Reno Air Inc. History

Address:

P.O. Box 30059
Reno, Nevada 89520-3059
U.S.A.

Telephone: (702) 686-3835
Toll Free: 800-RENO AIR

Public Company
Incorporated: 1990
Employees: 2,137
Sales: $349.88 million (1996)
Stock Exchanges: NASDAQ Pacific German
SICs: 4512 Air Transportation, Scheduled

Company History:

Probably the most distinguished of the several dozen low-fare start-up airlines that began flying regional U.S. routes in the early 1990s, Reno Air Inc., has earned praise from observers and passengers by delivering first-class service at modest prices. Its new jets, reliable departure times, and other premiums make its motto of "Discover a Better Low Fare Airline" seem somewhat understated. Reno Air is the only scheduled commercial airline based in Nevada. As of March 1, 1997, the company operated some 29 aircraft, which departed primarily from the hub in Reno/Tahoe, Nevada, and flew to destinations in San Jose and southern California, as well as to its target cities of Las Vegas, Los Angeles, and Seattle.

Rocky Origins in the Early 1990s

Reno Air was conceived in 1990 by Joseph Lorenzo (no relation to Frank Lorenzo), formerly an executive at Frontier Airlines, and Jeff Erickson, former president of the original Midway Airlines (which soon folded), with the help of fellow airline executive Robert Reding. Reno's consistent tourist traffic, available airport space, and existing high fares made it an attractive home.

In December 1991, Erickson replaced Lorenzo as chief executive. The company launched its first flight, bound for Los Angeles, from Reno/Tahoe International Airport on July 1, 1992. The plane was a new McDonnell Douglas MD-80. Part of Reno's original fleet had originally been ordered by Midway Airlines.

The company's employees numbered 150. Like Kiwi International (formed by employees of the defunct Midway), Eastern, and (original) Pan Am Airlines, Reno Air was also able to field a low-cost, non-unionized staff, with labor costs reportedly half of Southwest's. Less seniority among the employees, low turnover, and greater flexibility helped contain costs.

Reno disdained the "cattle call" approach of many budget airlines and ensured reserved seating for its customers. It also offered meals on flights and maintained a first-class section. Nevertheless, its policy was to match competitors' promotional fares while charging only modest mark-ups for last-minute tickets.

By the end of 1992, the fleet had grown to eight aircraft, all MD-80 jets. Reno Air seemed poised for profitability. However, the next year it launched a risky expansion into the Midwest and West Coast, adding another nine planes to support these ambitious plans.

Reno Air launched its initial public offering in July 1993, then recorded a loss of $7.3 million for the year on revenues of $124.6 million. In 1994 those losses nearly doubled on revenues of $195.5 million.

Navigating Major Obstacles in the Mid-1990s

Many start-ups assumed a confrontational stance against the big carriers. Frontier Airlines, for example, became embroiled a vicious fare battle with United Airlines that resulted in an antitrust investigation. In 1993 Reno Air found itself engaged in a game of brinkmanship with Northwest Airlines which ended in a similar investigation, a lawsuit, and Reno Air's withdrawal from Northwest's home market of Minneapolis. A Reno Air spokesman reported that Northwest subsequently doubled its Minneapolis fares.

Reno Air could also cooperate with the major players. It entered an alliance with American Airlines toward the end of 1993 in which Reno would handle American's regional traffic after the carrier vacated its San Jose hub. American was eager to vacate the San Jose hub due to intense pricing pressure from Southwest Airlines, but could not escape its lease agreements. Moving into San Jose gave Reno a strong business hub to complement its tourism-oriented home base. Reno was also able to offer American Airlines AAdvantage frequent flyer miles as an added perquisite for its customers, in addition to its own frequent flyer program. Reno added a couple of new routes, to Chicago and to Orange County, California, within a year of teaming up with American.

In spite of American's vote of confidence, Reno Air began to appear to be yet another casualty of severe competition in the deregulated airline industry. Fluctuations in the cost of jet fuel posed an ever-present threat to any hope of profits, although having American Airlines as a supplier helped keep prices down (this arrangement would end in September 1996). Like most of the other start-ups, Reno Air was scrambling for capital in early 1994 when chairman Lee Hydeman stepped up to the role of CEO.

