He had a powerful selling point: Reno Air offered a higher level of service than America West did. American Airlines was in essence planning to hand off some of its West Coast customers to the substitute carrier, but it still wanted those passengers to transfer to American flights to the East Coast. So American preferred an airline that could offer a level of service that its own customers would find attractive.
"I convinced American that we were a better fit for them," Lorenzo says. "We had the same airplanes, we had the kind of service they wanted. We had the low costs. They saw we offered first class and coach, we operated on time, we had newer planes." Last May 28 American and Reno Air signed a deal in which Reno has an option to lease as many as seven of American's gates at San Jose.
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Decision #5: Build a marketing plan to distinguish the company from other low-cost competitors.
Surveys show that passengers choose airlines based largely on price and the frequency of flights. But for Lorenzo, that was not enough. Shortly after Reno Air's first plane rolled down the runway, he and Erickson started an in-house tour operation, called QQuick Escapes. Until then, tour packages to Reno offered by independent operators were expensive and were mostly for weekend travel. Lorenzo wanted QQuick Escapes to put passengers on his planes during the slow midweek period. For many vacationers the deal seems irresistible: a midweek package from Seattle runs $168 for round-trip airfare, two nights in a hotel, and airport transfers. QQuick Escapes fills about 10% of the airline's seats in and out of Reno.
Tour packages are nothing new to airlines, of course, but Lorenzo's selection of Reno as the carrier's home base, where there is little competition, made it that much easier. That is not the case in Newark, where Kiwi has found it difficult to put together tour packages to its Florida destinations. The major airlines have already wrapped up the tourist market to Orlando, a major Kiwi destination. Delta, for example, is the official carrier of Disney World, which enables it to offer special rates and tie-ins with Disney World hotels and attractions.
Lorenzo also made another wise marketing move. As part of the arrangement to lease gates from American Airlines in San Jose, he made a deal that enables Reno Air passengers to accumulate mileage in AAdvantage, American's frequent-flier program. Such programs have been the only truly successful device to increase brand loyalty in the airline industry.
Lorenzo felt that a frequent-flier program for the West Coast flights would give Reno Air a competitive advantage against Southwest Airlines and other low-cost competitors that fly some of those same routes. Reno pays American for participation in the program, which adds another cost, but Lorenzo figures he will more than get the investment back in increased market share.
"San Jose is primarily a business market," says Lorenzo. "There, the frequent-flier program is very important, because all other things being equal, businesspeople will choose the carrier that has the best program. So we came to the conclusion that the frequent-flier program was absolutely necessary in San Jose and San Francisco and other markets where we'd expand."
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Decision #6: Admit when you've made a mistake.
New airlines are fragile creatures. "A mistake on only one variable in this business," says Julius Maldutis, an airline analyst at Salomon Brothers in New York City, "can lead to catastrophic results." Lorenzo and Erickson almost made that one mistake. They announced in December 1992 that Reno Air would open a new route from Reno to Minneapolis as part of a broader strategy to connect Reno to the major metropolitan areas of the Midwest. But Minneapolis is the home of Northwest Airlines, whose reaction in defense of its turf was immediate and severe. First Northwest announced that it would fly the same Reno-to-Minneapolis route. Then it announced it would fly three additional West Coast routes in and out of Reno, in effect shadowing the new airline's route structure.
Although the government no longer regulated routes and fares, CEO Erickson decided to seek the help of the Clinton administration anyway. He called Federico PeÑa, the U.S. secretary of transportation. "We felt," says Erickson, "that they were trying to put us out of business," in violation of federal antitrust laws. PeÑa called in executives from Northwest, who quickly backed down from their threat to fly the three additional routes.
But Northwest did not back down on its promise to compete on the Reno-Minneapolis route. Lorenzo probably should have recognized an angry hornet when he saw one, but he decided to go ahead and open the new route anyway. When Reno Air initiated Reno-to-Minneapolis service, last April 1, it drove the lowest round-trip nonstop fare down to $190, from $440 previously for connecting service. But Northwest matched the fare, even though it was probably losing money at that level. Then Reno dropped its fare to $100. "When we took the fares down, traffic didn't increase," says Lorenzo. "It actually declined slightly. We were never able to expand the market, and I still don't know why."
Reno Air flew only half the passengers it needed to break even. In two months of flying, the new carrier lost about $1 million. It was either give up the route or go broke; Reno Air could not sustain the losses any longer. That was an important lesson: though Northwest was on the verge of bankruptcy at the time, it still had both the resources and the resolve to outlast Reno Air in a fare war. By quitting the route and cutting its losses when it did, Reno Air survived the kind of serious miscalculation that had grounded other carriers in the past.
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Despite the costly mistake, Reno had $531,000 in operating profits on $85.2 million in revenues for the first nine months of the calendar year, ending September 30, 1993 -- a stellar performance for a new carrier operating during a period of financial distress for the industry. By the end of the year it had 1,200 employees and 17 jets.
