CEO's abrupt departure fuels uncertainty at Great Plains

 - May 29, 2008, 8:04 AM

Since it began flying a pair of 32-seat Fairchild Dornier 328JETs from its base in Tulsa, Okla., last April, Great Plains Airlines has been promoting plans to establish a new kind of regional airline, dedicated to providing nonstop service from the nation’s heartland to points throughout the U.S. Unfortunately for now former Great Plains CEO Jim Swartz and company, all the talk hasn’t yet eased the apprehension of equity providers, leaving the company ill-equipped to expand beyond the five-city network it serves today.

Great Plains’ prospects for attracting the funding it needs to add airplanes to its fleet–both for markets within an 800-nm radius of Tulsa and points farther afield with longer-range equipment–grew bleaker on September 11, when the financial markets in an instant curtailed the flow of capital to the airline industry. Federal loan guarantees and direct government aid helped boost their confidence in established carriers, but Great Plains faces obstacles that airlines with long records of profitable flying don’t.

Less than two weeks after AIN visited Great Plains’ headquarters in Tulsa, Swartz abruptly resigned his post as CEO, citing personal reasons and a desire to relocate to Phoenix, where he heads an air ambulance service. His successor and the airline’s co-founder, Jack Knight, offered no further details about his partner’s departure, indicating only that Swartz will remain a director and help with special assignments.

Knight said the change in leadership will in no way alter the direction of the company. Of course, with or without Swartz, Great Plains still faces the unenviable task of convincing wary investors that its business plan will not only overcome the current economic crisis, but the often cut-throat competitive tactics used to thwart the majority of other startup efforts.

The airline’s owners argue that their plan of matching, rather than attempting to undercut competitors’ pricing, and the avoidance of fortress hubs will help insulate Great Plains from destructive price wars. By offering direct service in underserved secondary markets with regional jets, they reason, the airline will stimulate new business and attract passengers disenchanted with connecting service from dominant carriers, even if fares run, for example, $5 above those of established airlines.

However, soon after Great Plains revealed its plans to fly nonstop medium-range service from Tulsa and Oklahoma City with 50-seat regional jets, signs of pre-emptive strikes by major airlines had already surfaced. American Airlines, for one, in November 2000 began flying nonstop Boeing 727 service between Tulsa and Los Angeles after years of unsuccessful prodding from the Tulsa airport authority. On July 8 Memphis-based Express Airlines I began flying 50-seat Bombardier CRJs between Tulsa and Minneapolis on behalf of Northwest Airlines, then in September opened another route between Oklahoma City and  Minnesota’s largest city.

Now, one of Great Plains’ most coveted markets–Tulsa-New York–has caught the attention of Continental Airlines, which has told the Tulsa airport authority it may begin flying between Tulsa and Newark by the end of the year. Although the airlines deny that Great Plains affected their strategies for those markets, Swartz thinks otherwise. “All three of those [American and Northwest] routes were messages to me,” said Swartz. “But it’s better for us if they go in before we spend the $1 million it takes to open a new market.”

Notwithstanding investor anxiety and the incursions by other airlines, Knight said he plans to field between six and 10 more 328JETs for service inside an 800-nm radius of Tulsa and Oklahoma City within 12 months. For longer-range markets, the company still hopes to secure 50-seat Embraer ERJ-145s or Bombardier CRJs after it reaches its full complement of 328JETs.

Although at press time it had yet to apply for loan guarantees available under the Air Transportation Safety and System Stabilization Act, Knight said he planned to do so in time to get an approval by the end of this month. If all goes as planned, he said, the airline would start taking more 328JETs by the end of next month.  As of December 10 the company had also taken $58,085 in direct aid payments.  

One might forgive Knight’s optimistic timeframe, given the level of enthusiasm and cooperation state and local governments showed for the project. Then again, as Swartz recalled, “It wasn’t so much that we chose Tulsa; it was more that Tulsa chose us.” Responding to complaints from locally based companies about the lack of direct air service to Tulsa and Oklahoma City, Oklahoma governor Frank Keating signed into law a tax incentive program to stimulate more investment in local air service. The state attracted Great Plains with some $17.9 million in tax credits, contingent on the city of Tulsa’s participation in the project. The city, in turn, used Air Force Plant 3 at Tulsa International Airport as collateral to back a $15 million loan to Great Plains from the Bank of Oklahoma.

