Airline Entrepreneur:
Starting and Operating an Airline

The context:

The context for this topic is semi-factual, semi-hypothetical, and completely realistic.

The factual elements are those that concern the Oxnard Airport. The hypothetical elements are those that concern your “clients.” The topic is entirely realistic, because what your clients plan to do is being done already, apparently with success, by three other companies – one in Farmingdale, New York (on Long Island), another in Lawrenceville, Georgia (a suburb of Atlanta), and the third in Gaithersburg, Maryland (near Washington, D.C.). Your clients want to do it in Oxnard, California. The “it” that your clients want to do is start an air taxi service – referred to by some as an “air limo” or “air charter” company – based at the Oxnard Airport.

Oxnard Airport

Oxnard is an ocean-front city, some 60 miles northwest of downtown Los Angeles. The Oxnard Airport is owned and operated by Ventura County. The FAA has classified the airport as a “primary commercial service airport” – the top classification – because it has more than 10,000 passenger boardings a year (or did at the time it was classified).

Indeed, as recently as 2001, the Oxnard Airport boarded almost 35,000 passengers a year, and thus was well above the floor for its “primary commercial service” classification. However, 2001 was the airport’s “highwater mark” (at least in this century), insofar as passenger boardings is concerned. By 2008, the number of boardings at the Oxnard Airport had dropped to just over 16,000; and in 2009, it dropped below 12,000.

Boarding statistics for 2010 are not yet readily available, but the number certainly shrank even further, probably quite dramatically, because in June 2010, United Express – which had been providing scheduled service between Oxnard Airport and Los Angeles International Airport (LAX) – cancelled that service, saying it was “not economically feasible.” That left Oxnard and the rest of Ventura County without any commercial air service at all, because United Express was the only airline doing business out of Oxnard Airport. (American Eagle, which once offered scheduled flights into and out of Oxnard, suspended its service in 1996.)

United Express’ exit from Oxnard must have been a huge disappointment for Ventura County, perhaps even an actual shock. Not long before, the county’s Director of Airports had made a excellent, data-laden presentation to the airline, explaining why it ought to offer flights to San Francisco and Denver as well as to LAX.

At about the same time (though perhaps in the wake of United Express’ decision to leave Oxnard) the Airport Director also tried to pursuade

  • Branson Air Express to offer service from Oxnard to Las Vegas, Los Angeles, Portland, Sacramento, Salt Lake City, San Francisco, San Jose and Seattle
  • California Pacific Airlines to offer service to Las Vegas, Los Angeles, Portland, Sacramento, San Francisco, San Jose and Seattle
  • Delta Connection to offer service to Salt Lake City
  • Frontier Airlines to offer service to Denver
  • Horizon Air to offer service to Las Vegas, Portland, Sacramento, San Jose and Seattle
  • SkyWest to offer service to Las Vegas, Los Angeles, Sacramento, Salt Lake City, San Francisco and San Jose, and
  • US Airways to offer service to Phoenix.

All of those presentations, like the one to United Express, were excellent and data-laden. But none was successful. Commercial air service still isn’t available to or from Oxnard Airport. As a result, Ventura County residents who wish to fly anywhere have to drive 67 miles to LAX – a trip that takes (according to Google Maps) more than an hour on those rare occasions when there is no traffic, and as much as two and a half hours when there is traffic, as there often is.

Your clients and their plans

Your clients are Eric, Fran and George. They want to start a company called “Jubilation Air.” In the beginning, it will be an Oxnard-based “air limo” business. Eventually, though, your clients hope to grow Jubilation Air into a full-fledged regional airline, like Colgan Air and SkyWest.

