Will Air Taxis Fly?

Will Air Taxis Fly?

by Justin Martin
Chief Executive, March 2005

Once bitter rivals, Don Burr and Robert Crandall team up to challenge the private jet industry.

Until very recently, it probably would not have been wise to seat these two men together on a cross-country flight. Don Burr is the founder of People Express, the celebrated but failed experiment in no-frills travel. Robert Crandall is the retired CEO of American Airlines. Back in the 1980s, the pair engaged in a fierce rivalry for air supremacy. Now, they’ve forged an unexpected partnership around a new air taxi business called Pogo. Their start-up has the potential to challenge the airline establishment, but it also faces serious hurdles.

In some ways, Burr and Crandall are a dream duo, possessed of skill sets that are remarkably complementary. For each, the new venture represents a fresh start, an opportunity to learn from past mistakes. But the pair also have strong…quot;and quite different…quot;personalities. “Based on their earlier careers, this certainly seems an unlikely collaboration,” says Philip Baggaley, an airline analyst for Standard & Poor’s.

If all goes as planned, Pogo will become the world’s first air taxi service. It will offer a degree of flexibility, convenience and efficiency lacking in other air travel options, most notably flying with commercial carriers tethered to major airports through the hub-and-spoke system. According to a recent survey by NASA, commercial flights of less than 500 miles move at an average speed of less than 100 miles per hour. If you factor in all the common delays, such as sitting on the runway and waiting at the luggage carousel, you’re actually not going much faster than a car.

Part of Pogo’s plan is to take advantage of the 5,400 small airports sprinkled around the United States. You can avoid the hassles of Boston’s Logan International Airport, for instance, by flying into Hanscom Field in suburban Bedford, Mass., or bypass LAX in favor of nearby Hawthorne Municipal Airport. To do so now, you would have several options: own a private jet, charter one, purchase a fractional share of an aircraft through a company such as NetJets, or participate in a membership program with an outfit such as Sentient Jet or Marquis Jet.

That’s where Pogo comes in. Crandall and Burr are trying to carve out another option, far more flexible than the existing choices, akin to simply calling a car service. It would make it possible to book a highly customized itinerary on short notice…quot;even the day of departure…quot;that would allow you to avoid major airports or to fly directly between two smaller destinations, such as Brattleboro, Vt., and Lancaster, Pa. “Air travel isn’t fun anymore,” says Crandall. “But if you can leave from an airport closer to your home or office, cut the airport wait from two hours to 10 minutes, avoid being patted down by six different inspectors, then we’ll have materially changed the experience.”

Of course, such convenience comes at a cost. While Burr and Crandall are still working out the particulars of their pricing, a trip on Pogo will certainly cost more than a first-class ticket on a commercial carrier. At the same time, their business plan is based on undercutting the price of their various competitors. The pair believe they have identified a niche: high-earning business customers. According to Pogo’s research, there are 3.8 million people in the U.S. who earn above $150,000 and fly more than five times a year. High productivity is expected from these highly paid individuals, so perhaps their companies will be willing to shoulder Pogo’s premium in exchange for more efficient travel. After all, it’s a waste of money to let a $200,000-a-year marketing VP sit in an airport all day. Mean- while, Pogo could prove an efficient way for a team of three or four employees to make a series of business calls in different cities in a single day and still make it home for dinner. There’s also the prospect of tapping the personal air travel market.

To succeed, Pogo doesn’t exactly need to drive Continental or United out of business. Right now, Pogo’s well-heeled target market takes 30 million trips a year that are shorter than 500 miles. If Pogo can capture just a sliver of these fares…quot;a mere 2 percent, the partners calculate…quot;they’ll have a going concern.

Another key is the airplanes themselves. Pogo’s entire existence is predicated on the availability of a new class of so-called very light jets, or VLJs, currently under development by companies such as Adam Aircraft in Englewood, Colo., and Eclipse Aviation in Albuquerque. Very light jets will carry price tags of less than half the $4.1 million it costs to purchase a Cessna CJ1, the least expensive jet currently available. They will also be half as expensive to operate. Pogo has placed an order for 75 Adam A700’s, a seven-seater that travels 380 mph, has a 1,200-mile range and weighs in at just around 7,500 pounds. “SUVs with wings,” is how Burr describes them.

