Washington Dulles Needs a New Airline and the Time Is Right

NEW YORK ( TheStreet) -- In the early 1990s, commercial aviation gave up on John F. Kennedy International Airport in New York. Hub carrier Pan Am shut down. The New York area had two other airports, both more popular. Mass transit to JFK was inadequate. JFK was considered to be fine for international, but domestic travelers would never go all the way out there.

Who thought this? Everybody. Or everybody except for David Neeleman, who wanted to start a JFK-based domestic airline. Today, JetBlue (JBLU) is one of four key airlines in the world's biggest travel market.

Why bring this up? Because the very same opportunity exists today at Washington Dulles International Airport.

To review, hub carrier United (UAL) isn't gone, but it has pulled way back. The Washington area has two other airports, both more popular. Mass transit is inadequate -- but the Washington Metro is coming in 2020. Dulles is thought to be fine for international, but domestic travelers would never go all the way out there. Sound familiar?

A big question today is: Where are the airline start-ups? Throughout its history, the U.S. airline industry has been besieged by start-ups. Granted, nearly all of them failed. But a handful succeeded. All it takes is a good idea, a smart entrepreneur, a boatload of money, a lot of luck and the right airport.

Dulles is the right airport. Moreover, the Washington Airports Task Force, a non-profit partially funded by Virginia, wants to help. The task force is dedicated to "optimizing the capacity" of Dulles. "I would love to see (a new airline)," said Keith Meurlin, task force president, who retired as Dulles airport manager in 2005 after 28 years at the airport.

For the moment, Dulles trends are not good. Dulles served 21.6 million passengers in 2014, down from 27 million in 2007. By contrast, Reagan National Airport served 20.8 million in 2014, up from 17.8 million in 2005. Baltimore-Washington served 22.3 million in 2014, up from 19.7 million in 2005.

In February, Dulles traffic was down 2.7% from a year earlier. United's domestic passenger count fell 10% as the carrier ended flights to 16 destinations and reduced flights to 29 others. United's international passenger count fell 14%, as service to a half dozen destinations was cut or suspended. Also Southwest's (LUV) passenger count fell 11%, while growing 130% at National, where the carrier acquired slots.

"Dulles had a very robust partner in United a few years ago," Meurlin said. "United was making money back then. But the drive for efficiency, consolidation, and yield has negatively impacted Dulles."

Call it cutting back under pressure from Wall Street, if you like. Or call it creating a huge opportunity at an underserved airport that is not only located in the country's seventh-largest metropolitan statistical area, but is also a major international hub. At Dulles, 24 international carriers serve 49 destinations, including 34 on United.

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Now let's look at some potential destinations for our new airline. Let's call it "Ted" because it is a nice name, already known in the airline industry, and we are going to be friends with United.

Meurlin lists a half dozen major markets with no Dulles service. They are: Houston Hobby; Milwaukee; Oakland; Omaha; Orange County, Calif.; San Jose, Calif.

Cities dropped by United, where Meurlin sees opportunity, are: Albuquerque, N.M.; Binghamton, N.Y.; Colorado Springs, Colo.; Fort Lauderdale, Fla.; Manchester, N.H.; Miami; Pensacola, Fla.; and Salt Lake City. (Only Miami has service today.) Also, Meurlin said four cities could support flights connecting to international flights. The four are Bangor, Maine; Baton Rouge, La.; Birmingham, Ala.; and Peoria, Ill.

Also, a half dozen markets have just one daily flight on United or United Express: they are Grand Rapids, Mich.; Honolulu; Louisville, Ky.; Phoenix; Portland, Ore. and Sacramento.

Now let's look at some potential problems.

For one, the cost per enplanement at Dulles, paid to the airport by the airline, was a relatively high $26.44 in 2014. Few airports are over $20. The cost at National was $11.26, close to the national average of $11.18. But the Metropolitan Washington Airports Authority is committed to reducing costs at Dulles, partially by sharing National revenue. Of course, the easiest way to reduce an airport's per-passenger cost is to increase the number of flights and passengers.

Aviation consultant Bob Mann said Dulles is a good place to start an airline because "every time United contracts, that creates a vacuum; the Metro will make it more accessible and all of the government density makes it attractive." Mann said a working relationship with United would be key.

But two problems trouble Mann. One is that an existing carrier such as JetBlue could easily spot opportunity at Dulles and decide to grow there. (Virgin America (VA) might also). Either would make it tough for a start-up.

Another problem, Mann said, is that it would cost about $100 million to start an airline. The Federal Aviation Administration certification process is rigorous: the agency requires sufficient reserve capital to operate for six months with no revenue.

Also, "financial markets have turned against funding airline start-ups," Mann said. "The only place to find that kind of money now is venture capitalists," and they would prefer to invest in technology, he said.

But let's say we raise the money. Now, not to get ahead of ourselves, it's time to acquire some airplanes.

To get a sweetheart deal, we look to Bombardier, trying to find a visible U.S. customer for its new CSeries 300 jets, as it competes with Airbus and Boeing (BA).

"You would want to go with the CS300," said aviation consultant Scott Hamilton, who closely follows aircraft manufacturers. "A reasonable, comfortable single-class configuration would seat 149," while a smaller CS100 seats about 125.

"It would be tough to get cheap rates" at Bombardier, which recently required refinancing, but "it remains to be seen what the new executive team is going to be able to do," Hamilton said.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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