UAL Corp. pulls the plug on startup bizav venture Avolar

 - May 15, 2008, 4:46 AM

Little more than a week after halting efforts to find outside investors for a majority share in its Avolar business aviation venture, United Airlines parent UAL Corp. pulled the plug entirely on March 22 and announced it is closing down the Chicago-based subsidiary.

“Since my arrival in October, we have explored every possible option that would have enabled UAL to benefit from its original investment in this subsidiary,” said United CEO Jack Creighton. “Unfortunately, none of them proved financially viable in the current airline operating environment created by the downturn in the economy and exacerbated by the September 11 terrorist attacks.”

Creighton said UAL had already begun “an orderly shutdown of the operation” and that customers who signed up for Avolar’s fractional-ownership program were being notified.

It was on March 8 that UAL ceased efforts to keep Avolar afloat by the sale of a majority share in the subsidiary. At that time, Creighton said Avolar was “pursuing a new business plan that will enable it to realize its value without additional investment from UAL or the involvement of private equity investors.”

As part of the decision, UAL also announced that Stuart Oran had stepped down as Avolar’s president. At the same time, UAL sent two new executives from its ranks to Avolar: Doug Hacker, who took over as acting president; and Amos Kazzaz, assigned to assist with the new business plan.

The UAL board of directors authorized the creation of Avolar, originally named United BizJet Holdings, in May last year. Ambitious plans included a variety of business aviation programs, including fractional ownership; aircraft management; on-demand charter; corporate shuttle operations; and establishment of links between United Airline’s mainline commercial service and business aviation products outside the U.S.

UAL initially earmarked $250 million for the Avolar project, despite the protests of its union leadership. Even as it moved ahead with funding the Avolar program, UAL was facing a first-quarter 2001 loss of $305 million, compared with first-quarter 2000 earnings of $136 million. Already staggering financially, UAL was hit hard by September 11. Among the aircraft targeted by the terrorists was United Flight 93, a Boeing 757 that crashed in southwestern Pennsylvania when passengers attempted to thwart the hijackers.

Following September 11, United announced the furlough of approximately 20,000 employees and a 20-percent reduction worldwide in its flight schedule. As a result, UAL was hoping for some $800 million from the billions of dollars in relief funds allocated by the federal government.

Rep. Peter DeFazio (D-Ore.), citing the need for federal relief funding and the layoffs, described the decision to move ahead with the Avolar launch as “outrageous.”

Nevertheless, UAL continued to stand by Avolar. As of February, Avolar had placed orders for a total of 306 aircraft from four manufacturers, and had begun operating a Part 135 on-demand charter core fleet consisting of two Falcon 50EXs, a Hawker 800 and a Beechjet 400A. Avolar had further announced an agreement with Airbus to market and operate, on behalf of the aircraft owners, a fleet of as many as 15 Airbus Corporate Jetliners. A spokesman said at the time that Avolar had also been “very actively” signing up new fractional owners and earning revenues.

Dassault had agreed to sell 122 (46 firm orders) business jets to Avolar last summer, and by early last month the French manufacturer had begun work on the
first 10 aircraft. Five were to be delivered this year and five next year. Dassault chairman and CEO Charles Edelstenne, however, said early last month that he viewed the Avolar contract “cautiously,” adding that the company would have no problem reselling the initial aircraft should the order be canceled. The 10 aircraft now in the pipe-line are already available on the corporate market.

Gulfstream, which had received a firm order from Avolar for 12 GIV-SPs and GVs last June, declined to comment. Earlier this year, Avolar had signed letters of intent with Raytheon Aircraft for 25 Beechjet 400As, and with Bombardier for a mix of 57 Learjet 45s and Learjet 60s. Spokesmen for Bombardier and Raytheon said the closing of Avolar would have little, if any, effect on the respective companies.

An Avolar spokesman said it remains to be determined whether deposits will be returned by manufacturers, and that all contracts are being revisited in light of the shutdown.

The value of all the aircraft ordered by Avolar (including firm orders, options and letters of intent) is estimated at nearly $4 billion. While Avolar would have been required to ante up deposits for firm orders, the airplanes would ultimately have been paid for by the fractional-share customers.

It was the abandonment of a search for new money in the form of investors that signaled the death knell for Avolar, according to some industry observers.

Richard Aboulafia, senior analyst for the Teal Group, last month referred to UAL’s new business plan for Avolar as “the emperor’s new clothes,” referring to the fable entitled, The Emperor’s New Clothes. In the Hans Christian Andersen tale, the vain and rather slow-witted emperor is persuaded by two scoundrels of the beauty of a new costume they have made for him, when in fact he is wearing nothing at all. Avolar, concluded Aboulafia before the shutdown announcement, “is being sent up the creek without a paddle. That doesn’t mean there won’t be some miracle, but the odds are against it.”

Competitors agreed. Before UAL decided to close Avolar, a spokesman for Executive Jet noted that its NetJets fractional program had taken eight years to turn a profit. “We have invested billions of dollars and bought thousands of aircraft [and] for anybody to try and copy what we have done would require a huge investment,” he said. “Fifty-seven companies have tried and 51 have fallen by the wayside. It’s a very expensive proposition.” Make that 52 now–by Executive Jet’s count.

The closing of Avolar, announced late on Friday March 22, resulted in a 56-cent jump in UAL stock value, to $15.70 per share. But with severance payments to Avolar’s 80 employees, possible order-cancellation penalties and refunds to fractional-share buyers, UAL expects a major writeoff to negatively affect its second-quarter bottom line.