Colorful Cape Air makes its money where the sun shines

 - April 17, 2008, 5:58 AM
A comparison of the small regional carrier Cape Air to the old television series Wings, which focused on the often humorous doings of a small Cape Cod-based regional airline, is inevitable. In truth, there are some similarities. It is a small operation, by today’s regional airline standards, based in Cape Cod at Barnstable Municipal Airport in Hyannis, Mass. But unlike the fictional television show, Cape Air is unlikely to be canceled by network TV executives and, according to founder and president Daniel Wolf, is doing quite well.

Wolf, a Quaker-educated product of Germantown Friends School in Philadelphia, started Cape Air in 1989 with a pair of Cessna 402Cs on a Massachusetts route connecting Boston and Provincetown. It was a leap of faith for Wolf, who completed his higher education with a degree in political philosophy from Wesleyan University. But the timing was good, and armed with a pilot’s love of aviation and a second certificate in airframe and powerplant maintenance from the Quaker School of Aeronautics, he launched Cape Air.

Those early days began a long consolidation period, when some 150 regional carriers nationwide began cutting routes deemed uneconomical to serve with larger turboprops. At the same time, demand for service to smaller markets was growing rapidly. Cape Air filled that demand.

With sufficient venture capital funding, Wolf saw continuing opportunities for growth, with more airplanes–always Cessna 402Cs–and more routes.

A second segment, linking Boston and the summer destination of Martha’s Vineyard, Mass., opened in 1991. A year later, Wolf saw his fledgling operation go into the black, where it has remained ever since.

In 1992 Wolf bought Edgartown Air and the next year began opening Florida routes from Key West Naples and Fort Myers on the west coast and Fort Lauderdale on the east coast. He acquired Nantucket Airlines with its 22 daily flights between Nantucket, Mass., and Hyannis in 1995, and continues operating it as a sister airline under the original name. In 1998 a new Caribbean route between San Juan, Puerto Rico, and St. Thomas started an expansion into the Caribbean. Today, Cape Air and its parent company, Hyannis Air Service, has its main headquarters in Hyannis, where it remains the sole occupant of a large hangar on the airport’s north ramp. It also maintains a southern headquarters at Naples (Fla.) Municipal Airport and a smaller permanent operation at San Juan’s Luis Munoz Marin International Airport.

Gorillas at the Gates
Neatly crowded into the Hyannis facility are maintenance shops, administration offices, ticketing, scheduling, operations and training. It is where the company-wide practice of “Mocha Hagotdi” began. What sounds like a Native American phrase is actually an acronym that Wolf said describes the company’s business philosophy: “Make our customers happy–have a good time doing it.” It encourages, and is intended to encourage, creativity on the part of everyone, and it is not unusual to see that creativity emerge in the form of humor.

At the Cape Air ticket counters, the usual procedure involves handing out red or yellow boarding cards for respective flights that may be departing within minutes of one another. At one counter, the employees decided to substitute fruit for boarding cards. To the amusement of Cape Air passengers, and confusion of others not flying Cape Air, the announcement came over the public address system, “Will all the bananas please proceed to Gate Five for boarding.”

On another occasion, employees at a Cape Air ticket counter covered the “C” on the Cape Air signs, dressed in gorilla suits and welcomed passengers to “Ape Air.”

Creativity and humor encourage enthusiasm, and enthusiasm is contagious, said Wolf. He is a willing participant himself and has commissioned a Cape Cod artist named Jurek to paint several 402s as part of an “Art In Flight” series. The result is whimsically painted aircraft with swans, a parrot, a shark, a pirate and flowers blending with images of Indians and actor Lon Chaney emblazoned on the fuselages, and rainbow-colored spinners.

But passengers have learned not to expect bananas and oranges at every departure. Their tickets might not be taken by gorillas, and not every airplane looks like a 1960s psychedelic retrospective. Wolf doesn’t want to “institutionalize” the creativity and humor he encourages, and to which he partly attributes the company’s success.

