Tower Air, Inc.

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Tower Air, Inc.

JFK International Airport
Jamaica, New York 11430
U.S.A.
(718) 553-8500
(800) 34-TOWER; (800) 348-6937
Fax: (718) 553-4312
Web site: http://www.towerair.com

Public Company
Incorporated : 1982
Employees : 1,750
Sales : $483.82 million (1998)
Stock Exchanges : NASDAQ
Ticker Symbol : TOWR
NAIC : 481111 Scheduled Passenger Air Transportation; 481212 Nonscheduled Chartered Freight Air Transportation

Tower Air, Inc. specializes in giving travelers good deals to about a dozen varied niche destinations, often ones of cultural interest. Although the New York-Tel Aviv market accounts for a quarter of its revenues, Tower has also flown charters to Mecca, while Greece, Italy, China, Japan, and Russia are some of its other destinations. The company has achieved low costs (just five cents per seat mile), allowing it to sell discount tickets without the restrictions required by other airlines. Tower keeps its giant planes filled with passengers, averaging load factors around 75 percent. Since inception Tower has preferred to stay in markets for the long term. It avoided fare wars by not supplying too many flights; most of its scheduled routes operated once per day or a few times per week. It was also careful not to overexpand as other budget carriers had in trying to compete with the majors. Scheduled operations accounted for half of Tower’s business in the late 1990s. The company also flew freight and offered maintenance services.

1980s Origins

Morris K. Nachtomi, a 30-year veteran of Israeli state airline El Al, was one of the Tower Air’s four founders. His family had immigrated to Israel shortly after it became independent. Following an early retirement from El Al, he and a few colleagues moved to New York to help Flying Tigers start its short-lived passenger line.

Nachtomi was also the first president of the passenger offshoot of the Flying Tigers cargo line, Metro International Airways. When the Tigers abandoned the passenger business, Nachtomi bought the Tower name from Tower Travel Corporation, a travel agency offering packages to Israel and Western Europe that had been one of Metro International’s clients.

After leasing charters, in November 1983 Tower Air began scheduled service on a leased Boeing 747. The first destination: Israel. Charters accounted for most of its business in the first few years. Charter operations gave Tower a “heads-up” to potential lucrative scheduled routes such as Paris (which it served through Orly, deemed better for the local market) and São Paulo. In refining its niches, the airline scheduled arrivals and departures to avoid rush hours.

Nachtomi became president in 1986 and was named chairman and CEO in 1989. After the Nachtomi Partnership bought out the other investors, his family then owned about three quarters of the stock.

Soaring Through the Persian Gulf War

Tower flew U.S. troops and cargo during the Persian Gulf War and was the second largest troop carrier, flying 300 sorties. Tower was the only foreign carrier to continue passenger service from Israel during the war, though lack of insurance prevented it from flying passengers to Tel Aviv. Thus, the airline flew civilian passengers out of Tel Aviv on the return trips of its military flights. Military charters typically provided one-fifth of revenue, though in 1991 they accounted for half.

Tower had two of its best years in 1990 and 1991, thanks to its responsiveness in canceling flights to match market conditions. Revenues in 1991, when Tower employed a little more than 500 employees, amounted to $245 million, up from 1990’s $172 million. Tower attempted serving the German city of Cologne in May 1992. Scheduled service to Scandinavia was curtailed in the winter of 1992 as it was found unprofitable. Tower simply did not subsidize money-losing routes. It also did not work with ticket consolidators for fear of becoming branded a commodity carrier.

While Tower hoped to build its presence in Europe and to initiate new service to South America, it eschewed opportunities in the former Soviet states, where it did not perceive the potential of profits. Moreover, the company did not see much potential for expansion in the United States, where it competed with a number of carriers under bankruptcy protection. In the early 1990s, Tower flew only between New York and Miami and San Juan in the domestic market.

At the time, Tower’s fleet numbered only six Boeing 747s, which it spent $32 million to refurbish rather than invest hundreds of millions of dollars on the new MD-11 and A340 airliners it considered. The airline specialized in the bottom end of the market, and rather than sacrificing perquisites like in-flight meals and movies, Tower’s passengers could expect less-frequent flights between destinations. The airline’s New York-San Juan flights, for example, operated only on Saturdays. While this made the carrier less than ideal for business travelers, its New York-Paris business fare was only $299, one-third the price charged by the major carriers.

In the early 1990s Tower leased two buildings at JFK International Airport. One was a passenger terminal that the company spent $8 million to renovate. Tower planned to expand this terminal in the mid-1990s at a cost of another $6 million. The other building, Hangar 17, housed Tower’s new corporate headquarters.

In 1993, Tower kept busy flying U.S. military personnel and cargo to support operations in Somalia. It was the first airline to fly troops into Mogadishu and also transported refugees for the United Nations during the conflict.

