In the newly competitive airline industry, a second generation of management revels in a good dogfight.
In the newly competitive airline industry, a second generation of management revels in a good dogfight.
Peter Van Arsdale had the game won from the start. His competitors at the negotiating table wore business suits. Van Arsdale wore a pilot's uniform, with shoes shined and nameplate burnished. They sat fingering calculators. He had the numbers in his head. They were new to aviation, station managers for fledgling carriers struggling to survive the rigors of deregulation. He came from three generations of aviators. As president of Provincetown-Boston Airline Inc. (PBA), he was representing arguably the oldest and most consistently profitable commuter airline in the United States.
It wasn't much of a battle -- in the past few months most of his competitors had approaehed Van Arsdale for a job -- but by the end of the meeting he had saved PBA some $8,000 a year on its share of the new commuter terminal being built in Sarasota, Fla., enough, he thought, to justify the one-hour flight up from the company's home base in Naples, Fla. And he enjoys getting into the trenches, particularly if it will show up on the bottom line.
Profiting from hands-on management is nothing new for PBA. Begun by John Van Arsdale Sr. in 1949 as the successor to Cape Cod Flying Service and run by his sons since 1980, chairman and ehief exeeutive officer John Van Arsdale Jr. and president Peter Van Arsdale, the company has shown a profit for each of its 33 years.
The 1980s haven't brought prosperity to the airline industry. Recession, the air traffic controllers' strike, and escalating fuel and labor costs have all taken a toll. Among the major carriers, Braniff International Corp. went under, and DeItn Air Lines Inc. reported a loss for the first time in 25 years. Among the regionals, Air New England Inc. folded, and high-flying Air Florida System Inc., which had reported a $5.1 million profit in fiscal '80, lost $14.7 million in the 1982 first quarter alone.
But PBA has thrived. Revenues in 1981 rose to $18 million from $12 million; revenues for the first three quarters of 1982 reaehed $25 million. The company has expanded from 6 routes to 24, adding service to 17 cities -- new markets that accounted for almost half of PBA's 53% growth in the number of passengers carried in 1981. In August 1982, PBA boosted its passenger boardings 100% from the August 1981 level, to 102,815, becoming the first of the regional airlines to board more than 100,000 passengers in a single month. And even with such dynamic growth, the bottom line has still shown profit: $127,000 before t:ixes in 1981 ($267,000 after taxes because of investrnent tax credits) and a projected $250,000 for 1982.
"We're not tremendously profitable," John Van Arsdale Jr. says. "Just consistently profitable -- regardless of what we confront."
John Van Arsdale Sr. gave his sons a commuter carrier unique in the United States, one that violates many of the established rules for airline success:
* PBA flies a largely resort trade. It alternates between dual seasonal markets, concentrating on Massachusetts' Cape Cod and island vacationers from Boston, New Bedford, Mass., and New York in the summer and on sun-seekers along Florida's Gulf Coast in the winter. "The nice thing about the airline business is that your capital assets are highly transportable," John Jr. says. While PBA doesn't abandon routes during the off-season, it relocates 50% of its aircraft, some 70% of capacity, north in summer and south in winter.
* Conventional wisdom stresses the value of modern, fuel-efficient equipment for ease of operation and maintenance. But the backbone of the PBA fleet is made up of aging aircraft: 6 Martin 404s and 12 Douglas DC-3s (including "Old 36," with more hours in the air than any other commercial aircraft still in operation), all of which had seen long service with a multitude of previous owners.