Although Reno Air lost $13.9 million in 1994, a dramatic turnaround was completed by 1995, when Reno proudly posted its first annual profit of $1.9 million on revenues of $256.5 million. The company flew twice as many paying passengers (four million) in 1995 as it had in 1993. It had also added nearly 500 employees in the two years, reaching a total of 1,600.

Reno Air brought its own tour operation on-line in 1995. Dubbed QQuick Escapes after the airline's computer reservation code, "QQ," the program bundled rental cars and hotel rooms with airfare to Nevada resorts. Electronic ticketing was introduced in August 1995 under the EZTrip banner, and ticketless travel came to account for nearly one-third of passenger sales within two years. Although Reno Air was enrolled in travel agency reservation systems, it felt the fees imposed (usually amounting to ten percent or more of the ticket price) were a particular hardship for low-price carriers such as itself. Ticketmaster and Reno Air teamed up to sell combined entertainment/travel packages a year later. Travel agents accounted for about 60 percent of ticket sales.

In September 1995, the title of CEO passed to Robert Reding, who continued to fly commercial jets and piloted the company's first flight into Fairbanks, Alaska. Less celebration accompanied the 4.3 cent per gallon federal aviation fuel tax that again went into effect on October 1 after an exemption designed to relieve the ailing airline industry expired. Each penny increase in the cost of a gallon of jet fuel cost Reno Air almost $900,000 per year.

A modest expansion resumed. Reno's network of scheduled flights stretched north to Anchorage, while its charter flights ventured south into the Caribbean and Mexico. The company ferried passengers to these destinations for San Jose and Great Lakes tour operators. Subsequent expansion plans would add more routes to the west and east. Reno invested in a new hangar facility and refurbished its planes' interiors in 1996.

From the beginning, the carrier operated a young fleet in comparison with its budget counterparts. Its jets averaged between five and six years in age and several were acquired new. Reno aimed to own half of its aircraft, but in 1996, twelve of its fourteen jets were leased. Two planes acquired in 1996 were state-of-the-art MD-90 aircraft which were quiet enough to operate at the Orange County airport.

However, these aircraft acquisition plans were tempered somewhat by a canceled July 1996 stock offering. At the time, aircraft stocks had fallen due to a ValuJet crash. Unlike many other small U.S. airlines, Reno Air did not report a significant loss of passenger confidence following the ValuJet crash of May 1996, which prompted new concern over the safety of budget carriers. Executives pointed out that the company worked very closely with a small number of vendors to ensure that its maintenance was carried out to a high standard. Nevertheless, the company's stock, like that of virtually all other U.S. airlines, was devalued during the crisis. Compounding the troubles, fuel prices rose by about a third in 1996, and Southwest Airlines, Reno Air's no-frills competitor, drastically lowered fares for almost half the year. Nevertheless, the company posted a respectable $2 million profit in 1996.

In 1996 the company considered changing names to reflect its geographic influence, but tradition prevailed. Citing examples of so many regional airlines that had collapsed under the strains of overexpansion, Reno executives announced a period of consolidation. Reno Air would focus on the key markets of Los Angeles, Las Vegas, and Seattle; refine the efficiency of its operations; and get more use out of its aircraft.

Just a few years after its first flight, Reno Air employed 2,000 and operated more than thirty McDonnell Douglas jets. The company's 300 pilots flew more than eighty flights per day from Reno and San Jose. It concentrated on the markets of Las Vegas, Los Angeles, and Seattle. It had successfully shed the label of "start-up."

Soaring into a New Century

A New Year's flood gave 1997 a particularly inauspicious beginning. Both the Reno/Tahoe airport and the Reno reservations office were closed for a day and a half and travelers shunned the area for weeks. However, Reno Air's antediluvian recovery promised to make 1997 a banner year, given the company's plan to curtail growth. A dramatic increase in fuel prices reinforced the company's thinking.

The company did intend to grow its business in one place: service to the booming Las Vegas area. Two dozen new flights to McCarran International Airport were added in May 1997. Additionally, a new reservations facility was opened in Las Vegas. In April, Reno Air had devoted an airplane to its "Gulf Coast Flyer" routes between Biloxi, Orlando, Tampa, and Atlanta, and in January, it began competing with Northwest Airlines again with a single daily flight to Detroit. In September 1997, Reno Air, which maintained sales offices in Germany, began offering shares through the German Stock Exchange in Berlin and Frankfurt.

Reno Air Inc. History

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