Saturday, March 23, 2002

Comair's history sometimes turbulent

Airline turns 25, surviving bumpy ride

By James Pilcher
The Cincinnati Enquirer

        When Dave Mueller had the idea to start a new airline 25 years ago, there were no dreams of changing the airline industry.

        No delusions of remaking the economic landscape of the region, or those of cities throughout the Midwest. And certainly, there were no plans to eventually employ more than 5,000 workers.

        The then-24-year-old pilot who was bouncing around on the corporate scene had a different motivation.

        “I couldn't get a job with a major airline, and I wanted to fly,” Mr. Mueller says. “That, and the other down-and-dirty of it is that my dad and I recognized that there was a shortage of capacity in the short-haul market in this part of the country. But he would never have gotten into this business if not for me.”

        Comair's success is well documented, and the only locally based passenger airline took the rest of the region along for a ride.

        But little did Mr. Mueller know at the time that the bright future also included some dark moments.

        The 25-year history of Comair, which began operations April 1, 1977, with three planes and a two-room office at the Cincinnati/Northern Kentucky International Airport, was filled with pitfalls that could have meant an entirely different fate for the airline and the region.

        Hard to imagine, considering that Comair has grown to the point that it has an estimated $1 billion annual impact on Greater Cincinnati's economy, according to the Northern Kentucky Chamber of Commerce.

        It has made many employees and local investors extremely wealthy through the success of its stock, and then a buyout by current owner Delta Air Lines. And it is now one of Northern Kentucky's largest employers, with about 3,500 workers based at Cincinnati/Northern Kentucky International Airport, which industry analysts point to as a textbook example of how regional jets changed the face of aviation.

        “They essentially made Cincinnati a hub for Delta, which has said that the operation there would not be profitable without Comair,” says Jim Parker, an Atlanta-based regional airline analyst for the brokerage firm Raymond James & Associates.

        And cities throughout the Midwest and Southeast previously ignored by mainline carriers have felt its effects. Those communities have gotten more service as other airlines have looked to compete with Comair's regional jets, meaning even more impact to those economies.

        “When we first started here, there were maybe a couple of mainline carriers, and we just had to scratch out a space,” says Pam Clause, station manager at the Akron/Canton Regional Airport, one of Comair's first markets.

        “Now, we're up to five flights a day and made the other competitors bring in more planes,” Mrs. Clause, a 23-year Comair veteran, says.

Four turning points

        All of this almost never happened. The company's history includes four turning points that, if events had unfolded differently, could have meant the end of Comair.

        First, there was the decision to sign up with a major carrier to provide feeder traffic — a concept that was catching on in the early 1980s. Mr. Mueller says Comair considered offers from North Carolina-based carrier Piedmont Airlines as well as Delta Air Lines, which was then creating its Delta Connection feeder network.

        “We came very close to creating an affiliation with Piedmont at their hub in Dayton,” Mr. Mueller says. “In fact, we were about to sign the deal when I went down to Atlanta. And during that visit with (then-Delta chairman and chief executive officer) David Garrett, he told me in confidence that they would be building a hub in Cincinnati in two years.”

        Mr. Mueller says he was asked to wait 60 days, and he's now glad he did, eventually signing with Delta in 1984. Piedmont no longer exists, while Delta is the nation's third-largest carrier.

Reshaping an industry

        Then there was the decision that changed not only Comair, but the industry. Mr. Mueller, who was slowly taking over control of the company from his father, Ray, had brought in David Siebenburgen, a former accountant from Arthur Andersen, as his right-hand man.

        Both Daves were convinced that to survive, the airline needed to grow. The only problem? The plane that would allow them that growth didn't exist.

        Comair couldn't afford the operational costs of a full-size airliner, which would lose money if not filled to the brim on shorter routes. And turboprops couldn't go as far as the carrier was looking to expand.

        So the two men began lobbying aircraft manufacturers to take a gamble on building a smaller jet that would operate just like a mainline plane, but carry half the passengers.

        “I still have the clip from the Wall Street Journal, which says something like "Dave Mueller is crazy,' ” Mr. Mueller says.

        Most manufacturers scoffed at the idea, and tried to convince the men that it would be cheaper just to build and operate a bigger, longer-range turboprop.

        But they were undeterred, and after a false start with Brazilian manufacturer Embraer, they got Bombardier of Canada to give it a try.

        In June 1993, they introduced the Canadair Regional Jet, which eventually revolutionized regional airlines, although the industry took a while to catch up — essentially allowing Comair to literally rake in money.

        “We essentially bet the entire company on that idea, and who knows where it would have gone if it hadn't worked,” Mr. Mueller says. “All we knew was that if you lined up 10 people and asked them which one they'd rather fly on, nine would say the jet, even if they pay a little more for it. That's how we made money on those short routes that weren't profitable otherwise.”

        Says Mr. Siebenburgen: “It was a no-brainer for me, having flown on the turboprops. It was the fear factor. People, including myself, are afraid of those turboprops. Once we got going with the jets, we knew we had something going.”