* Conventional wisdom touts the value of having a limited number of aircraft types. Instead, PBA has five. Along with the 30-passenger DC-3s and the 44-passenger Martins, the airline flies 27 9-passenger Cessna 402s, 4 58-passenger Nihon YS-lls, and 7 19-passenger Bandeirantes. It is these anomalies however that give PBA its greatest competitive advantage, the ability to balance capacity and demand. Passengers holding PBA tickets rarely know on what size plane they will fly; advance reservations, time of day, major airline feed, and gut feeling determine what equipment will be rolled out to the gate. No prospective passenger is ever turned away. There is no overbooking. Load factors, the ratio of seats occupied to the number of seats available, stay high. While PBA can cut costs during light traffic periods by flying smaller planes, the airline keeps extra equipment on hand to fly additional sections of each flight if so much as one would-be fare shows up.
But the PBA story is really a tale of two airlines, a story of changing generations and a changing business environment, of changing opportunities and strategies that buiIt on the old while embracing the new. For 31 years John Van Arsdale Sr. ran PBA cautiously, buying old planes to fly in monopoly markets, growing slowly, and avoiding debt. But the 1978 passage of the Airline Deregulation Act doomed that strategy. Deregulation allowed major carriers to drop routes at will, routes that then became potential markets for any commuter line that was willing to enter the competitive fray.
"Dad's philosophy was to entrench yourself and avoid competition," says John Jr. "When someone would threaten to come in on top of Dad he would run to the state public service commissions, the Civil Aeronautics Board, nnd the FAA [Federal Aviation Administration] to complain. That's the way things were done back then."
"But we were younger. We were willing to take risks. And we're not afraid of competition -- in fact, we're pretty awesome competition ourselves." "The Old Man," employees call him. More formally, "Old Man Van. " Now two years retired, John Van Arsdale Sr. has attained the status of fondly remembered myth. Persistent, they call him. And visionary.
Flying made John Van Arsdale ill, but when he was a boy, before his father was killed in a crash at the Hyannis, Mass., airport, father and son flew together in a biplane. "When I'd feel myself getting sick I'd signal him and he'd turn the plane upside down and I'd let it all go," he remembers.
He struggled, burp-bag in hand, to get his private pilot's license. Then he washed out of flight training in World War II and saw service as a weatherman instead. Convinced that, sickness notwithstanding, commercial aviation was where his professional future lay, he set up Cape Cod Flying Service outside of Hyannis in 1946, repairing the runway himself, buying the planes, hiring instructors to train GI-bill veterans, and enrolling at his own school to get his commercial license at government expense.
Moving to Provincetown Mass., in 1948, he saw increased demand for charter service between the Cape Cod resort town and Boston. So he started Provincetown-Boston Airline, with inaugural service on November 30, 1949. He chose the name, he says, "so I wouldn't have to tell people where I flew."
The airline's pattern was set with his first route. Like most of PBA's flights today, the Provincetown-Boston run was over water, cutting 120 land miles to 45 air miles, shortening what was then a five-hour drive to a 30-minute flight. He instituted mixed fleet/demand scheduling, rolling out a two-seat Luscomb for one passenger, a Piper Clipper for two, and a Stinson Voyager for three. He moved his family to Provincetown so he would become the "local" airline. "There's only one way to run a small airline successfully," he argues. "You've got to live in the community, make it your home base, get to know everybody." PBA today still bases its personnel in whatever town they serve.
Provincetown-Boston was a pioneer: It had a dirt runway, a jerry-built terminal, and a wind sock and a radio, rather than radar and navigation aids. Mom Van Arsdale sold tickets. Pop Van Arsdale flew the planes. The four children, too, were expected to pitch in, starting at age 12 as assistant linemen, picking up cigarette butts around the airport. John and Peter both started learning to fly at 14, soloed at 16, and were licensed as private pilots at 17 and as commercial pilots at 18.
"It was primitive, really something," John Jr. says. "Sometimes an employee would stick his head outside and listen for the plane, then direct the pilot home by radio. He might say, 'You sound like you're getting a little too far to the west,' and the guy would turn east, and the next thing you'd know, you'd see this plane come drifting over the airport." Provincetown-Boston operated only during the summer tourist season, so each spring new pilots would have to be hired. "And when the weather was bad you couldn't send them out. My father would climb on the airplane and go to Boston, 'cause he knew his way back and these other guys didn't."
