure travelers.”
Morris says he and other executives of the new airline–which include chairman-designate Jake Garn, a former Utah senator, and president-COO John Pearsall, who worked previously at America West Airlines and the now-bankrupt National Airlines–have gotten a positive response from the Fortune 500 companies they have met with.
But a National Business Travel Association study last month found that less than 5 percent of the business travelers it sampled paid first-class and business-class fares between 1999 and 2002, and only a quarter of business people flew on an unrestricted fare. The majority, 70 percent, flew in coach on a restricted, or discounted, ticket.
In a separate survey, the trade group last month polled about 10 percent of the more than 2,400 corporate travel managers and travel service providers it represents. More than half said they expected their total travel spending this year to be down from 2002, when spending was already low. Three quarters of those polled said they didn’t expect the business-travel industry to recover until next year, at the earliest.
“Business travel has been the hardest hit, which makes me a little suspect about the timing here [for Primaris],” says Kasper. “It’s a narrow market to begin with and it would be difficult to sustain that kind of service.” On the other hand, he notes that it doesn’t cost nearly as much to start an airline these days as it did in the heady 1990s, when planes were packed with passengers. Air traffic has fallen off so much since then that many of the major carriers have been forced to “park” some of their planes. That means the cost to lease an aircraft is down dramatically from just a few years ago. And, with more than 110,000 job cuts in the airline industry since the September 11 attacks, there are plenty of well-qualified airline workers–from mechanics to pilots–looking for a job. Interest rates are also much lower now so it costs less to borrow money for a start-up. “All those things make it cheaper to enter the business than when the business is booming, because that’s when the established airlines are soaking up all the airplanes and labor they can,” says Kasper.
JetBlue Airways, one of the most successful start-ups in recent history, had more than $130 million in capital funding when it launched in early 2000. Primaris has told the Department of Transportation it plans to launch with about $60 million in capital, which it is still securing. Seventy-Six Degrees, a limited-liability company, now holds about 10 percent of the airline, and Morris says he has “soft commitments” from a number of other investors.
The airline also estimates it will have a lower break-even level than those at most airlines, which now need to fill about 80 percent of their flights to break even on average, according to the Air Transport Association, which represents the major carriers. Morris says Primaris will need to fill just over 60 of the plane’s 100 seats on any flight to make a profit. (It is configuring its Boeing 757s to accommodate just 100 seats–about half the normal number of seats in a 757–for more space). And Morris is confident that the airline can meet that goal. “We’re offering a great product for a very good price,” he says.
Will the price be good enough to lure travelers away from other carriers? American Airlines, the world’s largest carrier, learned the hard way that passengers often prefer to save a few more dollars than gain a few inches in legroom. The airline had pulled seats from more than 700 planes over the past few years and launched a massive ad campaign distinguishing itself as the carrier with more legroom. But last week, American–which had been teetering near the brink of bankruptcy in recent months–announced that it will add back seats in 174 aircraft, or nearly a quarter of its total fleet, and offer lower fares instead. Chief executive Gerard Arpey said the decision was made after customers in some markets made it clear “that price is predominately how they choose a carrier”–not legroom.
That may not bode well for Primaris. “Their plan goes against the grain of what people want. People consistently go with the airline that gives them frequent-flier miles and maybe less comfort but a better price,” says Mo Garfinkle, president and chief executive of GCW Consulting, an international aviation consulting firm.
While it is based in Las Vegas, Primaris won’t fly there–at least, not initially. After the airline receives government approval, a process that began in March but could still take several more weeks, it plans to start with nonstop first-class flights between popular business destinations like Los Angeles, San Francisco, Boston, New York, and Washington, D.C., as well as major European cities such as London, Paris and Frankfurt. The airline could launch with three aircraft as early as late summer or early fall, then add a dozen more airplanes within the first year. For Primaris to succeed, though, its plan–as well as its planes–will need to fly with passengers.