Eric is a professional pilot and a resident of Oxnard. He flew for United Express, until the airline shut down its Oxnard operations in June 2010. United Express offered him continued employment based in San Francisco. But Eric was unwilling to relocate. His wife is a partner in an Oxnard law firm. Their children are happily-enrolled in the Oxnard school system. And commuting to San Francisco is no longer possible. Rather than leave Oxnard, Frank became a Cirrus Standardized Instructor Pilot. Most of his students have Private Pilot certificates and have just purchased a Cirrus, so they need “transition training.” Eric usually does transition training at the airport where his students keep their planes. But transition training for an experienced pilot is generally done in just eight lessons, so he needs to be away from home for only a week or two at a time.

Fran is an independent manufacturer’s representative. She has her own business; she is not an employee of the manufacturing company whose products she sells. She operates her business as a sole proprietorship; she receives a commission for sales she actually makes; she pays all of her own expenses; and at tax time, she reports her commission income and business expenses on a Schedule C to her personal Form 1040 income tax return. Fran also lives in Oxnard, and when she first started her business, her sales territory was simply Ventura County – an area she easily covered by car.

Fran is a very successful sales rep, and in January 2010, her territory was expanded to include all of California, Nevada and Arizona. Covering that big an area by car kept her away from home three weeks a month, and it exhausted her. It also provided her with a huge income. By mid-September 2010, Fran calculated that she was on her way to having a couple of million dollars in taxable income for that year, but no time to spend it. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 provided Fran with a solution to her dilemma. It gave taxpayers a “bonus depreciation” deduction equal to 100% of the cost of new business-use airplanes (and other capital assets) purchased after September 8, 2010.

Thus encouraged by Congress and the President, Fran immediately bought an airplane to use for her business travel. And not just any airplane, either. Fran bought an exquisite, top-of-the-line Cirrus SR22T GTS, fully equipped with every bell and whistle that Cirrus has to offer. The plane cost $689,900. But it gave her a $689,900 tax deduction for 2010, which saved her $241,465 in federal income taxes and another $14,212 in California income taxes (California doesn’t have “bonus depreciation”). So, “out of pocket,” the Cirrus actually cost her only $434,223 – or, to put it another way, the federal government and the state of California “reimbursed” her for more than 37% of the plane’s cost, the first year she owned it. A bargain too good to pass up? You betcha!

Fran was not a pilot when she bought the Cirrus. Indeed, the only time she’d ever spent in a plane – other than a Boeing or Airbus, on a commercial flight – was the hour she spent in a Cirrus with the Cirrus sales rep. That, however, was not a problem, because Cirrus has a program for customers just like Fran – people who want to learn how to fly, at the same time they use their newly-purchased planes for business travel. Called Cirrus Access, the program pairs new plane-owners with a Cirrus Standardized Instructor Pilot, so plane owners can learn to fly even as they take care of business. That’s how Fran and Eric met. He was her flight instructor. It took her a few months to get her Private Pilot certificate. But that was fine with Eric, because he was able to live at home while he instructed her.

Fran was easily able to cover her entire territory in her Cirrus, and her sales continued to increase. As a result, in January 2011, the company whose products she sells increased her territory again, this time making her the company’s rep for the entire country. Fran’s Cirrus could take her from coast to coast. (James Fallows did it in an older model Cirrus, and wrote a chapter about it in his book Free Flight: Inventing the Future of Travel.) Alas, even Cirrus-lovers will admit that flying coast-to-coast in a Cirrus is an adventure, not transportation. So as much as it pained Fran to do so, she parked her plane in a hanger and bought a Marquis Jet Card from NetJets; and now, most of the time, she travels for business on a Cessna Citation jet.

George is a wealthy real estate developer and investor. His portfolio consists of hotels, office buildings and industrial parks in Ventura County. He was a frequent flyer on United Express flights between Oxnard and LAX, which is how he and Eric first met. George was deeply disappointed when the airline pulled out of the Oxnard Airport. Some people think a city is not really a “city” unless it has a professional sports team. George never had any illusions about Oxnard getting a pro team, even though Oxnard has a population of 200,000, while Green Bay, Wisconsin (home of the NFL’s Green Bay Packers) has a population of just 150,000. But George believes that a city is not really a “city” unless it has commercial air service – at least to some airline’s “hub” city. For this reason, George feels that it’s his civic duty to bring airline service back to Oxnard.