In the winter of 1957, looking for more efficient use of equipment and personnel, Van Arsdale and his wife drove through Florida, searching for carriers having similar seasonal problems and with which Provincetown-Boston might ally. Naples Airlines, on Florida's Gulf Coast, was the solution. For three years the two companies leased planes and traded personnel, until the city of Naples refused to renew the owner's airport lease. So in 1960, Van Arsdale bought Naples Airlines out and hecame a dual-market carrier.
Although John Jr. and Peter spent time away from the family business after college -- John in the budget and accounting office of the Marines and Peter flirting with a banking career on the West Coast -- by 1974 they were firmly established as their father's successors. John was vicepresident of administration, Peter, assistant vice-president. Their father signed a buy/sell agreement with them both, promising to retire on January 1, 1980.
But when the day came, The Old Man had changed his mind. The post-deregulation transition was ineomplete, he said. He wanted another year. He stepped down to the post of vice-president -- naming John Jr. chairman and CEO and Peter president -- but he held 30% of the stock.
"My father was determined to call all the the shots," John Jr. remembers. "And you can hardly blame him. He founded the company. He ran it for 31 years, working seven days a week." He had reason to feel proprietary. From 2,495 passengers in 1947 the airline had grown to 314,619 passengers. By 1980 the mom-and-pop operation employed 230 people. The philosophy had stayed constant for 31 years: good service, reasonable fares, and monopoly markets.
But in the post-deregulation era the boys felt it was time to test their competitive strength. It was u philosophical difference that came to a practical head over their decision to go into the MarathonMiami market, a route served by then-booming Air Florida.
Their father was in Washington when they were approached by the Marathon Chamber of Commerce. Ocean Reef Airways Inc., operating as an Air Florida commuter line on a so-called wet lease -- a lease not just of planes but of pilots, flight crews, and all operational personnel as well -- had cut service to Marathon, Fla., to two flights a day. Traffic was down 30% in one year. But as a tourist center, Marathon depended on that traffic. So the city fathers turned to PBA for help. A visit to Marathon convinced the boys that, with stimulation, the market could be profitable for them, yielding some 40,000 ro 50,000 passengers a year. And there was a further temptation: Air Florida's terminal lease had expired, and the Marathon airport officials agreed to give the Van Arsdales exclusive rights.
Peter recalls that C. Edward Acker -- then chairman of Air Florida, now chairman of Pan Americun World Airways Inc. -- called up his office when he heard they would be competitive. Acker was pleasant, welcoming them to Marathon, Peter says, aIthough insisting "it isn't much of a market." In 20 minutes, having heard that Air Florida had been evicted from the terminal and forced to set up shop in a rented trailer, Acker called back, livid.
"It's never a very pleasant experience to get evicted, I guess," Peter says, grinning. "Ed's got a big ego. He's not used to getting kicked out on his ass."
Acker today acknowledges the Van Arsdales as "good, smart, stable operators" and "tough competition." And he is politely forgiving about the terminal switch, calling the move "misled" and saying that "even the Van Arsdale boys would admit they overstepped."
The Van Arsdales, however, remain unabashed. "It was dirty pool, sure," John admits happily. "But that's the way it's played. The losing guys are always the gentlemanly competitors. "
After 31 years of flying exclusive routes, Provincetown-Boston wus about to enter its first market war. But the family battle would come first. When the senior Van Arsdale returned to Naples from his trip to Washington, he was incensed.
"He said we were crazy," John remembers. "He demanded that we either conform with all his wishes until January 1, 1981, and stop this expansion and all the other foolishness or redeem all his stock and buy him out immediately.
"It really was a case of him or us. He felt that we were squanderers, too flashy, too eager to try new stuff. But when we said, 'we'll take option two,' I think he was secretly relieved."
