Feds vetting People Express airline proposal

April 3, 2012

April 03--NEWPORT NEWS -- People Express, the new airline startup based in Newport News, recently signed operations agreements with airports in Providence, R.I, and Pittsburgh -- more are said to be on the way.

But whether the carrier ultimately gets off the ground hinges in large part on two federal agencies.

People Express is in the midst of a protracted dual application process seeking operational approval from the U.S. Department of Transportation and Federal Aviation Administration. Results are expected later this summer.

The carrier is hoping to start flights this year to a handful of East Coast cities, but significant hurdles remain, according to federal officials and information contained within the Department of Transportation application for economic authority to conduct business. The FAA is vetting the airline's ability to safely operate.

People Express President and COO Michael Morisi says the process is moving along as expected and he hopes to receive both required approvals in time to start airline operations in August.

Morisi previously said the airline secured about $5 million in investments and commitments and recently entered an agreement with a New York-based investment bank to raise additional capital. Since then, Morisi has declined to discuss financial specifics, citing a "quiet period" initiated at the bank's request.

Federal application

The Department of Transportation "Certificate of Public Convenience and Necessity" application centers on the airline's financial ability to do business and the competency of its principals. The 148-page document sheds new light on the People Express business plan and its current financial standing.

According to the document, People Express anticipates its first year operating expenses to total about $90 million. The Transportation Department requires a startup airline to have three months of operational funding available in addition to pre-operating costs. That amount totals $27.9 million for People Express, the document stated.

People Express notes in the application that the $5 million raised is an amount sufficient to cover "virtually all" of its remaining pre-launch activities. An offering of common stock is expected before the start of operations. People Express projects it could generate $45 million, according to its federal application. That would leave the airline with a working capital surplus of more than $22 million, according to the airline's financing plan.

People Express has signed a "Term Sheet" to purchase a fleet of 12 Boeing 737-400 airplanes in addition to spare parts, a tool inventory and flight simulator. Delivery of the aircraft will be staggered through the first two years of operation, with up to eight planes in operation during the first year, but the deal has not been finalized, the application narrative stated.

Fares and headquarters

People Express plans to use a three-tiered pricing structure featuring, the application states:

-- capacity-controlled deep discount fares that are, on average, 60 percent to 70 percent below the current fare level in each market

-- everyday low fares representing a 40 percent to 50 percent discount

-- A business fare that will represent a 30 percent to 40 percent discount.

Morisi has said the airline intends to utilize a large ramp area behind its Newport News headquarters in the airport's old terminal to store and maintain its fleet of aircraft.

The U.S. Department of Transportation application also notes the airport "and one of its other non-airline tenants are in the process of building a hangar on the field for B737 aircraft." People Express plans to enter an agreement to use the hangar when its planes need to be under roof for maintenance, according to the document.

In an attached letter to Morisi, Ken Spirito, executive director of the Newport News-Williamsburg International Airport, wrote -- prior to the airline's February announcement -- that he authorized more than $150,000 of improvements to the nearly 15,000 square foot office space People Express now occupies in the old terminal. In March, Spirito confirmed the airport waived the first year of rent that runs $5.25 per square foot. The airport has also waived landing and terminal counter fees for one year.

Maintaining safety

While discussing the FAA certification process in general terms, administration spokeswoman Alison Duquette noted the "romantic" image many people have about starting an airline.

"It's a very difficult business," she said.

In order to secure FAA certification, airlines must demonstrate they can meet all of the administration's safety standards. The airline must prove the "air worthiness" of their aircraft and everything contained within. The same goes for pilots, flight crews and dispatchers, she said. In addition, comprehensive manuals have to be in place providing specifics on how the airline will conduct business and operations specifications must meet strict FAA standards, she said.

"Each carrier, depending on their routes and aircraft will vary. Each one tells us how they will do business from a safety perspective," Duquette said. "The guiding manuals, though, are the lion's share of the work done (in the application). Every single thing on the airplane has to meet (FAA) standards."

Economic fitness

While the FAA is concerned with safe operations, the Transportation Department wants to ensure the airline startup has a solid fiscal plan.

Bill Moseley, a department spokesman, said the department is concerned with "economic fitness." That includes ensuring the airline has adequate funding and competent, experienced management and is controlled by U.S. citizens. No more than 25 percent of voting stock can be owned by non-citizens.

Moseley said the duration of the process depends on what, if any, issues are raised. "It can be very quick, or very protracted," he said.

Even though the industry climate isn't exactly conducive to starting a new airline these days, Moseley says the department still receives applications, albeit less than during the industry's now-past hey day.

"They come in fits and starts," he said.

People Express

The startup airline was announced in mid-February and is currently being vetted by federal agencies. Airline officials hope to start flights by late August to a handful of East Coast cities including Pittsburgh, Newark, Providence, R.I., Orlando and West Palm Beach, Fla.

Copyright 2012 - Daily Press, Newport News, Va.