Comair Holdings Inc.

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Comair Holdings Inc.

P.O. Box 75201
Cincinnati, Ohio 45275
U.S.A.
(513) 525-2550
Fax: (513) 525-3716

Public Company
Incorporated: 1977
Employees: 2,200
Sales: $297 million
Stock Exchanges: NASDAQ
SICs: 4512 Air Transportation, Scheduled; 6719 Holding Companies, Not Elsewhere Classified; 8249 Vocational Schools, Not Elsewhere Classified

Comair Holdings Inc. is the parent firm of subsidiary Comair Inc., a regional airline which makes up 96 percent of the company’s business. Through a partnership with Delta Airlines, Comair Inc. provides connecting flights between 78 cities in 27 states. In addition to its U.S. flights, Comair provides service to the Bahamas and Canada. Comair Holdings also oversees the operations of several other subsidiaries, including Comair Aviation Academy Inc. (a flight training service), Comair Investment Co., Comair Services Inc. (a noncommercial charter service), and CVG Aviation Inc. (which owns and operates the airline’s hub at the Cincinnati/Northern Kentucky International Airport).

Comair was established in Cincinnati in April 1977 by the father and son team of Raymond and David Mueller. A couple of years earlier, David Mueller had been working as a corporate pilot for a Cincinnati bank, when he first observed the inadequacy of flight service in the area. He and his father decided to found a company that would provide higher frequency flights between cities lacking efficient, reliable air service. Raymond Mueller was the company’s first president and David Mueller, aged 25, was the executive vice-president.

From their base at the Greater Cincinnati International Airport, David Mueller also served as pilot, reservationist, and baggage clerk at the fledgling company. With a fleet of three Piper-Navajo aircraft, the company’s first scheduled flights offered transportation between Cincinnati, Cleveland, Detroit, and Akron-Canton, all within a 500-mile radius. As the company grew, larger nine passenger Piper-Chieftain aircraft were added to the fleet.

The company had only been in business for two years when tragedy struck. In 1979, a Comair plane crashed at the Greater Cincinnati International Airport, killing eight people. The settlements and fines cost Comair approximately $500,000. Moreover, the company garnered considerable negative national publicity, as increasing numbers of Americans began to question the safety of the smaller planes used by regional airlines. In 1980, the company reported an earnings loss and faced what the younger Mueller would later refer to as “the company’s darkest moment.”

Describing the company’s plans to overcome the setback, in a March 1984 interview in The Cincinnati Post, Mueller asserted that he and his father “decided to bet the family jewels” on their ability to turn Comair around, noting that they eventually were just “plain lucky.” Specifically, Comair focused on keeping costs low, increasing the frequency of flights to selected cities, and providing comfortable seating in planes carrying 50 or fewer travellers. The strategy paid off. Comair not only overcame the crash, but also secured a solid place among regional air carriers in the Midwest. The company also benefited from the deregulation of the airline industry in the early 1980s. As the major airlines dropped unprofitable routes in the face of intensified competition, Comair and other regional fliers were quick to fill the gap in service.

In 1981, Comair began a major enhancement program, upgrading its fleet with more modern turbo-prop aircraft and doubling the size of its fleet with the addition of ten Brazilian-made Embraer Bandeirante twin-engine airplanes. The following year, Comair added SB3-30s to its fleet; with a capacity of 30 passengers, these were the first Comair aircraft to feature flight attendants, lavatories, and in-flight food and beverage service. With plans for a $1 million expansion of its home base, Comair was taken public in 1981, trading on the NASDAQ National Market System for the first time in July of that year.

With continued investments in new aircraft, Comair was able to increase the frequency of its flights. While most regional airlines were focusing on hooking up passengers with major airline flights, 70 percent of Comair’s passengers (the vast majority of which were business people) were reaching their final destination on Comair. Although this meant that the smaller Comair was competing directly with industry giants, Comair had the advantage of offering more frequent flights.

Nevertheless, Comair recognized the value of linking its service to that of the major airlines and in December 1981 began its relationship with Delta Air Lines, becoming part of the Delta-matic computerized reservation system. Within three years, Delta and Comair had entered into a marketing agreement under which Comair became an official Delta Connection carrier. Comair’s Cincinnati departures were thereafter coordinated to help customers catch Delta flights at other airports in 15 cities located in seven states. With the expansion of Delta Airline’s Cincinnati operations and the growth of the Greater Cincinnati area, the two companies oversaw more than 100 daily departures from the Cincinnati Airport in 1984.