As Great Plains executed the final phase of its financing plan, selling its tax credits to Blue Cross and Blue Shield of Oklahoma and the Farmers Insurance Group for $14.6 million, just 300 mi away, in Columbia, Mo., the financially strapped Ozark Air Lines prepared to ink a deal to wet-lease one of its two 328JETs to Des Moines, Iowa-based Access Air. When Access Air declared bankruptcy in late February 2000, Great Plains stepped in, bought Ozark for $34.2 million and moved the operation to Tulsa. In fact, Great Plains still flies under Ozark’s operating certificate and still uses Ozark’s maintenance base and offices in Columbia. Many of the airline’s 148 employees originally worked in Columbia for Ozark’s previous owner, Dr. Wes Stricker, who now serves on Great Plains’ board.

Now flying its pair of 328JETs to Colorado Springs, Colo.; Nashville, Tenn.; Albuquerque, N.M., Oklahoma City, Okla.; and Tulsa, Great Plains has turned its attention to building a large enough network to justify the fixed costs of a Part 121 operation. Now stretched to their operational limits, the Pratt & Whitney PW306-powered jets work extremely hard, flying the highest use rates in the industry for the type at some 10 hr a day. Although Swartz estimated the airline would likely need at least six more 328JETs to achieve the economies of scale needed to reach profitability, Knight reminded that appropriate routes and scheduling affect profitability as much as proper fleet size.

By the Numbers

Although he declined to offer traffic figures, Knight confirmed that since September 11 Great Plains has logged roughly 50-percent load factors, some five points below its target. Department of Transportation data show its third-quarter revenue passenger miles at slightly more than 7.5 million and available seat miles at nearly 14.8 million, resulting in a load factor of 51 percent. However, it boarded only 12,930 traffic on a total of 1,158 departures, for an average load of 11.2 passengers, suggesting a significant difference between the amount of O&D traffic and total passengers per leg. So even though its load factor runs near 50 percent, Great Plains’ third-quarter traffic figures show less-than-profitable passenger numbers, even assuming optimum economies of scale.

Still, no one expected it to turn a profit in its first year of operation, and compared with its predecessor’s failed operation in Columbia, Great Plains has found a virtual wellspring of business in Tulsa and Oklahoma City. Swartz attributed Ozark’s problems in Missouri primarily to the small size of the market it tried to draw upon. Although its business plan targets primarily “secondary markets,” Great Plains  generally won’t consider any destination with a population of less than 500,000, except in “some specialized circumstances.” For example, Hailey, Idaho, and Aspen, Colo., might qualify as such “niche” markets, where altitude and restricted approaches give the 328JET a distinct operating advantage over other aircraft types.

Among Great Plains’ top target markets in the central U.S., San Antonio ranks as the largest in terms of passenger traffic to Tulsa and Oklahoma City, followed closely by Austin and New Orleans. Great Plains already serves the fourth-largest, Nashville, which accounted for roughly 40 percent of its passenger volume in the third quarter. Other possibilities include El Paso and Midland, Texas, and Birmingham, Ala. Of course, more so than size, the level of competition in a particular market will define Great Plains’ level of interest.

Knight said he thinks capacity reductions at major airlines following September 11 has opened more network opportunities. But continuing restrictions on slots at Great Plains’ most coveted destinations– New York La Guardia and Ronald Reagan Washington National–remain an ongoing concern for any aspiring entrant into those markets. As a result, a code-share may present Great Plains’ only chance to fly those high-yield routes. But without financing to acquire airplanes, a code-share contract seems a distant prospect. Conversely, without the backing of a major airline, raising money becomes all the more difficult.

Although Great Plains faces a not uncommon dilemma, today’s difficult economic and political climates have raised more issues than anyone envisioned when Knight and Swartz launched the venture 1998. Insurance costs rose 60 percent after September 11, while advance bookings dropped 13 percent just as the company looked ready to land its elusive financing deal. And while fortunes have turned recently, as the Thanksgiving holiday brought a 24-percent increase in November traffic, the longer-range outlook remains in the hands of those who control the needed capital resources. Only time will tell whether or not those custodians of commerce decide to take a chance on Great Plains.