Generous federal aid to U.S. airlines during the pandemic delayed and deferred the industry restructuring that had just started as the crisis began, startup Avelo’s new chief financial officer says, arguing that as the industry restructures, even more opportunities for new entrants exist.
“I don’t want to use the word ‘disrupt,'” Hunter Keay, who took Avelo’s financial helm on February 23, said. “The [Payroll Support Program] deferred a lot of potential restructuring that we’ll see over the next few years; there will be a few pieces moved around the chessboard.”
Federal aid through 2020’s CARES Act and subsequent coronavirus aid packages required airlines that took the funds to pledge not to furlough or lay off employees and to continue operating to all their pre-pandemic destinations. In practice, most airlines offered voluntary buyouts and separation to employees, and several applied for temporary exemptions to drop service to cities already well connected by other airlines, or from nearby airports. When the aid expired on September 30 last year, airlines began to rationalize their networks, cutting flights to dozens of cities.
When Avelo launched last year, CEO and founder Andrew Levy said the changing industry landscape was the perfect opportunity to launch a new airline. Aircraft were available and cheap. The buyouts opened a large pool of airline talent. And slots at airports were easier to come by, he said. The end of federal air only will accelerate the industry’s transformation.
Keay agreed with this assessment and said the major airlines already are changing their networks. There are two reasons for this, he said. First, the pilot shortage is preventing regional carriers, on which major airlines rely for lift to smaller cities, from hiring enough staff to operate their planned schedules. Just this week, United Airlines said it would end 17 routes due to pilot shortage at its regional carriers. American Airlines and Delta Air Lines also have cut regional routes, although not as dramatically as United.
Second, major carriers have been buying larger aircraft — Boeing 737 Maxes and Airbus A320neos and A321s — that can’t operate economically to smaller cities. “Airlines are far more likely to take delivery of current generation aircraft and flex retirements on smaller gauge aircraft,” Keay said. “They can’t serve secondary cities on an infrequent basis and be competitive with that.”
With the combination of larger aircraft at the major carriers and a pilot shortage at the regionals, airlines are finding they can’t “sustain service to smaller cities with a regional jet,” Keay said. And this is where Avelo has an opportunity.
Keay said the carrier so far has not had any difficulty hiring pilots. Part of that is its size. It currently operates a fleet of just six Boeing 737s, a split of -700s and -800s. It does not anticipate barriers to hiring even as it plans to expand its fleet to up at 15 aircraft by year’s end. “Our pay is just better,” Keay noted, adding that due to its small size, first officers can expect faster promotions to captain.
Avelo essentially operates two separate networks, one based in New Haven, Conn., and the other in Burbank, Calif., in the Los Angeles Basin. Flights from both airports focus on leisure destinations to smaller cities, like Santa Rosa Calif., and Medford and Bend, Ore., from Burbank and Charleston, S.C. and Orlando, Fla., from New Haven. “Leisure travel is just more durable,” Keay said. In addition, the carrier operates a few flights from Las Vegas, and it has some major metropolitan areas — like Denver and Salt Lake City — in its route mix. The airline has no interest to expand aggressively into major hub or slot-constrained airports, Keay said.
There are no plans in the near future to link these two networks. Instead Avelo is using the two separate operations as test cases to see where to expand. “It’s unique for an airline,” Keay acknowledged. “But we have the ability to evaluate these markets independently.” The New Haven operation is performing well, especially on sun routes, he said. The region’s wealthy catchment area helps, as does the airport’s proximity to commuter rail lines. The California operation has lagged, due in part to the state’s stricter Covid-19 restrictions. With many of those restrictions now easing, Keay believes the California network will catch up.
Keay had been airline industry analyst for Wall Street for almost two decades before joining Avelo. He noted he joined the “Great Resignation,” a pandemic-era trend of workers quitting their jobs or starting something new. “There are a lot of people leaving their jobs and there’s a desire for people to see what’s out there,” he said, noting this presents his new company with a chance to mop up more talent. “I was drawn to the idea of building something from the beginning.”