Once in control, John Jr. and Peter went after Marathon with a vengeance. Air Florida had been flying two trips a day -- three trips in season. Provincetown-Boston -- now known as PBA -- would fly five. Air Florida's fare was $37. PBA's would be $27. There would be T-shirts for townspeople and a flood of ad revenue for the agents, and other airline representatives.
The first flight took off, as scheduled. 10 hours after the party ended. Then the competition began in earnest. Air Florida increased its flights to seven and cut its fare to $26, estimated by John Jr., because of the wet-lease arrangement, to be some $7 below cost. PBA cut its fare to $19. "And then," says John, "we both just stood there trying to bleed each other." Acker and the Van Arsdales battled over schedules as well, each repeatedly moving departure times a few minutes ahead of the other to come up first on travel agents' computers. Traffic at the Marathon airport soared ro 2,779 passengers in November, up 100% from the previous November, with PBA winning the competitive battle. "Air Florida had developed a poor reputation by not serving the community," Peter says. "And we were the good guys. By December, traffic was up again, to 3,691 passengers -- 2,217 of whom rode PBA. Although both airlines flew 19-passenger planes during the winter, demand scheduling gave PBA a marketing advantage: They never turned a passenger away because a flight was full. PBA also used 30-seaters "or whatever the hell we needed," recalls Peter. When spring came und traffic dropped, the mixed fleet enabled PBA to fly smaller 9-passenger Cessnas, operaring at half the competition's cost.
John Jr. and Peter were quick to put their own stamp on the airline, changing some of their futher's most cherished policies. He had bought surplus planes at a low price and depreciation, with small interest payments and tax credits, and with high maintenance and low utilization. The new generation flipped the card, adding new planes with a high purchase price and depreciation, large interest payments and tax credits, low maintenance, and high utilization. One week after their father retired, John and Peter signed for two Bandeirantes, the first turbo-props in the fleet. "Dad had gone 30 years without flying one," John jokes. "We went one week."
Their father had avoided any major debt. By the end of the year, PBA had bought two more Bandeirantes -- for $1.5 million each, with $225,000 down and 7.5% financing -- and five more Cessnas -- $225,000 each, 15% down, and 12.5% financing. There was new construction as well: the Van Arsdale memorial maintenance hanger, so called "because my father said it would be buiIt only over his dead body," John Jr. explains, and two new passenger terminals.
"We started to get in a pretty tight cash position then," John Jr. remembers. "My Dad came by in July and said, 'You're never going to make it. You'll be $2 million short.' That scared the hell out of me.
"I'll never forget December 31 of that year. I was sitting in the office writing a letter when the monthly figures came in -- I hadn't known until then that we were going to make it."
But make it they did -- profits of $1.5 million on $12.5 million total revenues.
And they would win the Marathon battle, too, aIthough it would be their longest competitive struggle. Air Florida pulled out of the Marathon market on December 1, 1981.
The PBA offices stand at the entrance to the old airport terminal in Naples, looking like a ramshackle prefab motel unit. The company logo -- a white seagull over the red letters PBA on a blue field -- is on the cloor. It hangs above a no-smoking sign, a legacy of John and Peter's days of picking up cigarette butts. Inside, the tiny paneled warrens are crowded with people and typewriters and countless towers of paper on either edge of collapse. An oil portrait of The Old Man hangs on one wall. On the other, a painted plaque proclaims the family credo: "The Lord Giveth, the Government Taketh Away."
Monday through Saturday, from nine in the morning to seven at night, the brothers are at work. Whatever else their father taught them, the value of hard work was always primary. "Dad was a classic entrepreneur, a one-man show," Peter says. The elder Van Arsdale -- who today edits the PBA newsletter -- had tried to do everything himself: planning, marketing, scheduling, even loading bags and pasting up his own ads. With expansion, however, John Jr. and Peter have had to departmentalize and delegate. Today there is a vice-president and general manager, vice-president for maintenance, vice-president for operations, and vice-president for finance, as well as a computer for payroll, maintenance, and inventory. John Jr. and Peter have divided executive responsibility by personal inclination: John likes the change of seasons, so he oversees northern operations. Peter likes the sun, so he stays south. John likes marketing, Peter finance, so John sets schedules and Peter sets fares. They handle all customer complaints personally.