Comair’s fleet at this time consisted of approximately 21 jet-prop aircraft, having been augmented by the September 1984 addition of a Saab-Fairchild 340 airliner, the first airplane designed specifically for regional service. Designed through a joint venture between manufacturers Fairchild Industries and Saab-Scania AB, this craft could travel at faster speeds and offered increased passenger comfort, and Comair had soon ordered 12 more of the same model. Such growth prompted the company to expand its facilities at the Cincinnati Airport with the construction of a $1.8 million corporate office building as well as a new hangar.

Remarking on the success of Comair’s relationship with Delta in a December 1984 Cincinnati Enquirer article, Charles Cur-ran, Comair’s senior vice-president for marketing, noted that since becoming the Delta Connection, Comair had tripled its business. The following year found Comair reporting considerable increases in all areas used by the industry to measure an airline’s vitality.

Indeed, in a 12-month period beginning in August 1984, the company increased the number of passengers it flew from the Cincinnati Airport by 200 percent, making Comair the airport’s busiest airline, with more daily departures (93) than any other airline. Moreover, the company ranked second only to Delta at the airport for the number of passengers carried. During this time, the company served 23 markets from Cincinnati and flew as far north as Toronto, as far east as Richmond, Virginia, and as far south as Chattanooga, Tennessee. Comair ranked seventh in size among national regional carriers.

Because the airline now carried a wider variety of passengers seeking connections with Delta flights, rather than Cincinnati-based business travelers only, it began to broaden its scope in the mid-1980s. Tapping Delta’s diverse customer base, Comair eventually expanded its services to include limited weekend flights, as well as flights to tourist destinations and smaller cities of as few as 150,000 people.

A series of unfortunate events, however, contributed to Corn-air’s first quarterly loss as a public company in March 1986. One factor in this loss was a March 10th tornado that hit two Comair hangars, severely damaging four planes and the airline’s offices. Although the loss was insured, business for March was disrupted while repairs were made; March was usually the company’s busiest month of the quarter. In addition, in December 1985, the Federal Aviation Administration (FAA) grounded all ten of Comair’s Saab-Fairchild 340s, citing problems with their twin turbo prop engines that could cause the planes to catch fire in icy weather. In order for the 340s to resume flying, they had to be fitted with a system for continuous engine ignition, and this was not completed at Comair until January 5. A final factor in the company’s depressed earnings, one that industry analysts regarded as perhaps the most crucial, was that Comair had operated with excess seating capacity over the year. Preparing for a proposed expansion of Delta’s flight service from Cincinnati, Comair had purchased several new planes and was having a hard time filling seats as it waited for Delta to complete the expansion project.

Delta’s expanded hub did materialize the following year, and the two companies were soon overseeing over 125 Cincinnati departures daily. Moreover, the company’s fortunes brightened in the second period of 1986, when the company was able to battle fierce fare competitions by reducing unit costs per available seat-mile to under 17 cents for the first time in history. Despite the early quarterly loss, Comair showed a profit for the 1986 fiscal year. Charles Curran reminded the public, in a September 1986 Cincinnati Post article, that Comair had “never had an unprofitable year since [its] inception on April 1, 1977.”

In May 1986, Comair issued 1.85 million new shares of common stock to Delta, generating $16.9 million for Comair. Delta thus emerged with a 20 percent interest in the regional airline and a new seat on Comair’s board of directors. Commenting on the transaction in the Cincinnati Post, a Delta official stated that the company had made the investment “to solidify and enhance the Delta Connection program in which the two companies have successfully engaged the past two years.” Comair used the increase in capital to replace its lost hangars and office, and to continue upgrading its fleet of 37 aircraft. By July 1987, Comair was flying to 29 cities and had plans to add other locations at a rate of four or five per year.

During this time, Comair began flying to Florida at the request of Delta, which had recently become the official airline for Disney World in Orlando and needed the regional carrier to feed its airliners bound for larger cities. Comair joined with Delta to open hubs in Orlando and Ft. Lauderdale, and its success was immediate; the Florida market was profitable by the fifth month of operation. The number of daily Florida flights steadily increased until the figure rivaled that reported at the home base of Cincinnati.

Not surprisingly, David Mueller, who had replaced his father as company president, announced at the company’s September 1988 annual shareholder meeting that Comair would be looking for “any and all aviation related business in which we can be successful.” Preparing for acquisitions, Comair Inc. was soon reorganized into a subsidiary of a new Kentucky parent firm, Comair Holdings Inc. The regional airline, along with CVG Aviation, a jet charter service concern that provided services for non-commercial planes at the Cincinnati Airport, were both now subsidiaries of the new Comair Holdings. Eventual acquisitions included a flight training company, an investment company, and an aircraft leasing company.