In February 2011, George invited Eric to lunch, to find out what Eric knew about starting or buying an airline. Eric knows quite a bit about the economics of the airline business, and what he knows was not encouraging – not, at least, in the current economic environment. On the other hand, Eric wondered whether things might be more promising in the charter business. Knowing that Fran was by then an air charter customer, he invited her to the lunch to find out what she had learned about jet charters. Because of her own business experience, Fran is a proponent of starting small and affordably, and growing as success permits. Also, Fran has a Cirrus SR22T GTS sitting in a hanger, virtually unused. And she knew that her Cirrus could, as a practical matter, get to and from LAX as fast as any jet. She therefore proposed that the three of them start an air limo business, using her Cirrus as its first plane. More planes – maybe even a new Cirrus jet when they become available – could be added later, as their business grew.

Fran’s idea was greeted with enthusiasm by Eric and George. Immediately after the lunch, Eric did some preliminary research and discovered that three companies already offer air limo service using Cirrus planes like Fran’s, but none of them do business in California or anywhere on the west coast:

  • Hopscotch Air is a Delaware corporation based on Long Island that provides service in the northeast.
  • Imagine Air is a Georgia Limited Liability Company based near Atlanta that provides service in the southeast. And
  • OpenAir is the trade name for K and R Aviation, a Limited Liability Company based near Washington, D.C., that provides service in an area that it’s website describes as “Central, Eastern and Southern United States,” but no further west than east Texas.

Eric also confirmed that Fran’s Cirrus can fly non-stop from Oxnard to all of the destinations – Seattle and Denver included – that the Oxnard Airport Director identified in his unsuccessful efforts to lure commercial airlines to Oxnard.

With this information in hand, Eric, Fran and George agreed to form a company, of which each of them would own a third. Eric would contribute his services as a pilot. Fran would contribute her Cirrus, which now has a fair market value of $650,000. And George would contribute $650,000 in cash.

They have come to you for advice on what they have to do to make Jubilation Air a reality.

The legal issues:

By the time we finish studying this topic, you should be able to answer questions like these:

  • What type of entity should your clients form for the company? (A corporation? A subchapter S corporation? A limited liability company?)
  • The company will have to sign a lease for office, check-in and hanger space at the Oxnard Airport. Are the lease terms being offered by Ventura County acceptable?
  • What certification will the company need in order to operate an air taxi service, and from which government agencies will it get it?
  • What will the company have to show, in order to get the certification it needs?
  • May the company offer scheduled flights under the certification it will obtain, because it will be using a Cirrus SR22 which has fewer than 9 seats, or will it be limited to offering flights to destinations and at times requested by customers?
  • May the company advertise or post online the availability of “empty legs,” or empty seats on flights that are scheduled by the company’s customers?
  • Are there any legal or tax factors the company should take into account in deciding whether to charge extra for luggage, or whether to include luggage in the price of passenger transportation?

Some resources:

Airport lease

Ventura County, Department of Airports

Sample Lease

Rent and Fee Schedule

Required Minimum Standards for Aeronautical Services for Ventura County Airports

Transportation Research Board

Airport/Airline Agreements – Practices and Characteristics

Guidebook for Developing and Managing Airport Contracts

Survey of Minimum Standards: Commercial Aeronautical Activities at Airports

 Air Taxi/Air Charter Certification

DOT, How to Become a Certificated Air Carrier

FAA, Certification Information for Operating Under Part 135

Scheduled flights, empty legs, empty seats

FAA Opinion Letter to Jet Linx Aviation

FAA Opinion Letter to Premier Jet

Patent Application for Charter Flight Scheduling

Luggage fees

IRS Private Letter Ruling

[Updated 4/6/2011]