SkyMall, Inc.

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SkyMall, Inc.

1520 E. Pima Street
Phoenix, Arizona 85034
U.S.A.
(602) 254-9777
Fax: (602) 254-6075
Web site: http://www.skymall.com

Public Company
Incorporated: 1989
Employees: 200
Sales: $60.8 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: SKYM
SICs: 5961 Mail Order Houses; 2741 Miscellaneous Publishing

SkyMall, Inc. is the largest in-flight catalog company in the United States, offering its “SkyMall” catalog on most U.S. domestic passenger air carriers. On United Airlines flights, the catalog is called “High Street Emporium”; on US Airways (USAir), it is known as “Selections.” Headquartered on seven acres of property in Phoenix, Arizona, the company makes products and services available to more than 400 million airline passengers per year, marketing and selling a broad selection of premium merchandise provided by participating merchants. The merchandise of each participating merchant is presented in a separate section of the SkyMall catalog to allow browsing from “store to store,” providing the convenience and variety of an upscale shopping mall environment. The company produces four catalogs per year, with the fourth quarter holiday issue being the largest. The company operates a toll free telephone order center, with 24-hour-per-day coverage, taking between 2,000 and 6,000 calls per day, including those made from airplanes on air-to-ground phones.

Some of the major air carriers partnering with SkyMall Inc. have included Alaska Airlines, Aloha Airlines, America West Airlines, Continental Airlines, Delta Air Lines, Frontier Airlines, Hawaiian Airlines, Horizon Air, Midway Airlines, Reno Air, Skywest/Delta Connection, Southwest Airlines, Sun Country, Trans World Airlines Inc. (TWA), United, and USAir.

Dream Investors: 1989-90

The idea for SkyMall Inc. was formulated in 1989 by Robert M. Worsley, a former accountant with Big Six firm Price Waterhouse LLP. According to a 1996 article in Forbes, Worsley, who went on to become the president and chief executive officer, “got the idea for SkyMall on a flight from Seattle to Phoenix back in 1989. Paging through the Giftmaster Inc. (a tiny subsidiary of Minneapolis-based Carlson Companies Inc.) catalog from the airline seat pocket, he was startled by its poor merchandise.”

Figuring he could offer better products, Worsley approached companies like The Sharper Image and Land’s End and offered to carry their products. They agreed. Worsley incorporated SkyMall Inc. in Arizona and began mailing out his 100-page business plan to 50 venture capitalists and individual investors. In February 1990, WordPerfect co-creator Alan Ashton agreed to help finance the company, pitching in $250,000. Worsley and two other investors each invested $25,000 in the fledgling company.

Worsley spent nearly $3 million in his start-up phase, buying a 21,000-square-foot warehouse in Phoenix, Arizona and installing state-of-the-art technology such as NeXT personal computers and Sun Microsystems servers, at the adjacent customer service center. The first catalog, distributed on Eastern Airlines in 1990, carried products from Bits & Pieces, Hammacher Schlemmer, The Nature Company, Spiegel, and The Wine Enthusiast, which were purchased by SkyMall at a 35 percent discount, so that the company might match the prices featured in the individual merchant’s catalogs and the products were stocked in the warehouse in Phoenix. Revenues for 1990 were a mere $200,000.

Going Down in Flames: 1991-94

By February 1991 the company’s catalogs were being carried on TWA, and Continental Airlines added the catalogs in April. July was a boom month for SkyMall, with Alaska, Atlantic Southeast, Delta, Horizon, SkyWest, and USAir all starting to carry the company’s catalogs. The air carriers were paid a percentage of sales. The early catalogs averaged between 60 to 80 pages, but the extra weight of all that paper forced SkyMall to cover the airlines’ extra fuel costs for carrying the catalogs when the commissions fell short.

That year, Worsley got a call from Carlson’s senior vice-president, Walter Erickson, inquiring if SkyMall would be interested in purchasing Giftmaster, which was bringing in some $6 million in annual sales and was barely breaking even. Ashton and Worsley bought the competition for a few million dollars, moving its operations to SkyMall’s Phoenix headquarters and slowly replacing the Giftmaster catalogs with SkyMall catalogs.