Pogo’s maiden flight is planned for early 2006. Burr and Crandall intend to start small, initially operating only within a 500-mile radius of New York City. They plan to roll out further over time, creating a series of 10 or 12 regional “pods,” covering areas such as Florida, northern California and the upper Midwest. They hope to build up a fleet of 1,000 planes.

First In the Game

Burr and Crandall aren’t the only people thinking about creating an air taxi service, but they’re easily the most credentialed. As of late January, Pogo was the only air taxi operator that had filed with the Securities and Exchange Commission. “I’m sure there are a hundred guys out there thinking about this,” says Crandall, “but we have a jump start.”

 Credit for dreaming up the venture goes to Burr. During spring 2001, at an aviation conference in Hawaii, the topic of air taxis was getting bandied about and it captured his imagination. Shortly afterwards, Burr noticed a comment Crandall had made to an aerospace trade publication, extolling the prospects for air taxis, and contacted him about teaming up. They met at Crandall’s beach house in Gloucester, Mass., for a lengthy and brutally candid lunch. “He told me what he liked about the idea and what he didn’t like about the idea,” recalls Burr, “and we began a dialogue.”

Crandall signed on with Pogo in March 2004. As chairman, he works out of his home in Palm City, Fla., while Burr, the CEO, is ensconced at company headquarters in Stratford, Conn. They communicate through emails and phone calls. Even after Pogo begins service, they have no intention of working in the same physical space. Given their past skirmishes, some distance might be a good idea.

Between 1981 and 1984, Burr built People Express from scratch into the nation’s fifth-largest air carrier, with 4,000 employees and serving 100 cities, including a few overseas destinations. As he grew more successful, he grew bolder. In 1985, he introduced People Express service into Dallas, the home base of Crandall’s American Airlines. Crandall counterpunched, offering discount tickets designed to undercut People’s bargain fares. He also took out advertisements in every market in which People operated, saying, “You don’t have to fly on People Express anymore to get these prices.” Within a year, People was in a death spiral. Burr put his company on the block, and its operations were ultimately absorbed into Continental. “Crandall dumped that on us,” recalls Burr. “That, coupled with his introduction of frequent-flier miles, collapsed our business model.”

Now, these two Reagan-era rivals have joined forces. Burr is the entrepreneur, while Crandall brings the experience of running a large legacy carrier. But other differences prove more telling, and are far more relevant to the future of Pogo.

Burr, age 62, is a longtime disciple of what might be termed “new era” management. Early in his career, he spent seven years at Texas Air, working for hard-liner Frank Lorenzo. He resigned in 1980, uncertain of his next move. But Burr had one idea firmly in mind: He did not want to be a Lorenzo-style manager.

Burr describes Pogo as “version 2.0 of People Express.” Without question, he plans to offer some form of universal stock ownership, as did People. He also intends to introduce employee cross-utilization, which was well received at People. The idea is to involve pilots and mechanics in various disciplines outside their expertise…quot;training, for example, or customer service…quot;and to solicit their input. “People love it,” says Burr. “They get to go beyond being simply a stick-and-rudder person or a wrench person. They become a full-scale business person.” In turn, says Burr, the company develops a “positive karma” among its employees.

By contrast, the 68-year-old Crandall isn’t exactly aglow with positive karma. Rail thin with steel-blue eyes, he’s a chain-smoking workaholic and a notoriously bare-fisted boss. At American, his employees had a variety of nicknames for him, the most simple and endearing: “Fang.” He once laid off 7,000 of American’s 41,000 employees. As implied by its name, Pogo has aspirations to be a folksy company, like People. It seems a safe assumption that Crandall will cede the touchy-feely employee and customer stuff to Burr.

But Crandall brings other strengths to the mix. He has superb instincts about the practical use of information technology. Early in his career, he worked for Hallmark Cards, where he ultimately was named head of computer programming. At American, he was on the bleeding-edge, recognizing the value of technology long before his industry peers.

