Thanks for the posting on Blackstar Airlines. It lead to a front page story
in the current edition of Airline Financial News.
I am switching to a sister publication, Commuter/Regional Airline News, and
I will be looking for story leads on the list.
Tom Smith
Two Budding Airlines Pursuing Business Travelers
As Organizers Seek Start-up Capital, Experts See Too Much Competition
Airline Financial News, Feb. 9, 2004
Two investment groups have filed papers with the U.S. Department of
Transportation to launch new airlines catering to a business clientele. Both
groups are currently raising the tens of millions needed to put planes in
the air.
Blackstar Airlines, which will be based in Los Angeles, filed an
application to start a commercial airline flying only international flights.
Its application is currently under review.
Primaris Airlines, headquartered in Las Vegas, will be flying an
all-first class airline at low-fare prices. Its application was approved
last fall conditional on the firm raising at least $65 million and obtaining
its planes. The firm recently applied to establish non-stop service between
Los Angeles and Washington Reagan National Airport.
Industry observers don't give either party high odds for success.
Both business plans are flawed because each budding carrier will face
intense competition and neither airline appears to be taking pro-active
steps to avoid this early competition.
While both investment groups have ranks filled deep with pilots, the
edge initially appears to go to Primaris. The proposed Primaris board
includes Jake Garn, a former U.S. senator from Nevada, and Donald Bliss, the
former CEO of USWest Communications. The Blackstar team is dominated with
former officers of Polar Air and retired United Airlines [OTC: UALAQ]
pilots.
Blackstar
Serving an international crowd, Blackstar will be an airline
striving to provide a luxurious trip at a cost below the current market
rate. "We want to remind you what flying was like back in the 1970s when
flying was a pleasure," said Robert E. Burnstein, vice president of flight
operations. "You will be so comfortable that you will hate to get off."
To achieve that high degree of passenger comfort, Blackstar will fly
Boeing [NYSE: BA] 747-400s with fewer seats, but more flight attendants. Its
planes will be configured to carry 300 passengers in three classes. Whereas
the typical B747-400 carries 360, with dense seating in coach, Blackstar
will arrange its coach class with 3-3-3 seating. There will be 18 flight
attendants per plane to assure greater personalized attention, he said.
Leather seating and in-flight, seat-back entertainment systems with
live television programs will be the norm. Blackstar hopes to make a mark
for itself with a meal service that is superior to most other airlines.
Burnstein said the meals in the 12-seat first class and perhaps the 70-seat
business class will be cooked on the plane. The flight attendants will
complete a four-week cooking school as part of their training program.
The first class seat will be the new sleeper style similar to what
is being installed in such airlines as British Airways [NYSE: BAB] and
Virgin Atlantic.
Blackstar will begin with two daily routes: Los Angeles
International Airport (LAX) to Paris and LAX to Frankfurt. Within six
months, Burnstein said the carrier will add daily flights to unspecified
Asian cities.
Its fare structure will price all seats at 10 percent below other
airlines flying similar routes. The carrier will match "sale fares," he
added.
The company will lease aircraft that are five to seven years old.
The interiors will be gutted and the exteriors painted in a scheme that
melts from a flat black nose to a metallic gray tail. Blackstar will have
six planes in operation by the end of the year, he said.
Blackstar, Burnstein said, is not modeling its service after any
other airline. Instead, he attributed the ideas and concept to its founder,
John Victor Marra, a naturalized citizen who most recently was a captain in
Air Atlantica Icelandic flying B747s. He also has nearly 10 years experience
as a pilot for Alitalia Airlines. He and three others have invested at least
$100,000 each in the venture.
Because of a lower overhead due to its non-union workforce,
Burnstein said the break-even point for each flight would be a load factor
in the 50 percent range. He anticipates early profitability, in part,
because it is projected that each flight will be much fuller than the
break-even point.
According to its filing with DOT, Blackstar anticipates posting a
profit of $8.9 million in 2005 - its first full year of operation. By 2009,
it projects an 11 percent profit margin earning $121 million on $1.1 billion
in revenues. Burnstein said the group is currently seeking investors and
anticipates an announcement of the commitments by late March. While he would
not disclose a start-up capitalization goal, the filing projects $232
million in total capitalization at launch. By comparison, JetBlue Airways
[Nasdaq: JBLU] was launched with $140 million in start-up capital. Once up
and running, Burnstein said the investors do not plan to take Blackstar
public.
Burnstein said the group is confident of its success in part because
of its airport and route selection. "There is greater potential for success
out of LAX than elsewhere. Washington Dulles, New York and San Francisco are
already well served. We selected these routes because there is little
existing service - perhaps just one flight a day."
The flight schedule from LAX indicates three daily flights to Paris,
one each on United, Air France [Paris: AF] and Air Tahiti Nui. There are
four daily flights to Frankfurt, one each on United, US Airways [Nasdaq:
UAIR], Delta Air Lines [NYSE: DAL] and Lufthansa [OTC: DLAKY].
"Right off the bat using LAX sends up a red flag," said John
Wensvee, a marketing professor at Embry-Riddle Aeronautical University, who
specializes in both international airlines and low-fare operations. "If you
are a new operator not doing domestic operations and not worried about
connecting flights, then you avoid the major, congested airports like LAX.