Employees are also inspired to such creativity by virtue of ownership through an employee stock-ownership plan. Private investors own 50 percent of the stock in parent Hyannis Air Service but employees hold a healthy 30 percent. Wolf is a minority stock holder, with 20 percent of the company’s shares. Philosophically, Wolf believes an employee stock-ownership plan creates a proprietary feeling that encourages each individual to contribute to the value of the company, and to work as a team to increase its value. “Philosophically,” he said, “we believe the employees who are here day in and day out building the company should own some of it.”

Those employees include some 100 pilots and 35 maintenance technicians among the total full-time workforce of about 450. There are another 100 seasonal workers, primarily in ticketing, who typically are college interns. The busiest period runs from May through September, when the total workforce, including Hyannis and the Florida and Caribbean operations, may reach 550 to 600 people. About 20 to 25 pilots and mechanics are “migratory.” In the winter, when demand rises for air transport in South Florida and the Caribbean, they move to the Naples and San Juan operations. Cape Air also finds it easy to shift about 25 airplanes back and forth to meet the seasonal demands.

By managing its assets carefully, said Wolf, the company has never had to resort to seasonal furloughs of full-time personnel.

The ability to shift assets easily to meet the demands of seasonal travel is an advantage, Wolf contends. The winter season may see about 17 aircraft operated in the Caribbean and another seven from Naples. In the summer, that number may shrink to as few as six airplanes in the Caribbean and two in Florida.

About 40 percent of Cape Air’s main departure-point passengers–Boston, Providence, Fort Myers and San Juan–fly point-to-point. The remainder continue on, most with major airlines. While the company maintains interline agreements with most of the majors for ticketing, reservations and baggage, it has yet to form any code-share deals. “We value our independence,” said Wolf. “We’re not married to anybody, so we get to dance with everybody.

“Our success is driven by running an airline in the best interests of the customers,” he explained. “The relationship with a major is secondary to our relationship with a customer.”

For that reason, Cape Air does not charge a re-ticketing fee, typically $75 among the major airlines. “People don’t buy a ticket with the intention of changing their minds, so we do not charge a change fee.”

50-percent Load Factors
The South Florida routes flown by Cape Air now include segments between Key West and Fort Myers, Naples and Fort Lauderdale. In the Caribbean, San Juan-based airplanes and crews serve Ponce, Puerto Rico, and the islands of Tortola, St. Thomas and St. Croix.

In the north, Cape Air serves Boston, Martha’s Vineyard, Nantucket, New Bedford and Provincetown in Massachusetts and Providence, R.I.

Including all routes, the average load factor runs slightly over 50 percent, which Wolf said provides a healthy income. He figures the airline must maintain a 45-percent load factor to be profitable. The load factor in 1999 averaged 53 percent and 51 percent in 2000. Last year, even with a temporary drop in demand following September 11, the carrier managed to maintain a load factor of 52 percent.

Last year, the slowest winter month showed a total of 35,000 passengers carried. The highest summer month saw the company carrying about 75,000 passengers. Between the northern and southern operations, the company carried 564,678 passengers last year, compared with 557,575 passengers transported in 2000.

Expectations for this year are positive despite the effects of September 11 and the recession, perhaps as high as 540,000 passengers. The confidence lies in part with anticipation of a sharp rise in demand as vacationing travelers choose to remain close to home. As one Cape Air employee put it, “We’re a close-to-home airline.”

Since 1998 the company has shown a steady growth in revenue, from $23 million in 1998 to $29 million in 1999, to $33.5 million in 2000 and $36 million last year. The annual profit margin has been a steady 5.8 percent, Wolf said.

Expansion remains a matter of careful consideration, steady rather than spectacular. Routes added are typically seasonal and, according to Wolf, are added only when they are “complementary to those destinations we already serve.”

He praises the Cessna 402 as the ideal choice for the routes flown and describes the nine-passenger, single-pilot airplane as a “rugged, reliable and very c.g.-tolerant” workhorse. It also allows the addition of aircraft to meet last-minute passenger demand, usually without sacrificing a profitable load factor.

