The airline industry remains solidly profitable in the U.S., but rising fuel prices are taking a bite out of earnings even at the strongest U.S. airlines, such as Southwest Airlines (NYSE: LUV).
Nevertheless, a start-up airline based in Southern California recently finalized plans to make its long-awaited debut on Nov. 1. California Pacific Airlines believes it can profitably serve a niche that other airlines are ignoring. That said, another airline start-up that also thought it had found a comfortable niche was forced to suspend all flights last week. This highlights the difficult odds that California Pacific must overcome.
Cleared for takeoff after years of delays
California Pacific Airlines has been working to get off the ground for many years. I first wrote about the company in early 2014, when it was one of three airline start-ups looking to begin operations by the end of that year. In fact, the start-up had been tentatively scheduled to take flight as early as 2010.
The airline’s commercial launch was postponed repeatedly due to problems ranging from FAA certification delays to funding problems to lack of authority to operate at its planned home base: Carlsbad, California’s McClellan-Palomar Airport. California Pacific now appears to have overcome all of those hurdles, in part by buying a small airline that already has FAA certification.
Back in 2014, California Pacific Airlines envisioned flying from Carlsbad to six destinations: Oakland, San Jose, Sacramento, Las Vegas, Phoenix, and Cabo San Lucas. However, its plans have changed somewhat. The carrier now plans to begin service from Carlsbad to San Jose and Reno on Nov. 1 and to add a route to Las Vegas on Nov. 15. It expects to announce at least one additional route soon.
The initial flight schedule published last week calls for two roundtrips a day to San Jose on weekdays and one roundtrip a day on weekends. California Pacific will fly four times a week to Reno (Mondays, Wednesdays, Fridays, and Sundays) and three days a week to Las Vegas (Tuesdays, Thursdays, and Sundays).
Management expects the San Jose and Reno routes to cater primarily to business travelers, while the Las Vegas flights will attract more leisure travelers. All flights will be operated with 50-seat E145 regional jets for now.
Does California Pacific Airlines have a competitive advantage?
Operating at McClellan-Palomar Airport is the crux of California Pacific Airlines’ business plan. It will be the only airline operating there, due to the abrupt shutdown of fellow start-up Cal Jet earlier this year.
McClellan-Palomar Airport is located more than 30 miles north of downtown San Diego. It’s the only commercial airport in the “North County” region, which has a substantial population between 500,000 and 1 million (depending on the exact geographic definition used). California Pacific Airlines is touting the airport’s convenient location, dirt-cheap parking (just $5 a day), and short security lines in a bid to attract customers.
As a result, California Pacific Airlines believes it can charge a premium. For example, it will charge $99 one-way for nonrefundable tickets on the San Jose route, whereas ticket prices start at $59 one-way for most San Diego-San Jose flights on Southwest Airlines: San Diego’s dominant carrier. The pricing gap relative to Southwest is similar on the other two initial routes.
Luckily for California Pacific, established carriers would have trouble taking advantage of the convenience factor of McClellan-Palomar Airport, because the runway is too short for most mainline commercial jets. But that may not be enough of a competitive advantage.
Southwest Airlines flies up to 12 times a day from San Diego to San Jose and up to 10 times a day from San Diego to Las Vegas. It also operates two daily nonstops between San Diego and Reno, with numerous additional one-stop options. For many travelers — especially the business travelers that California Pacific Airlines is targeting — the convenience of Southwest’s high flight frequency will outweigh the convenience of a short trip to the airport.
Even with a niche, it’s hard for airline start-ups to succeed
PEOPLExpress and Eastern Air Lines — the two other airline start-ups that were trying to begin service in 2014 — both managed to launch operations years ahead of California Pacific Airlines. In an ominous sign, both went out of business quickly, even as the U.S. aviation industry was earning record profits. PEOPLExpress only lasted a few months, while Eastern Air Lines survived for two and a half years.
California Pacific Airlines may be better positioned than these carriers, because its ability to operate at McClellan-Palomar Airport gives it a unique niche. Yet that still may not be enough to allow California Pacific to hold its own with behemoths like Southwest Airlines.
For example, in recent years, airline start-up OneJet appeared to find a profitable niche offering business travelers nonstop service between midsize cities on small planes. It had no direct competition. However, the carrier had trouble sustaining the profitability of its routes, perhaps because of rising fuel prices. In any case, it abruptly suspended service on all of its routes last week.
OneJet says it expects to start taking bookings again on Oct. 1. But historically, when airlines suspend service, they rarely take off again. OneJet is also facing a federal tax lien for $622,000 and a lawsuit from the local airport authority in Pittsburgh, which wants to recover $763,000 of incentives provided for routes that OneJet isn’t operating.
I wish California Pacific Airlines the best of luck with its plan to restore commercial airline service to the underserved North County region. It’s going to need a lot of luck to survive.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of August 6, 2018
The author(s) may have a position in any stocks mentioned.