Comair’s flight service was expanded to include routes between Cincinnati and Chicago’s Midway Airport as well as routes between Florida and the Bahamas. And, as Delta announced plans in 1990 for a $319 million expansion, Comair officials expected to almost double the company’s operations over the next few years. Comair placed orders for more than 100 planes, 60 of which were Brazilian jets that would enable Comair to more than double its flying radius from its current hubs. Comair also set its sights on moving from its one-gate operation to a separate facility with a minimum of 25 to 30 gates.

In October 1990, David A. Siebenburgen succeeded David Mueller as president of Comair Holdings Inc. Siebenburgen remained in his previous capacity as chief operating officer as well, while Mueller retained his roles as chairman and chief executive officer. Over the next two years, Comair focused on adding flights both in frequency and to new locations. By 1991, Comair’s aircraft fleet had grown to 75, including five new 340s for the Cincinnati market and 20 Embraer Brasilias for the Florida market. Naturally, the company’s work force grew in accordance, surpassing 2,000 by the spring of 1990. In spring of 1992, Comair began seasonal flights to vacation sites such as Myrtle Beach.

In April 1992, American Airlines announced rate changes that would affect the entire airline industry. While American simplified and lowered their fares, other major airlines moved to match these rates, hoping that increased passenger volume would offset losses from lower fares. While some industry analysts warned that the regional airlines affiliated with major airlines would suffer from the fare war, Comair was nevertheless able to utilize cost containment strategies to come out ahead. In addition, one company official stated in a May 1992 Cincinnati Business Courier that “a major financial blow to Delta would not necessarily have an equal impact on Comair. Unlike other regional carriers that are totally dependent on a major airline, Comair connects only 45 to 50 percent of its business with Delta. And the break-even load factor—the percentage of seats that must be sold for a flight to break even—is 39 percent for Comair vs. about 70 percent for major carriers.” Indeed, in the early 1990s, while the major airlines reported a collective loss of $10 billion, Comair was one of the few airlines to remain profitable. Comair’s combination of good planning for future growth and a tight rein on costs had once again seen it through a rough time.

In the spring of 1993, Comair announced the acquisition of its first 50-passenger Canadair jet. Known as the world’s quietest jet airplane, the Canadair had a top cruising speed of 530 miles per hour, and it’s range was 1,500 miles—three times the range of Comair’s then-current fleet and well beyond the typical two-hour flight limit of most regional airlines with turboprops. Comair ordered 20 of these jets and planned to enter markets in 36 new cities through 1995.

On September 3, 1994, Comair began leasing and operating from a new $50 million terminal built by the Greater Cincinnati International Airport. With 53 gates, the 170,000 square-foot facility enabled Comair to double its passenger capacity. Amenities in the terminal included automated teller machines, a combination newsstand and gift shop, and a food court, with McDonald’s, PizzaHut Express, and other fast-food restaurants commonly found in larger airline terminals, but not as prevalent in a regional airline terminal. Another unique item was the “Kid’s Corner,” a space filled with large, bright plastic toys and a play yard for children.

Commuter airlines began a shaky few months in October 1994, when an American Eagle plane crashed in Indiana. As Federal regulators investigated the matter, suggesting that commuter airline restrictions and safety regulations were perhaps inadequate, the public lost some confidence in their commuter flights. In addition, Comair felt specific pressure from new cost-cutting measures implemented by the major airlines and new low fare competition. As a result, Comair’s stock fell to $17 a share in December of that year, down from a high of $34.50 in late 1993.

Referring to the volatility of Comair’s stock price, in an August 1994 article in the Cincinnati Enquirer, CEO Mueller suggested to shareholders that Comair was being unfairly associated with other commuter air link-ups. “While the carrier continues to make money, investors lump Comair together with other re-gional airlines—even those that haven’t performed as well,” he noted.

Comair sustained the bad publicity generated by the American Eagle crash; in 1994 the company reported record revenues of $297 million, posted record profits of $28.5 million and carried a record 2.7 million passengers over the course of the year. Moreover, Comair’s expansion continued. In January 1995, the company reached an agreement with Canada’s Bombardier Inc. to acquire five more Canadair Jet aircraft, with conditional orders and available options to purchase 35 more. Once a formal purchase agreement was completed, delivery was expected to continue through fiscal 1999. Fulfillment of the order would give Comair 70 Canadair jets, which would help the company continue to enhance its Cincinnati and Orlando hubs.