Like their father, both still fly. Resort markets mean traffic and demand surges, not only in season but around weekends and holidays. Management that can grab a plane and carry a load makes it easier to meet the promise of unlimited seats.
"When I don't get called on to fly occusionally, I figure we're overstaffed," John says. "Besides, you can sit in your goddamn office each day and think everything is going well, but you've got to get out and see for yourself. Your whole life with an airline is trying to catch the screwups before they happen.
"The key to good management is to set an example that starts at the top. At PBA everybody gets their hands dirty.
"We continually stress to our employees that we're not an airline. We're u service organization. Airlines mean waiting lists and overbooking and unhelpful people. But a service organization operates for the good of the customers -- that means everyone pulling together."
The staff of 500 is considerably younger that when Van Arsdale Sr. ran the operation. Turnover is low, and promotion is from within. Motivation, John says, is easy: "Our employees see thut we're a young, aggressive, and growing company, with the opportunity for real upward mobility."
The strategy for that continued growth is hatched in John's chaotic office, with the brothers sitting on either side of the messy desk, pictures of the fleet on the wall, and John's dog dozing in the corner. "You have to change your thinking continually," Peter says. "You're lucky if a five-year plan is good for six months."
"Instead of planning we react," John agrees. "We sit back, make ourselves strong, and wait for opportunities."
One such opportunity -- and two more violations of their father's policies brought six more cities into the PBA network in 1981. In the fall of 1980, Air New England, a certificated carrier transporting close to 600,000 passengers a year, announced that it was dropping service to New Bedford, service that had a federal subsidy, a Civil Aeronautics Board program used to ensure essential service to a market. John Jr. saw the opportunity New Bedford offered. It could be a door to La Guardia International Airport in New York City and out to Martha's Vineyard and Nantucket as well; a chance to battle it out with Air New England for the lucrative vacation trade. But his father had always argued that it was "suicide" to compete with a certificated carrier and bad business to accept a government subsidy.
According to Joe Mullin, the CAB's eastern regional director, PBA had to be "enticed" to file an application for the subsidy. "John had the businessman's wariness about getting involved with the federal government," Mullin recalls. "But he changed his mind when I pointed out that if he were not the carrier, then some other carrier would be subsidized in his neck of the woods."
"We felt that there was potential in New Bedford," John Jr. remembers, "but the market was very, very soft. Our problem was that we were competing with Air New England, which was very heavily subsidized ($6.1 million in 1981) and, as a result, could take a 40-passenger plane with all the amenities and run it against my 9-passenger plane without having to watch the bottom line."
CAB subsidies are awarded on the basis of an airline's experience and available equipment, as well as how much money it requests. Not only was PBA the lowest of four bids -- $799,225 during the first year, $420,783 the second -- it could promise unlimited seats as well as service by the turbo-prop planes it had bought after John Sr's retirement. Van Arsdale's strategy was to make New Bedford a hub, "a mini Atlanta," from which he could shuttle flights to New York, Boston, Martha's Vineyard, and Nantucket. His eyes weren't only on the New Bedford business, however, but also on Air New England's passengers throughout the region.
Unlike Air New England, which used subsidies to cover operating costs, PBA put its subsidy into capital construction. "You could never compete with Air New England unless you had the facilities," John Jr. argues. "So we took our subsidy money and spent it on buildings, advertising, and maintenance facilities. "
PBA's entrance into the market was carefully planned, starting six months before service was to begin. Seventy people were hired and based in New Bedford, to make PBA the "local" carrier. Advertising started three months before the first flight. A month later, schedules appeared in the Official Airline Guide. As in Marathon, service was kicked off with a party for the media, travel agents, and city fathers.