Cape Air operates under Part 135 and its 402Cs are certified in the normal category, so they do not have to demonstrate second-segment performance. The airplanes are all fitted with vortex generators on the wings and have what the airline deems to be acceptable single-engine performance. According to director of operations Larry Gualtieri, at sea level on a 40 deg F day, the engine-out rate climb at mtow is 350 fpm; elevate the temperature to 80 deg F at sea level, and the engine-out climb rate falls to 250 fpm.

Cape Air is the world’s largest user of 402s, most with 15,000 to 20,000 hr TT. The fleet dispatch rate runs well above 99 percent. In the off-season, maintenance personnel take advantage of reduced schedules to perform inspections and other service.

The 402’s twin Continental TSIO-520 piston engines have a TBO of 2,000 hr, and rather than engage in the expense of engine overhaul, Cape Air exchanges the engines for factory-rebuilt zero-time powerplants. Cessna started making the 402C, which Cape Air flies exclusively, in 1979; production ceased in 1986. The manufacturer, said Wolf, has been “absolutely fantastic” in its support of Cape Air’s 402C fleet. In fact, he added, “When they have a technical problem, sometimes they call us.”

Pilot Training Offered
Wolf said Cape Air has had no difficulty attracting pilots who meet the minimum requirements of 2,500 flight hours, of which 500 hr must be in multi-engine aircraft. Hiring pilots has proven particularly easy in recent months following massive layoffs in the major airline industry. A group of six newly hired pilots starting the company-mandated 50-hr ground school in March included four who not only came from major carriers, but previously flew for Cape Air.

For the most part, pilot training takes place in the aircraft, although the company requires a minimum of 40 hr of ground school, including time in its own integrated general aviation flight-training device at Hyannis. Wolf, who has flown more than 5,000 hr as a flight instructor, prefers that most of the training be done in the airplane. “We have the airplanes and we can afford to put the pilots in the cockpit,” he said.

In terms of flight hours, non-union pilots have learned not to expect to pile up big numbers, usually 650 to 700 hr a year. But with segments rarely more than 45 min in length, the number of cycles quickly accumulates. A dozen takeoffs and landings in a single day is not unusual.

The company also requires its pilots, who spend more time with passengers than anyone else in the company, to attend a customer-service seminar. And to ensure that he doesn’t lose touch with the real world, Wolf flies as a line pilot in a Saturday slot during the peak summer months at Hyannis. It allows him to stay in touch with the line, he told AIN, and it satisfies a love of flying.

Cape Air places particular emphasis on aircraft maintenance and, according to Wolf, the fleet is maintained to and beyond FAA and OEM requirements. Most of the maintenance personnel have extensive experience on the Cessna 402C. Charlie Lyon, he noted, was working on 402s for Cessna when it closed the production line and has spent 21 years working on various models. While starting pay for maintenance technicians averages $12 to $14 an hour, many with experience earn up to $22 an hour. With overtime, the top people earn in the $60,000-a-year range.

Effective Yield Management
The yield-management system at Hyannis Air is rather simple. Said Wolf, “After operating one aircraft type for more than 12 years, we have a very good understanding of what it costs to run an airline. We know what revenue we have to generate and we have set up a pricing structure that is sensitive to a divided market–tourists, weekend travelers and commuters–and we try to serve all those segments with a range of options and fares.”

Wolf is eloquent in his philosophy of fare structures. Cape Air, he said, lowered its fares only slightly after September 11 and during the recent recession, and for good reason.

“It troubles me when our industry, in an attempt to get passengers into the airplane, sells its product for less than it costs to produce it,” said Wolf. “It is the result of the people responsible for yield not living in the same building with the people responsible for load factors. On one hand, the marketing and load-factor people are trying to sell seats, often at any price. They do that, and the load-factor numbers start to come back up, but the yield is not enough to sustain the operation.

“We know what it costs us to put the product out there, and that is what we charge. If people are not willing to pay it, we’ll find out. I know we can fill every seat if we charge only a dollar a seat. That’s not the challenge. The challenge is making a profit.”