Initial Public Offering in 1993

Tower launched an initial public offering in 1993, with Nachtomi retaining about three-quarters of the shares. Tower Air took in $368 million in operating revenues in 1994. Scheduled passenger service rose 35 percent from 1993 to bring in more than half of the total, $206.6 million. Scheduled cargo operations accounted for $22.1 million, up 136 percent, while commercial and military charters were each worth about $67 million. The company’s maintenance services brought in another $5 million, up 63 percent from the year before.

Revenues could have been higher, had the company flown any charters to Mecca that year. Troubles in Israel hurt sales there, and too much snow in New England impeded commuter traffic. Still, Tower was the third busiest airline at the John F. Kennedy Airport.

Unfortunately, Tower’s operating expenses climbed even faster than revenues, to $46 million. A significant increase in marketing costs followed the launch of service to Ireland and India. The Bombay and New Delhi markets were in fact expected to surpass Tel Aviv within three years.

Tower chartered seven aircraft for the hajj (the Muslim pilgrimage to Mecca) in 1995. Painted in Air India and Garuda colors and staffed with their attendants, the flights were manned by Tower pilots and generated revenue based on block hours. Nachtomi told Air Transport World that year that flexibility was the key to keeping Tower’s costs low. “Power by the hour” (PBH) leases on six of its aircraft charged the company only for block time that its planes were in use.

A similar system applied to pilots, represented by a union, who were paid at a lower hourly rate than other carriers, but generally were able to fly more hours. Tower kept the pilots on call around the clock, facilitating last-minute charters. Pilots were based in New York, Los Angeles, and Miami.

Half of Tower’s employees in the mid-1990s worked part-time, and the company based cabin crews in Israel and India, also to match demand. The company made extensive use of outsourcing, often relying upon local travel bureaus rather than setting up its own offices in new markets. Tower only performed its own line maintenance and ground handling at JFK, where it had a supplier stock small parts at its hangar.

To guard against a possible scarcity of PBH-leased 747s, Tower maintained four of its planes on short-term leases while the other seven were owned, offering equity and associated depreciation and amortization benefits. Seating offered economy and business classes. The absence of a first class section and limited business seats allowed for a greater number of total seats, usually 470. By 1995, Tower’s fleet had grown to 17, all Boeing 747s. This singular type fleet helped the company control maintenance costs.

Company Perspectives

At Tower, we’ve been growing carefully. Maintaining the fleet are 500 ground support personnel, perhaps our only excess (although we’re sure you won’t see it that way). We have our own terminal at JFK, for a level of service and comfort unmatched with shared gates. And our CEO is at the airport every day; in fact, he has his office there. When you’re the perfect sized airline, nothing is overlooked. That’s control.

Challenges in the Late 1990s

During this time, Tower began losing customers due to a public perception of poor service. In fact, the airline received an estimated ten times as many complaints as other airlines. Moreover, at the end of 1995, one of the carrier’s planes skidded off a runway during an aborted take-off in a snow storm at JFK Airport. Although no fatalities occurred, Tower lost $5.2 million in the first half of 1996 and ranked fourth in the number of complaints per mile among leading U.S. airlines. Most budget airlines had faced such a perception challenge after the crash of a Valujet plane in May 1996. At the same time, major airlines kept lowering their fares. As a result, both volume and revenues fell among budget airlines, and Tower spent heavily on marketing to offset bad press, touting its safety record and own maintenance capacity in an advertising campaign to win back customers.

Under pressure from Delta, Continental, and American Airlines, the U.S. Department of Transportation (DOT) stripped Tower of its authority to fly to Brazil, transferring that entitlement to Continental and Delta. Undaunted, during the spring of 1997, Tower dedicated nine 747s to pilgrimages to Mecca. Still, Tower posted a loss of $4 million for the year on sales of $461.5 million.

In 1998, after a new U.S./France treaty, American Airlines, along with U.S. Airways, again challenged Tower Air service rights. However the DOT allowed Tower four additional Paris-New York flights, while U.S. Airways was cleared for daily Pittsburgh-Paris service. However, further expansion of Tower’s French routes was soon challenged by several major U.S. carriers who charged the carrier had historically underutilized its routes. Tower also was granted permission to serve the Dominican Republic in 1999, a right it had been granted several years earlier but did not utilize at the time.

In the summer of 1998, Tower pilots voted for representation from the Air Line Pilots Association over the previously used Tower Air Cockpit Crew Association. Tower pilots were now flying 30 percent more flights than the previous summer, and salaries were rising in comparison to the major airlines. The company employed about 75 captains and 78 copilots in 1998.

Although commercial charter revenues fell in 1998, cargo and scheduled passenger service showed significant gains. Tower operated 18 747s in 1998, three of them dedicated to cargo. Most of the aircraft were more than 20 years old. Half of them were owned and half leased. In addition, the company leased two freighters to Fast Air Cargo in Miami. Tower won a USAF Air Mobility Command contract as part of the Civil Reserve Air Fleet, which also included FedEx and BAX Global.

Tower opened a new office at Los Angeles International Airport in the fall of 1998. With hajj charters booked through 2001 and its military business secure, the company seemed poised for more careful expansion.