Unlike the situation in Marathon, where PBA was invited in, the New Bedford Airport Commission had initially favored another carrier for the CAB award. Today, however, Mullin of the CAB calls PBA service "a smashing success story, which I cite throughout the region." And New Bedford Municipal Airport manager Isidore Eisner has become a PBA devotee. "This airline is fantastic," Eisner says. "It is run by professionals versus men with pencils in their ears. Air New England's service was completely undependable. And Nor East Commuter wasn't above canceling a flight if they had only two people on board."
Service began on April 26, 1981. During PBA's first nine months the company carried 13,660 passengers through New Bedford, 221% more traffic carried through New Bedford than in the similar 1980 period. That summer saw another fare war as well, with Air New England dropping its price for the lucrative New York-Nantucket flight from $79 to $53 to compete with PBA.
During the summer of 1981, however, the air controllers went out on strike. When the Professional Air Traffic Controllers Organization walked out, PBA had just taken delivery of three new planes, besides starting its New Bedford service. PBA lost $125,000 in the first week of the strike alone. For 10 days it couldn't get a slot in or out of La Guardia airport in New York City; the number of Boston flights was cut in half. "The only good thing was that it hit us hard, but it hit Air New England even harder," John Jr. says. PBA kept ns many flights in the air as possible, flying on visual flight rules out of Boston. "Air New England had the option to fly VFR, too," he says, "but they canceled their flights instead. So they had airplanes sitting on the ground and customers coming over to fly with us."
Air New England, beset with labor problems and anticipating the strike, announced in July that it was canceling its flights to Nantueket, Martha's Vineyard, and Hyannis out of New York and Boston. In October 1981 the airline ceased operation aItogether. In August 1982, Will's Air, another island competitor, filed for protection under Chapter 11 of the bankruptcy law. The market belonged to PBA. Indeed, by the end of 1982, it seemed that PBA had come full circle. Of 24 routes flown, only Miami-Key West is still competitive. There was an attack on the Naples market by Air Florida -- Acker out for revenge, the Van Arsdales say -- but it lasted only seven months. Once again, PBA flies monopoly markets.
Expansion also seems to have slowed. John Jr. expects a 20% increase in the number of passengers in the North next year but plans no new markets. AIthough the carrier had hoped to enter several northern Florida cities this winter, it was thwarted by FAA restrictions on new slots.
Having absorbed a great deal of debt to fund expansion, John Jr. and Peter now find themselves also returning to their father's policy of low debt and cash payment. PBA reports $15 million in debt, with a 4-to-1 debt/equity ratio. "And we're knocking about $500,000 off each month," John Jr. says. "Within four years we'll be debt-free again."
PBA foresees no new competition for its routes in New England. John Jr. has heard no start-up rumors. "And if they don't get started early, you can write them off," he says. In Florida, the same FAA moratorium on granting new slots that foiled PBA's expansion plans meant no one could begin competing with them in the South either. Ed Acker had made noises about starting a Pan Am feeder, but, given that carrier's troubles, the talk has died down.
"So I've got at least a year to become more entrenched," John Jr. says. "In another year, I'll be the familiar carrier in all my markets. This is a period to improve our training program, our professionalism, and our creativity. If I do a good job for people, they're not even going to think about riding the competition, if there is any. They're going to say, 'Hey, call PBA.'
"We treat all our exclusive markets as if they were competitive. And to protect those markets we're willing to go as low as we need to go. So anyone who's thinking of trying to get in had better think a long, long time.
"I used to love to play Monopoly as a kid. If you play your cards right you ean maneuver yourself into a no-lose situation. If you own Boardwalk and Park Place, sooner or later someone is going to land on your space.
"There's no monopoly in this business anymore. Anyone can come in against you. But it's still the same game."