Following the September 11, Cape Air saw its passenger load drop about 20 percent “for about the first six months after the attacks.” It is now beginning to come back, said Wolf. But not less traumatic are the requirements of “some 75 or 100 federal security directives that we have to integrate into our operation at considerable expense.” It was a double hit, he said. “We’re flying fewer people and it’s costing more to do it.”

Fortunately for Cape Air, most of its passengers are frequent fliers–mostly affluent and of the opinion that the fares are reasonable. Fares range from about $225 round trip Boston/Nantucket to about $77 roundtrip from Hyannis to Nantucket. Fares on the southern routes are similar. A round-trip ticket for Fort Lauderdale/Key West costs about $205 and San Juan/St. Thomas costs $174.

Cape Air has only two real competitors in its market segments. Island Airlines, also based at Hyannis, competes directly with Nantucket Airlines on the Hyannis/Nantucket segment. In the Caribbean, American Eagle presents competition on the San Juan/St. Thomas route.

The airline offers frequent fliers a commuter discount book of coupons good for five round trips or 10 one-way trips. In March, a discount book of 10 one-way coupons for Boston/Nantucket sold for $899, including airport fee, federal segment tax and fuel/terminal surcharge. The discount amounted to about $45 per round trip, compared with the cost of simply purchasing five round-trip tickets separately.

While Wolf has resisted the idea of a code-sharing agreement with a major airline, he has in the past considered expanding to longer routes using larger turboprops such as the 19-seat Beech 1900 or the 36-passenger Shorts 360. And while the company focuses sharply on its airline operations, it has recently begun making aircraft available for on-demand charter and is considering that as a growth area.

Admirable Safety Record
Weather can affect schedules on the company’s Cape Code regional routes. Wind or fog affect about 20 percent of some 112,000 annual flights, particularly to Nantucket and Martha’s Vineyard. But if flying in the Cape Cod area can be challenging, the airline’s safety record does not reflect it.

Wolf is proud of Cape Air’s safety record, noting that it has been cited by the FAA for excellence in aircraft maintenance and recognized by the agency for more than 100,000 accident-free flight hours.

He admitted that the airline sometimes deals with questions about the safety of a single-pilot operation. His response: the reason for having two pilots is that the tasks require two pilots. In fact, he pointed out, “The number of accidents occurring as a result of pilot incapacitation in a single-pilot operation are far fewer than those occurring in a two-pilot operation, so it is not clear to me that it is safer to fly with a second pilot.”

Ironically, one of the few safety incidents in Cape Air’s history resulted from the in-flight incapacitation of a pilot. It came this past February when pilot Ronald Crews, 50, became disoriented on a flight from Martha’s Vineyard to Hyannis. Melanie Oswalt, a security trainer on board and a student pilot, took over the controls and made a wheels-up landing at Provincetown. There were no injuries to Crews, Oswalt or the three passengers on board. Crews had been a Cape Air employee for about four years. His license had been revoked in 1985 for knowingly transporting illegal drugs on an airplane. It was later reinstated.

It is a minor bump, but not one that Wolf has taken lightly. Crews is no longer an employee of Cape Air. A company spokesman said it is reviewing its hiring and screening procedures. Other changes may be called for, she said, based on the results of the FAA investigation into the incident.

In the meantime, Wolf is looking forward to the peak summer season, when he can climb into the cockpit on Saturdays as a regular line pilot. “When I fly, I really get to know how the operation is working.” That includes one occasion when a passenger recognized him. “He didn’t want to shake my hand,” recalled Wolf, ruefully. “He just unloaded on me about the fare.” Wolf was also trapped in Boston by a line of thundershowers, forcing him, along with his passengers, to find a hotel for the night to wait out the weather. But it’s all part of the job, figures Wolf.

“Nobody in this company spends more time with the customers than our pilots, and no one learns more about their needs and expectations. If we fulfill those needs and expectations, we’ll be successful.”