Worsley’s original intent was to deliver goods, such as dress shirts and ties, to customers who shopped midflight when they arrived at their destination airport, similar to pizza delivery. Unfortunately, most of his customers preferred to have their purchases delivered to their homes, leaving SkyMall holding expensive inventory and no delivery system. Losses mounted. In December 1991, Worsley begam experiencing chest pain and passed out in his kitchen and was carried out of the SkyMall Christmas party on a stretcher. Diagnosed with stress, doctors ordered him to cut back on work, but he took off weekends only, opening airport delivery services in Atlanta, Chicago, Dallas, Denver, Los Angeles, and San Francisco to try to unload excess inventory. Total revenue for 1991 reached $5.4 million, but the company was losing a half-million dollars per month.

By early 1992 SkyMall dominated the U.S. domestic in-flight industry. United joined the bandwagon in June and, that November, the company signed an agreement with Toronto-based TMS Marketing that brought its catalogs to Air Canada’s flights. But that year the company posted a net loss of $9.6 million on total revenue of $16.1 million; in 1993 another $5.8 million loss on $27.1 million in revenue was posted.

Ashton and another investor poured $25 million into the company to keep it afloat. Worsley desperately tried to make a profit for the company, selling his own inventory backlog in the company’s catalogs. However, fate seemed to be conspiring against the hardworking entrepreneur. By the end of 1993 the company’s computer system was misplacing orders and miscounting inventory; 20 trailers sat in the Phoenix parking lot, crammed to the ceiling with products; more than 400 creditors were owed approximately $9 million; First Boston canceled its planned initial public offering (IPO) of SkyMall stock; a Baby Bell company backed out of buying the sinking ship; and Ashton finally refused Worsley the $6 million more the beleaguered CEO requested. Desperate, the SkyMall CEO locked himself in his office for three straight days and came up with the plan to save his dying company: SkyMall would stop carrying inventory and begin having it shipped directly from the merchants to the customers, significantly decreasing the company’s operating expenses. In addition, the company would begin charging merchants $20,500 per page to appear in the SkyMall catalog.

Ashton liked the idea, but was not going to invest another dime in the company. So SkyMall employees, including Worsley and his family, began calling the company’s creditors one at a time to discuss reduced payment schedules. The airport stores were closed; Hammacher Schlemmer, SkyMall’s biggest catalog customer, helped by buying $1 million of SkyMall inventory, and the rest was liquidated; and Worsley called in OrderTrust to capture customer orders from SkyMall’s ordering system and route them directly to merchants’ fulfillment systems.

Turnaround: 1994

Although the company would post in fiscal 1994 a $12.2 million loss on total revenues of $30.3 million, slowly things started to turn around as the company implemented Worsley’s new plan. During 1994, Amtrak began carrying the company’s catalog on selected train routes. February brought America West into the SkyMall repertoire; Midway came on board in June; and that July, Hawaiian Airlines added SkyMall’s 136-page catalogs to its flights from the mainland to Hawaii and on inter-island flights. By September, SkyMall had dropped all of its airport delivery segment.

Clear Skies: 1995-Date

Growth continued in 1995, with Sun Country adding the catalogs to its flights in January and Frontier adding the catalogs in September. Revenues for the year reached $43.1 million and, for the first time in many years, the company posted a net income of a modest $758,000.

In 1996 the company was reincorporated in Nevada. Southwest Airlines added the company’s catalogs to its flights beginning in July. SkyMall acquired the Internet service company GiftOne in November of that year, gaining the capability to help customers manage gift-giving by sending e-mail reminders of family events and gift suggestions based on profiles of gift recipients provided by the shopper. The catalog grew to an average 148 pages. Following a test run of catalogs on Japan Air Lines (JAL) during the year, the company entered the international market, releasing a Japanese-language edition on United flights. Finally, in December 1996, the company completed its IPO, selling two million shares and bringing in approximately $14 million. Total revenue for the year reached $43.7 million, with a net income of an impressive $2.2 million. Worsley breathed a sigh of relief for the first time in a long while.

