Chautauqua Airlines, Inc. Business Information, Profile, and History

Company Perspectives:

At Chautauqua Airlines, serving our customers with the highest possible degree of safety, comfort, and convenience are our #1 goals. Our 26-year history of continued commitment to these goals along with a flawless safety record has ensured our success and enabled us to become one of the 20 largest scheduled regional airlines in the United States. We currently operate service to 34 cities in the United States, and 3 cities in Canada.

History of Chautauqua Airlines, Inc.

Chautauqua Airlines, Inc. is one of a dozen obscure airlines flying as US Airways Express. It tries to differentiate itself from the others by improved passenger amenities such as increased legroom. In November 1999, Chautauqua sealed an agreement to fly regional jets for Trans World Airlines, only the second client in its history. It carries about 750,000 passengers a year on 240 daily flights around 26 points in the Northeast and Midwest. Chautauqua is about a tenth the size of American Trans Air, a publicly traded airline also based in Indianapolis.

Upstate Origins

Joel and Gloria Hall started Chautauqua Airlines in Jamestown, New York, in 1973. Joel had previously been a chief pilot for Mohawk Airlines, which had merged with Allegheny Airlines in 1972.

Chautauqua's sole raison d'être was to take over routes from Allegheny (later called USAir and US Airways). This relationship pioneered code-share arrangements between major airlines and contract carriers.

In 1974, Chautauqua began flying two new, leased Beech 99s under the Allegheny Commuter name. The first destinations were Pittsburgh and Buffalo. Canton/Akron, Ohio was connected to Pittsburgh in 1979, when the company began operating a couple of Shorts 3-30 aircraft. Allegheny changed its name to USAir in 1979, and Chautauqua added flights between Orlando and three other cities (Ocala, Lakeland, and Vero Beach) following its expansion into Florida.

Routes between Pittsburgh and Lynchburg, Roanoke, and Charlottesville, Virginia, were added in 1984, along with the Fairchild Metro III to operate them. Chautauqua replaced its Shorts Brothers aircraft with the Saab 340 in 1986. The 30-passenger Saab aircraft cost several million dollars each.

In 1988, an affiliate of Guarantee Security Life Insurance Company of Jacksonville, Florida, bought Chautauqua Airlines from Joel Hall. Guarantee Security was oriented towards junk bonds but also bought several operating businesses, including a Cleveland amusement park and a Toronto women's clothing chain. Chautauqua Airlines employed about 250 people in the early 1990s. Revenues for 1991 exceeded $30 million.

Florida's Department of Insurance took over Guarantee Security Life in 1991 after it was declared insolvent, or actuarially unsound. The state then spent the first seven months of 1992 trying to find a suitable buyer for Chautauqua Airlines. Bidders included former USAir Express Allegheny Commuter President Fred Arnold and then current Chautauqua Airlines President Tom Hall (no relation to founders Joel and Gloria Hall).

Tom Hall resigned when the Department of Insurance stopped accepting bids in August 1992. According to Commuter Regional Airline News, he had offered $7 million for Chautauqua. A $10 million bid by Fred Arnold was also rejected, even though one analyst valued the company at just $5 million. British Airways' plans to invest $750 million in USAir supported the state's higher valuation.

A consultant for the State of Florida, I. Edward London, took over as CEO and president after Hall's resignation. London was a licensed private pilot but had never worked in the airline industry. He was an experienced entrepreneur and consultant, however.

In 1993, the insurance industry established the Guaranty Reassurance Corp. (GRC) to sell the assets of the Guarantee Security Life Insurance Company, including Chautauqua Airlines. GRC was given the next five years to increase the value of the airline, after which Chautauqua would either be sold or taken public.

Company founder Joel Hall died in December 1993 at the age of 59. By this time, Chautauqua had become the 24th largest scheduled commuter airline in the United States. Revenues were more than $40 million in 1993, when the company employed 265 people. Its 16 planes (nine of them leased) were constantly busy, flying between 18 cities in seven states and the Canadian province of Ontario. Although most of the flights fed USAir's largest hub in Pittsburgh, Chautauqua Airlines kept its headquarters in Jamestown, New York. Maintenance facilities had been established in Akron/Canton, Ohio, and Lynchburg, Virginia.

Switching Seats in 1994

The early 1990s were notoriously difficult for Chautauqua's sole client, USAir, which lost $2.6 billion from 1991 to 1994. They were also hard for Chautauqua, which saw revenue fall considerably when USAir began flying jets on routes serving Pittsburgh. Another negative factor was the 1994 crash of an American Eagle commuter plane flying from Chicago to Indianapolis. Imprecise media coverage spread the stigma of the crash to Chautauqua by association, and passengers stayed away in droves. The airline posted its first loss in 20 years in 1994, but returned to profitability the next year.

In the midst of these hard times came a dramatic change that would give Chautauqua a launching pad for another few years of vigorous growth. On May 8, 1994, Chautauqua Airlines exchanged routes with Jetstream International, literally overnight. Jetstream was owned by USAir and had been providing Indianapolis with commuter service.

After the swap, Chautauqua moved about three dozen maintenance personnel to Ohio and relocated two dozen flight crew to the Midwest. It added 15 flights a day to the 44 Jetstream had been operating from Indianapolis, where USAir was the leading carrier. Chautauqua also eventually moved its headquarters to Indianapolis. (Liberty Express, a subsidiary of Mesa Airlines which flew non-pressurized Beech 1900 aircraft, picked up Chautauqua's old routes out of Chautauqua County Airport.)

