Shortage of passengers hurts National

Richard N. Velotta and David Strow

Thursday, Dec. 7, 2000 | 11:26 a.m.

National Airlines of Las Vegas filed for Chapter 11 bankruptcy protection Wednesday because it was unable to attract sufficient financial support from casinos, failed to draw enough passengers and was hit by rising fuel costs.

Chief Executive Michael Conway said the company's Boeing 757 fleet would continue to fly its regular schedule and there would be no layoffs or pay cuts as its finances are reorganized.

The airline, the fifth-busiest at McCarran International Airport, has carried more than 2 million passengers since it started flying in May 1999.

Conway cited skyrocketing fuel prices as the primary reason National hit the financial skids. And while Conway said National has met passenger load goals as a new carrier, it lagged behind industry peers, according to U.S. Department of Transportation statistics.

Conway said when the airline began regular passenger service, its jet fuel cost about 60 cents a gallon, a price that had been stable for about 8 1/2 years. The cost climbed to a peak of $1.17 a gallon earlier this year before dropping to its current level of $1.09.

As a start-up carrier, National has not had the financial resources to "hedge" fuel prices, a practice utilized by many established airlines. With hedging, many airlines with deeper pockets are able to pay for fuel at lower prices several months in advance of increases.

Privately held National doesn't make its load factors public, but figures reported by the Department of Transportation indicate it had below-average passenger counts in the first half of the 2000 fiscal year.

During the period, National had 1.5 billion available seat miles -- the number of miles flown times the number of seats available. In that time frame, National had 789.4 million revenue passenger miles -- the number of miles flown by paying customers -- for a load factor of 53.7 percent.

Among scheduled and nonscheduled national passenger carriers, that ranked 19th of 22 airlines and trailed the average load factor of 64.2 percent. Conway has said that National should operate in the low 60s to break even.

If stacked against the major air carriers, National's load factor would have been last behind 12 airlines. McCarran's three largest players -- Southwest, America West and United -- had load factors of 67.1, 67.8 and 68.9 percent, respectively.

National became profitable for the first time in March, a month before it carried its 1 millionth passenger. Conway said the company was profitable through August before fuel costs put the company in the red again.

As a result of the filing, National will be under increased scrutiny by federal safety regulators.

Jerry Snyder, spokesman for the Western-Pacific region for the Federal Aviation Administration, said National's bankruptcy caught the FAA by surprise.

"We just recently completed an audit of them, within the last month, and they did very well," Snyder said. "For an up-and-coming, progressive airline, they did rather well."

Because of the bankruptcy, Snyder said the FAA will step up its inspections of National to ensure the airline's safety while it is in bankruptcy.

"There are specific requirements we have for increased surveillance when an air carrier has financial problems like this," Snyder said.

National operates 56 flights a day; all of them either originate in or end in Las Vegas. Service is provided on 175-passenger, twin-engine Boeing 757s with daily flights to and from Dallas-Fort Worth; Los Angeles; Miami; Philadelphia; San Francisco; Newark, N.J.; Chicago's Midway Airport; New York's John F. Kennedy International Airport and Washington D.C.'s Reagan National Airport.

The company still plans to inaugurate service to Chicago's O'Hare International Airport on Jan. 25.

Conway confirmed that other casino companies were contacted about investing in the airline since they were booking some of National's passengers in their hotel rooms. He did not specify what companies were approached. But gaming industry sources gave some details.

A meeting Monday was called by Harrah's Chairman and Chief Executive Phil Satre, who was unable to convince colleagues to join his company in investing.

The summit included top executives at Harrah's largest competitors, including MGM MIRAGE Chairman Terry Lanni, Mandalay Resort Group Chairman Michael Ensign, Park Place Entertainment Chief Executive Thomas Gallagher and Boyd Gaming Corp. Chairman William Boyd. Satre called the meeting after National had requested additional equity financing from his company.

Multiple sources familiar with the meeting said Satre appealed to the executives to invest with Harrah's in the airline's latest request for financing, arguing that they were deriving greater benefits from the passengers National was bringing into Las Vegas, since Harrah's has less hotel rooms and properties in Las Vegas than the other operators.

The other operators responded that they were willing to form marketing alliances with National -- but declined to invest in the airline, saying they didn't believe it fit in with their business as casino operators, and that the airline industry's volatility made it too risky an investment. Harrah's then declined to continue investing alone.

While declining to confirm if the meeting occurred, a Boyd Gaming spokesman said investing directly in National would be inappropriate.

"National Airlines is something that's good for Las Vegas, the extent to which we would help would be much the same way we'd help any other airline ... from a marketing perspective," said Rob Stillwell. "But we're not interested in investing in it."

Harrah's spokesman Gary Thompson was also unable to confirm the meeting occurred, but hinted that other casino companies needed to pony up. Without reciprocation, Thompson said Harrah's will be unwilling to invest "substantial" additional amounts into National.

"We are not willing to invest substantial amounts of our shareholders' money to benefit the shareholders of our competitors when 90 percent of the benefits National brings to Las Vegas go to other hotel-casino operators," Thompson said.

Conway said when it was clear that additional funding wasn't coming from Harrah's or any other company, the final decision was made to file for bankruptcy.

The filing said the airline had assets of $103.5 million and debts of $119.5 million. The company has entered into 20 leases for aircraft, 16 of which have been delivered. Thirteen companies have aircraft or engine leases with National.