Company Perspectives:

SkyMall, the largest in-flight catalog company in the United States, makes high-quality products and services available to more than 400 million airline passengers per year. The Company markets and sells premium merchandise from participating merchants, including major catalog companies and specialty retailers such as Brookstone, Frontgate, Hammacher Schlemmer, The Sharper Image and the Wine Enthusiast.

Following a busy 1996 holiday season, the company used some of the IPO influx of cash to expand its call center, building a 15,000-square-foot service center, formerly a warehouse area. The company also rebuilt existing offices on the company’s campus in the Sky Harbor park and redesigned exterior space for parking and employee recreation. The upgraded facility held 211 sales and customer service agents. Additional room to grow still existed, as the company also owned an adjacent 12,000-square-foot shopping center that it rented out to a Payless ShoeSource store and other retailers, as well as 4.5 acres of vacant land.

In mid-1997 the company entered the “e.commerce” arena, launching in partnership with MCI Communications Corp., Or-derTrust LLP, and LitleNet, an interactive shopping system on its own World Wide Web site (www.skymall.com). When “virtual malls” were first launched on the Internet, they did not fare so well. Notable early failures included MecklerWeb from Mecklermedia Corp. and another site by The Internet Shopping Network, a subsidiary of Home Shopping Network, Inc. in 1994, and MCFs MarketplaceMCI and IBM’s World Avenue in 1995. Some virtual malls, such as IMall Inc.’s IMall and Time Warner Inc.’s DreamShop, managed to struggle along, but the prospects for virtual malls looked bleak at the start. Major competition for SkyMall’s business partner LitleNet included CyberSource Corp., as well as package shipping giants Federal Express Corp. and DHL Systems Inc., who helped companies manage the logistics of processing and fulfilling electronic orders. Federal Express made its debut in e-commerce in 1996 when it announced Business Link, a web commerce offering eventually known as Virtual Order, which featured a company’s web catalog site and tracked orders for the company’s order processing center using its well-known tracking software, attracting e-commerce customers such as Sun Data Inc. (a Norcross, Georgia-based systems integrator and hardware distributor and reseller) and Garden Escape (a web-based merchant selling everything from plant bulbs to wheelbarrows).

Unfazed, SkyMall slogged ahead, going to work with LodgeNet Entertainment Corp. to provide interactive shopping services in more than 250,000 hotel rooms across the United States via LodgeNet’s broadband network. Other partners, such as Microsoft Corp., IIS, emaginet, and EDI, were quickly attracted to the project. Slow to start (accounting for approximately one percent and three percent of the company’s net merchandise sales in the fourth quarter of 1997 and the first quarter of 1998, respectively), it continued to grow and was another source of income for SkyMall.

During 1997 the company captured 70 percent of and first position in the American air carrier market, placing approximately 17 million catalogs on the flights of a majority of U.S. domestic airlines carrying some 400 million passengers. Reno Air was added in April. The catalog grew in size again, to average about 168 pages, and total revenue reached $60.8 million, with a net income of $2.6 million.

The e.commerce market growth created a few glitches for SkyMall. In December 1997 the company’s call center staff was frustrated because the computer system was taking minutes, rather than seconds, to input and save a single order, and calls were backing up. Worsley rolled up his sleeves, called in the IT (information technology) department, and spent most of the next three weeks working with programmers to troubleshoot the system, eventually fixing it.

By April 1998 the company had exclusive relationships with every major domestic airline in the United States to place its catalogs in aircraft seat pockets, save two: American Airlines, the second largest airline in the United States, with about 20 percent of the market, which did not provide its passengers with a catalog; and Northwest Airlines, which carried a catalog by Genesis Direct. In August, American announced, after 18 months of negotiations with various catalog companies, including SkyMall, that it, too, would be carrying Genesis Direct catalogs on its flights.

The Federal Aviation Administration expected U.S. passenger enplanements to increase from 595 million in 1997 to 924 million in 2009, a 3.7 percent compound annual growth rate, and the Direct Marketing Association estimated the catalog market as a $45 billion industry. SkyMall Inc. appeared to be in good position to monopolize the marketplace in the 21st century.