Two startups want to fix a broken US airline system

fn years before the pandemic, economic fortunes were flocking to “superstar” cities like San Francisco, New York, and Boston, where big companies like Amazon were building new offices and high-paid workers were spending money on homes, groceries, and services.

Now that migration to superstar cities has slowed, if not reversed, two new airlines are banking on the idea that they can build a successful national business by focusing on the rest of the country. Both launched in 2021 and are the first new airlines to launch in the US in 14 years.

The coming months will test their hypothesis. On February 1, Avelo Airlines will launch its fourth base, this time in Wilmington, Delaware, reestablishing service to the only state not currently served by a commercial airline. (Frontier departed in June 2022.) Founded by former Allegiant President Andrew Levy, Avelo has also established bases in New Haven, Connecticut, Burbank, California, and Orlando. Later in February, Breeze Airways, led by David Neeleman, one-time founder of JetBlue Airways, will launch new service to Vero Beach, Florida, Cincinnati, Ohio, Raleigh-Durham, NC and Orange County, California.

“I keep telling people, ‘Hey, people in Binghampton like to go to the same places as people who live in New York and LA – there are just fewer of those people,'” says Levy of Avelo.

On the surface, entering underserved aviation markets seems like a good idea. There hasn’t been a shortage of complaints about airlines lately; in October 2022, the most recent month for which data is available, complaints were three times their pre-pandemic level, according to the US Department of Transportation. And the consolidation that has left just four airlines — American, Delta, United, and Southwest — controlling about 80% of the domestic market has meant many cities have lost steady air service in recent years. That’s partly because since the deregulation of the airline industry in 1978, major airlines have increasingly focused on a “hub and spoke” model; They concentrate their resources in a few large airports, and travelers who want to go back and forth between two smaller airports have to transfer at a hub to get to their destination. For example, Cincinnati International Airport, which is not a hub, had 73% fewer flights in 2019 than in 2002.

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That also means higher ticket prices. Often, large airlines use small regional jets to get to smaller cities, which means fewer passengers per flight and increases the operating costs of each flight — costs that are passed on to customers. Breeze and Avelo have a different model that connects non-hubs directly and uses larger aircraft. You’re betting that travelers are tired of making multiple stops and tired of tiny regional jets that are sometimes only accessible by bus from a massive aircraft terminal. “We try to do what the big airlines don’t do — like get to Las Vegas from Huntsville, Alabama, twice as fast for half the price,” said Neeleman, CEO of Breeze.

In the past, starting a new airline was rarely a successful endeavor. Since the airline industry was deregulated in 1978, few airline startups have thrived, including American West, which later merged with US Airways (now part of American), JetBlue, and Virgin America, which was acquired by Alaska Airlines. “You can either bang your head against the wall or start an airline, and banging your head against the wall might be less painful,” says Henry Harteveldt, president of the Atmosphere Research Group, a market research firm. “Start-up airlines don’t have a great financial track record.”

About 90% of start-ups in the broader business market fail, and airlines are among the most expensive companies to start from scratch. Startups have to buy planes, recruit qualified staff, and wade through permits and other bureaucracy. Ticket prices are so relatively low today – thanks to falling oil prices since the 1980s and/or deregulation – that start-up airlines typically can’t charge high enough fares to recoup their costs.

Now is a particularly tough time: Volatile fuel prices since Russia’s invasion of Ukraine have made it more expensive to be an airline over the past year. Additionally, airlines are struggling with a pilot shortage caused by major airlines offering early retirements and buyouts to pilots early in the pandemic. With few new pilots entering the industry, airlines have to pay more to attract talent. The big airlines can pass those costs on to consumers, but those with fewer flights or smaller jets struggle to meet those costs.

Small airlines have complained for decades that larger airlines are undercutting their fares to put them out of business, but they are struggling to win antitrust arguments in court because lower prices are arguably good for consumers. But William McGee, senior aviation fellow at the American Economic Liberties Project, says there are examples of big airlines entering a market, undercutting fares and then raising them once the smaller airlines go out of business.

“Competition in the airline business is brutal, it makes an NHL hockey match look like a garden party,” says Harteveldt. Perversely, he says, the only way to be competitive in the airline industry is not to compete with other airlines. A new airline would have to find an underserved market that the big airlines have abandoned, he says, one that has a population large enough to support the service but not big enough to attract the big airlines. There are only a few of these cities left.

All of these factors explain why Breeze and Avelo’s first year was a challenging one. Avelo had to raise a second round of funds in late 2021 because business was slower than expected. Breeze also raised a second round in 2021. Both airlines have withdrawn from the routes; Avelo suspended operations from Arizona after American Airlines copied its route between Phoenix and Burbank, California. it also fell out of Grand Junction, Colorado and Bozeman, Mont. in 2021. In late 2022, Breeze cut a route between Charleston and San Francisco and one between Akron-Canton, Ohio and Hartford, Conn.

Still, both Breeze and Avelo say the state of air travel today presents a major opportunity. For one, rising airfare costs have prompted major airlines to pull out of many cities — 68 since April 2020 alone — leaving a space for startups to fill. In fact, around 90% of Avelo’s routes run between pairs of cities that are not currently connected. 95% of Breeze products belong to the same category.

There are some pandemic trends that Breeze and Avalo could also benefit from. Avelo saves money by not hosting flights — passengers can ask for water — and customers might not have accepted that before the pandemic, Levy says. With Breeze flying few intercontinental flights and Avolo flying none, they are able to recruit pilots and flight attendants who now prefer to sleep in their own beds at night and see their families more. Pilots of major airlines are often on the road and staying overnight far from home. “We have a lot of happy pilots who live in Charleston and leave in the morning and are home at night,” says Neeleman.

And as high housing costs drive some workers from the city centers to the suburbs and outskirts, airlines could see unexpected demand for flight services in places where economics haven’t worked before. For example, Breeze serves Westchester County in New York. As some telecommuters move to smaller cities, Avelo hopes to expand into markets like Huntsville, Alabama, where the population has grown 13% since 2019, as well as New Haven, Connecticut — Connecticut’s population has grown slightly during the pandemic after years of shrinking .

Avelo’s New Haven hub, which flies to Florida, the Carolinas, Tennessee and Chicago, was one of the most successful launches, says Brad DiFiore, managing director at Ailevon Pacific Aviation. Avelo had the foresight to see there was a market there when no one else did. “They found New Haven, which is a big deal — it’s a pretty big market that wasn’t being adequately served,” he says.

The cost of operating these smaller airports is lower for both airlines and consumers. Airlines have to pay airports a fee to serve them, and as major airports like New York’s LaGuardia have embarked on huge capital projects, they’ve gotten more expensive. A rough estimate: LaGuardia’s fees add up to about $40 per passenger, Levy says, while New Haven’s Tweed Airport is almost free. “The cost differential between using the main airport and using alternate airports is widening,” says Levy.

If successful, Breeze and Avolo could offer a lifeline to smaller communities that have been cut off from air service. Once airlines depart, so do business people and residents who relocate in search of somewhere more connected to the outside world.

But new airlines aren’t the only solution, DiFiore says. A company called Landline has bus routes between underserved air transportation markets such as Loveland, Colorado and Denver International Airport and Duluth, Minnesota and the Minneapolis-St. Paul Airport. The company allows customers to bundle their trips with United Airlines and Sun Country Air tickets, and finally, DiFiore says landline pickup locations could have TSA screening capabilities, so passengers don’t have to go through security when they arrive arrive at major airports.

The service might be cheaper than air travel, but it faces an even bigger hurdle than Breeze or Avelo: it depends on Americans being okay with bus travel.

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