Whether Pogo flies or fails will be extremely dependent on IT. To wit, consider this scenario: Three Kodak executives in Rochester, N.Y., want to fly to Philadelphia. On the same day, you also have two fares in Buffalo, with one planning to fly to Albany, N.Y., the other to New York City. Do you combine all five passengers on one plane and make several stops? Do you use two planes? Answer: It’s something for a robust computer system to figure out.

Burr and Crandall are confident they can assemble just such a system, thanks in part to a recent hire: Jeff Cohen, former chief information officer of JetBlue. JetBlue is considered an IT standout, and landing Cohen improves Pogo’s chances of meeting their thorny technology challenge. Dave Hurley, vice chairman of PrivatAir, one of the nation’s most successful charter operators, also has joined the team as a board member.

Thus far, the new-era manager and the neutron manager have managed to avoid any meltdowns, or at least they’ve been able to keep them quiet. Company insiders know of only one skirmish, and a pretty tame one at that. Burr wanted Pogo to offer frequent-flier miles. Crandall was against the idea…quot;ironically, since he was the first to popularize such programs. In the end, Crandall won out, arguing that such loyalty-building measures won’t be necessary until Pogo faces actual competitors. “I was all set for battle between these two guys,” says Cameron Burr, Don’s 42-year-old son and Pogo’s executive vice president. “But they’ve just been having fun.”

That could change in an eye-blink as Pogo approaches its inaugural flight and pressures mount. Not least of these is the question of whether Pogo’s planes will be delivered on time. Adam plans to begin production this year, but has yet to receive Federal Aviation Administration certification. As a hedge, Burr and Crandall are in talks with Eclipse, although that company faces even more serious delays. Fortunately for Pogo, other options also exist. There are a number of companies vying to roll out the world’s first mass-production microjet.

A Tall Order: Raising Capital

Raising money is another headache. In effect, Burr and Crandall are asking prospective investors to place a double bet: first on microjets, an unknown quantity, and then on air taxis, an unproven concept. So far, Pogo has been able to raise $8 million of its $28 million in start-up costs. Lead investor Julian Robertson of Tiger Management has put up $4 million. Another $3 million has come from outside individuals such as William Rutledge, former CEO of Teledyne, while the Burrs and Crandalls have chipped in a combined $1 million.

Pogo also will have to arrange some kind of lease financing for the planes. Here, too, the fact that very light jets don’t exist yet poses a problem. Financial services companies have been wary, unsure of how quickly this new category of plane would depreciate or what their resale value would be. “It’s been extremely difficult,” admits Burr. “We’ve had all kinds of trouble raising money so far.”

If and when Pogo starts flying, the company faces yet another hurdle: competition. First, there’s fractional ownership, although the cost structure is quite different from Pogo’s. To own even a small share of a jet can cost millions, not to mention such add-on expenses as storage and insurance. And even then you aren’t guaranteed use of your plane whenever you need it. Pogo’s planes would be available any time to fly anywhere. To be sure, you can charter a plane to fly any time, but charters can be extremely expensive (as much as $10,000 an hour). By relying on very light jets, with very low operating costs, Burr and Crandall project that Pogo’s service will cost closer to $1,800 an hour.

Pogo’s closest competition is jet-membership services such as Marquis Jet and Sentient Jet. These services allow you to fly anywhere, any time, but they require substantial upfront costs (see sidebar, page 43). Executives at Marquis and Sentient remain confident in their companies’ positions. “We’re a proven model,” says Ken Dichter, CEO of Marquis. “But we certainly have our eye on Pogo. The big question is whether Burr and Crandall can put together the infrastructure and all the other pieces necessary.” Sentient CEO Steven Hankin agrees: “I think very light jets will be enormously popular, but I don’t know if air taxi service will take off.”

If anyone can succeed at air taxis, a strong case could be made for Burr and Crandall, given all their experience. But the operative word is “if.” Fasten your seat belts and prepare for some turbulence.