Right away your cost structure has gone up. They are better off going to a
secondary airport with more space, lower fees and the flexibility to
negotiate."
In Europe, and eventually in Asia, Wensvee said Blackstar should
avoid the major airports and seek deals at secondary airports. "I have a
great deal of difficulty believing they will be breaking even in the 50
percent range."
Instead, Wensvee said the Blackstar plan mirrors the airlines flying
before deregulation with piano bars in the B747 bubble. "The twist is the
cost structure."
The 10 percent fare discount will probably not be enough to lure
passengers, said Joe Brancatelli, an airline observer and author the Joe
Sent Me newsletter. "When leisure travelers want to fly, they can always
find a deal. They may not be as good as London deals, but Paris is not that
expensive if you plan ahead. The business and premium customers already tend
to be the customers of the big airlines and they have status. They are not
going to walk away from a 5,000-mile round trip - that is halfway to elite
status. You have to knock their socks off with quality and they will still
want mileage."
The competition on these two routes is stiff, he added. While Air
France may not be great, it has the feed from its Delta partnership.
Lufthansa "is terrific in their premium classes" and passengers earn United
frequent flyer miles. And "Air Tahiti Nui is very aggressive. Blackstar will
have competitors on these routes who are thinking," Brancatelli said.
Jack Keady, an airline consultant, has some familiarity with the
Blackstar team. He was hired by Marra to draft a business plan for a Las
Vegas-based airline. The contract was ended early after disagreements over
the destination and other elements in the plan. Keady said the group still
owed him part of his fee. In January, he filed a series of questions with
the DOT contending key elements of the Blackstar application were
incomplete.
"It is flawed from the get-go. Very few international carriers make
big money. I think it will be a monster of a duty everyday to fill coach.
There are fares as low as $149 to fly to Europe. You are going to get down
in the dirt to attract these people." Without a code share or interline
agreement, Keady said, they won't get domestic airlines funneling passengers
into Blackstar's flights. "To establish themselves in the market is
overwhelming. You need millions. People who look for luxury don't go to the
Web sites."
Burnstein said the carrier would be negotiating a contract with the
computer reservation system (CRS) firms so that Blackstar comes to the top
of any comparative fare chart. "This will be a key to success."
However, in the interests of holding down costs, Wensvee said a deal
with a CRS is not a wise expenditure - in the seven digits - when Blackstar
is not planning to inter-line with other carriers.
"It doesn't sound like a keeper," Brancatelli said. "I hate to throw
cold water on anybody, but this doesn't look like it will get out of the
box."
"This is flawed even with its name," Keady added. "Blackstar is a
pilot's term for a dangerous airport, an unsafe place."
Primaris
Primaris plans to begin operations with three leased B757-200s that
are configured into a single cabin with about 100 seats. The carrier plans
to fly one or two flights a day on a point-to-point basis between 29 city
pairs. In its first year, it anticipates flights from New York to eight
other major cities in the United States, Canada, France and Germany. Service
between Boston and London Gatwick would also be established in the first
year. Its initial route and fare structure were filed under seal with the
DOT.
Repeated attempts to interview Primaris officers were unsuccessful
over the last three weeks.
According to its application, "Primaris expects to attract business
traffic from coach seats on network and low-cost carriers to its first class
seating due to prices as low as 70 percent below unrestricted coach fares."
For example, in its application for slots at Reagan National, Primaris
proposed its fare would be no more than $350 one-way to Los Angeles.
Other than extra legroom, the company's filings don't describe the
level of service that Primaris will be providing its passengers. To reassure
its business clientele, Primaris will require pre-clearance of all travelers
to enhance their traveling security. The proposed security survey has also
been sealed.
While much of the financial information surrounding the airline has
been sealed, Primaris projects earning a first year profit of $9.1 million
on revenue of $190 million.
The man behind Primaris is Mark Morris, a former president of DHL
Airways and an investment banker with Pentastar Capital, Quest Capital and
Universal Genesis. Primaris was originally founded as Genesis One in 2002.
It took on the Primaris name in March 2003 as it filed its application with
DOT.
DOT approved the application last September and the company has been
seeking a minimum of $65 million in start-up funding since that time. Its
original projections had the airline in the air by this time.
Brancatelli is a little more hopeful for Primaris than Blackstar. "I would
not totally write them off. In the right market it can be done."
However, at least two other airlines tried the concept in the past,
Regal and AirOne. In addition, he said, Lufthansa offers a premium level of
service on 44-person business jets serving the trans-Atlantic market. The
Primaris business plan, he said, may not be focused enough to succeed.
"I would not put my bets on them," Wensvee said. "They are not going
to make it. They might get up and running, but they won't last. The problem
is that they are going head-to-head on the same routes but selling it for
less. If I am Delta, I can slash my fares and even under cut [Primaris
fares] even if it costs me money. I have more resources to tap and I will
crush you.
"You will see the rise of the luxury-class business carriers, but
using a completely different business model. A number of people are out
there looking at new concepts. It can be done successfully as long as you
incorporate the right key ingredients. We have not seen anyone put together
all the right components." *
>>Contact: Robert E. Burnstein, Blackstar, (702) 438-1734; Primaris, (702)
270-0999; John Wensvee, Embry-Riddle Aeronautical University, (386)
226-6700; Joe Brancatelli, (845) 265-5211; John Keady, (310) 392-0090.<<