Bill comes due

        With the regional jet concept a huge success with both passengers and the ledger sheet, Comair stock began its legendary rise.

        It opened at $5 a share after its initial public offering in July 1981 — “something that probably couldn't be done in this day and age, especially since we really had no equity,” Mr. Mueller says.

        While it was traded actively, Comair stock split eight times, and reached a high of $38.38 a share Aug. 10, 1995. It was reporting profit margins in the high teens, almost unheard of in the airline industry, and by the late 1990s, it was expecting to generate $1 billion in revenue.

        Delta had bought 22 percent of the company and was by now handling all the reservations and marketing for the airline.

        Then, in early 2000, Delta made its play, making it clear it wanted to own its junior partner.

        And according to Mr. Mueller and others involved at the time, Delta played hardball. Rumors began that the Atlanta-based airline, now an established presence in Cincinnati, would not re-sign with Comair, driving Comair's stock price down.

        Mr. Mueller, by now chairman of Comair, and Mr. Siebenburgen, the chief executive officer, both say that they and Comair's board gave considerable thought to going it alone.

        “And we could have done it, too, but it would have taken us eight to 10 months to create our own reservation systems,” says Mr. Mueller, who was retained by Delta as a consultant. “But then I had to think of what that would mean to our employees, because cuts would have been necessary, and to our stockholders.

        “Could the final price have been higher? Yes. And if there is one thing I would have done differently, it would have been to fight harder to stay our own company, to the benefit of both Comair and Delta.”

        The deal, which closed in January 2001, was valued at $1.91 billion, or $23.50 a share. It made millionaires of several area residents and Comair employees, but a few still have hard feelings.

        “It wasn't a sale — it was a theft,” says Arnold Barnett, one of Comair's initial investors and the owner of the airline's primary ad agency, whose family owned about 325,000 shares of Comair stock at the time of the sale. “Before those rumors started, Comair was trading at $26 and dropped to $16. A fair price based on value would have been $30.”

        Mr. Siebenburgen says Comair officials came close to deciding to either find another partner or try operating as a self-contained entity. Almost to a person, none of the senior management or board wanted to sell to Delta.

        “But we just ran out of time, and we could have given it a go, but probably could have hurt ourselves irrevocably,” says Mr. Siebenburgen, who took over as president of Delta Connection and is now running Delta AirElite, the airline's charter/private jet management division. “I will say that Delta has been a good owner, I owe them that.”

Long time coming

        The final crossroads for the company came about 1 1/2 years later, as the festering conflict between Comair's pilots and management went public. Aside from the impact of Sept. 11, the 89-day strike became one of the biggest stories in the aviation world, not only for its implications for Comair and Delta but for the regional industry.

        It included issues that hadn't been settled throughout the industry, which treated the strike as a test case for the burgeoning regional jet segment. And both sides agree that trouble had been brewing almost since the previous contract had been signed.

        “I was very involved in the previous negotiations, and I knew what the pilots would be asking for the next time around,” says J.C. Lawson III, chairman of the Comair branch of the Air Line Pilots Association. “This was no spark, this had been smoldering awhile. And like all airline labor situations, you are married but can't get divorced.”

        That strange situation almost led to another way out, however — one bleaker than divorce. Although pilots still think that Delta was bluffing, company officials at both Comair and Delta say that if the two sides had not finally come to an agreement in June 2001, the company that Delta had just bought could have been put out of existence.

        No one will say how close it came — the pilots finally approved a new contract — but Delta eventually lost more than $500 million on the strike, and it was not in a position to continue those losses with the economy continuing to decline.

        “It was very serious, and while I always tried to keep my optimistic hat on, there was no denying some dire consequences if things continued down that path,” Mr. Siebenburgen says.

Clear sailing ahead

        Those key moments in Comair's history don't even include two fatal crashes, one in 1979 that took the lives of eight people, including the brother-in-law of close friends of Ray Mueller; the other in January 1997 outside Detroit that killed 29 — the precise times of each crash etched into the memories of those involved at the airline.

        “That's when you realize the importance of what you're doing, that something like this could happen 300 times a day,” Mr. Siebenburgen says. “That was the toughest thing I've ever been through personally and professionally.”

        Employees and executives say the setbacks served to make Comair stronger, allowing it to bounce back from Sept. 11. Comair could return to profitability this month for the first time since before the strike. It continues to grow and add planes and positions while the rest of the industry shrinks.

        Perhaps more importantly, this ability to survive and take the right step has allowed Comair to keep its own identity, despite being overshadowed by its relatively new corporate parent.

        And the community is also better for it, Northern Kentucky Chamber of Commerce President Gary Toebben says.

        “They've bounced back from everything that's been thrown at them and still been the best ambassador for the area that you could ask for,” Mr. Toebben says. “We saw how important they were to us during the strike. And given all that's happened, they're not going away anytime soon.”

        Says Mr. Mueller: “If you said at the beginning that the company would employ 5,000 and be a vibrant and energetic company, I would have laughed. I guess this isn't too bad for a kid from Northern Kentucky who just wanted to fly airplanes.”

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