In 1995, Chautauqua arranged to buy all of Jetstream's British Aerospace Jetstream 31 aircraft. It also picked up several routes in Pennsylvania, Maryland, and Ontario. Jetstream International subsequently changed its name to PSA Airlines. In the fall of 1995, Chautauqua took over PSA's flights out of Pittsburgh which used 19-passenger planes. This allowed PSA to reduce its diverse fleet to just one type, and gave USAir increased scheduling flexibility in mixing its jets with its subsidiary's turboprops.

USAir also stopped using Indianapolis as a mini-hub in 1995. In several cases, Chautauqua benefited by replacing canceled jet service with its own turboprop flights.

Chautauqua had 470 employees in 1996. It had doubled in size in the two years since moving from Pittsburgh to Indianapolis.

Chautauqua's customers could receive USAir frequent flyer miles and other amenities. Although its affiliation with a major airline gave it certain selling points like these, Chautauqua began to try to differentiate itself among USAir Express carriers. It served 'bagel buttons,' cheese, and champagne and outfitted some planes with leather seats. Chautauqua configured its Saab 340s for 30 passengers, not 34, giving each more legroom.

Half of Chautauqua's passengers connected with other USAir flights. This ratio increased to 90 percent on shorter flights such as Evansville-Indianapolis. Longer routes like Indianapolis-Nashville generated mostly point-to-point traffic, where Chautauqua's own efforts in keeping passengers were vital.

Officials from Chautauqua County, New York, met with Chautauqua Airlines President Tim Coon in October 1996, trying to entice the carrier to return to its former home. Liberty Express had scaled back service to the area when it took over Chautauqua's routes in May 1994.

USAir became known as US Airways in February 1997. Chautauqua, flying as US Airways Express, began flying between Columbus and Toronto nonstop in June 1997. It had been connecting them via Port Columbus for two years; now that city was at the end of the last leg. Air Ontario, a subsidiary of Air Canada, competed on the route. Revenues were about $80 million in 1997.

Sold in 1998

Wexford Management, LLC, a diversified Greenwich, Connecticut-based investment company, bought Chautauqua Airlines on May 15, 1998. It installed Edward Wegel as president and CEO. Wegel was a cofounder of Atlantic Coast Airlines, a publicly traded commuter operator for United Air Lines. By July the company had launched an advertising campaign aimed at the many local business people who were driving instead of flying to Chautauqua's destinations.

Wexford soon ordered 60 new 37- and 50-seat Embraer regional jets, which were enough in demand that it could probably easily lease whatever planes it could not use itself or in its newly acquired airline (Wexford also owned part of Las Vegas-based National Airlines and a leasing service in Switzerland). Chautauqua was operating 30 turboprops at the time of the order.

US Airways Express was slow to utilize regional jets, while competitors Continental Express and Delta Connection Comair were already stocking their entire fleets with jets. Out of ten US Airways affiliates, only Mesa Air Group was flying regional jets in 1998. The contract US Airways had with its pilots' union restricted the total number of regional jets that could be flown by its regional affiliates. They were permitted just one dozen in 1998, rising to 25 two years later. One analyst concluded the late switchover could only be effective as a move to defend market share, not add it as the other airlines had done.

The addition of jets to their fleets was what helped regional airlines outpace the majors in terms of earnings growth, making them attractive to investors. An initial public offering was tentatively scheduled for October 1998, but a stock market slump in the fall of 1998 resulted in Chautauqua deferring it. Revenues reached $84 million for the year, when Chautauqua Airlines had 500 employees.

Bryan Bedford, the 37-year-old CEO of Mesaba Holdings, Inc., was picked to head Chautauqua in June 1999. He had restructured Mesaba's contract with Northwest Airlines. Before that, he had led Business Express Airlines. One observer described him as the perfect choice for an airline planning to go public.

Chautauqua received permission to operate ten Embraer ERJ-145 regional jets for US Airways Express in June 1999. The recall of furloughed US Airways pilots earlier in the year cleared the way for the deal with the US Airways pilots' union.

Chautauqua Airlines, which had always been identified with US Airways, was looking for other areas in which to develop its business. Officials considered marketing flights out of Indianapolis under its own name, or partnering with another major airline in addition to US Airways.

TWA agreed to become Chautauqua's second client airline in November 1999. TWA was growing quickly after repairing a faltering reputation. It was, however, the last major airline to introduce regional jets on its feeder routes due to restrictive agreements with its unions. The machinists' union had signed a new contract in July 1999.

TWA already had agreements with two other contract carriers, but this was the first arrangement to use regional jets, rather than turboprops, to feed TWA regional traffic. The contract was good for ten years.

In September 1999, Chautauqua announced plans to relocate 60 flight and maintenance personnel to Fort Wayne, Indiana concurrent with the relocation of its maintenance center.

Principal Competitors: Air Ontario; American Trans Air.

Chronology

• Key Dates:

• 1973: Chautauqua Airlines founded to take over regional routes for Allegheny Airlines.
• 1986: Fleet is upgraded with purchase os Saab 340 aircraft.
• 1988: Guarantee Security Life buys Chautauqua.
• 1991: Florida's Department of Insurance takes over Chautauqua after placing its parent in receivership.
• 1993: An insurance industry group begins managing Chautauqua.
• 1994: Chautauqua exchanges routes with Jetstream International.
• 1999: Chautauqua lands its second client ever, TWA.