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All-Premium Carriers Defend Model After Maxjet's Demise

By Jay Boehmer / January 21, 2008 / Contact Reporter
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Two-year-old all-premium-class transatlantic carrier Maxjet Airways last month ceased all operations and filed for Chapter 11 bankruptcy protection. The move not only eliminates a competitor on the New York-London route and reduces premium capacity by about 4 percent, but also casts some doubt on the viability of the niche airline model.

Though executives at all-premium competitors Eos Airlines and Silverjet said they remain confident in their business models and distanced themselves from the shortcomings that undid one of their peers, others expressed concern for the sector.

At their peak last fall, the three all-premium carriers held about one-quarter of all premium seats between New York and London—a tipping point in their fight to gain corporate business on one of the world's most competitive routes (BTN, July 9, 2007). Now, heightened competition, a gloomy economic outlook and escalating fuel costs are challenging all airlines and small niche carriers in particular.

Maxjet CEO Bill Stockbridge cited several such factors in the carrier's downfall, posting on the Maxjet Web site that "today's fuel prices and the resulting impact on the credit climate for airlines" forced the carrier to "take this drastic measure."

Blue Oar Securities transport analyst Douglas McNeill last month said the carrier had been exhibiting a variety of problems in the run-up to the bankruptcy filing. He noted that Maxjet was "not as upmarket as Silverjet or Eos," and also ran into a number of reliability, operational and customer service issues. McNeill said Maxjet's route structure further hurt the carrier. "Washington flopped and fares to Los Angeles and Las Vegas look far too weak," said Blue Oar's McNeill in a note prior to Maxjet's bankruptcy filing

In light of Maxjet's demise, Eos founder and chief of strategy Dave Spurlock stressed that Eos is operationally break-even and confident in its business model, though challenged by competition and fuel costs. While travel buyers often referred to Maxjet and Eos as if they were twin brothers, Spurlock contrasted Eos' business model with that of its fallen competitor.

Spurlock said Eos more clearly had gone after the corporate segment, while operating more efficient aircraft and offering fewer seats, which allowed the carrier to expand frequency on its New York-London route. Spurlock said Eos also operated a higher-end inflight product centered around lie-flat seats.

"Our models were even more different than merely what you think of as our product specifications," Spurlock told BTN this month. "We went into the market with a very serious intent of taking share of the core business travel segment."

Eos said it recently secured $50 million in equity capital and took delivery of two aircraft, bringing its fleet to six. The carrier plans to secure two more aircraft this year and expand by up to three new routes, including its plan to serve Paris from New York in the fall.

Silverjet CEO Lawrence Hunt said Maxjet's downfall sparked investment jitters in the short term, but he remains confident in Silverjet's future as a profitable carrier.

U.K.-based brokerage firm Daniel Stewart & Co. in a research note predicted Silverjet would run out of cash within a year, though Silverjet challenged the brokerage by asserting inaccuracies in their analysis.

After a year of operation, Hunt said Silverjet is approaching profitability and expects to hit its break-even load factor of 65 percent on existing routes as soon as March. In filings with the London Stock Exchange, Silverjet said it recently raised £22 million from investors.

Hunt, like Spurlock, discussed a model that diverges from Maxjet by operating a higher-end product with a lie-flat seat, allowing it to charge a premium on fares. Hunt said Silverjet posted a lower cost of operation, while bringing in more revenue than Maxjet on fewer planes.

Blue Oar analyst McNeill said Silverjet and Eos are the beneficiaries of a folded Maxjet and the two carriers have benefited from a healthier business model.

London-based JP Morgan airline analyst Chris Avery said the three all-business-class New York-London carriers had been "fighting for overlapping customer segments," which had "depressed fares for all three." Although the least expensive competitor now is gone, Avery said, "There will only be room for one of them in the niche."
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