Jetrader

Q&A With Andrew Levy of Avelo Airlines

Jetrader spoke to Andrew Levy, founder, chairman and CEO of Avelo Airlines, about how he views the overall health of the industry, how Avelo Airlines came about and what sets it apart from others, and more.
 

Jetrader: Can you share a bit about your journey that led you to Avelo Airlines?

Andrew Levy (AL): There are some people who have been obsessed with aviation since they were kids, and I’m not one of them. It just kind of worked out that way for me. As I was nearing the end of my time at law school at Emory in Atlanta, I joined a college friend at an airline startup called ValuJet. Within a couple of weeks, I realized I really enjoyed it. It wasn’t that it was an airline; what I enjoyed was it was a fast-paced, early-stage, entrepreneurial company. I appreciated more of the airline aspects as time went on, because I realized how uniquely difficult and therefore challenging and interesting an airline environment is.

ValuJet was an incredible entrepreneurial story where you had four founders: Robert Priddy was the chairman and CEO; Maury Gallagher was the vice chairman; Tim Flynn was a financial partner; and Lewis Jordan came in as the president. To have a front-row seat to that entrepreneurial story and be a part of it was inspiring to me. It was something that never left me. I had an itch to do my own thing even more. And here we are.

Jetrader: How did Avelo come about?

AL: After 14 years at Allegiant, I was ready for a new challenge. By the time I left Allegiant, I had served as its president for five years, was chief financial officer before that, and oversaw planning and strategy from day one. We built an incredibly differentiated, uniquely successful airline, but I was starting to get antsy and was ready to do my own thing. So, I left.

Following my departure from Allegiant in 2014, a few of us here in Houston began contemplating Avelo. However, in 2016, I had an opportunity to go work at United as the chief financial officer. That was just too interesting of an opportunity to not take on, so I did that. I put Avelo on hold, so to speak, not knowing if I’d ever return to it. I went to United in Chicago as part of the team that was going to turn United around, but I decided to leave almost two years in the role. I knew that it wasn’t going to be the right fit for me, as I was too entrepreneurial to enjoy being at United.

At that point, there was an opportunity to buy an airline that would serve as a platform to build Avelo. The stars aligned with XTRA Airways, which had all the necessary regulatory structures in place.

On April 28, 2021, Avelo’s first flight departed L.A.’s Burbank Airport for Santa Rosa, California, becoming America’s first new airline in nearly 15 years. Three and a half years later we’ve flown nearly 6 million customers to 49 destinations across the U.S., Jamaica and Mexico.

Jetrader: Avelo offers a range of fare options, including premium products, setting it apart from typical ultra-low-cost carriers (ULCCs). How do you position Avelo between the major airlines and ULCCs, and what customer segments are you primarily targeting?

AL: When we started Avelo, the idea was to create a low-cost airline that offered a really good product. When you’re in the early stage of your life cycle, cost is what you have to sell. You look at Southwest and leading low-cost airlines in other parts of the world, like Ryanair and EasyJet in Europe, and they’ve had tremendous financial success, but they’ve really excelled by pairing low costs with great operational reliability.

So, the idea was, how do you build an airline that offers really low fares by keeping costs really low, and at the same time deliver a really good product?
You have to deliver a really good experience, and the idea for Avelo was to take those attributes of low cost, simplicity, and doing something unique and different, and combine them with a really great product from a reliability perspective. In some ways, it’s a little bit like Southwest Airlines back in the early days in the ’70s and ’80s, when they were always known for being able to do all these things and do them really well.

We’re an everyday low-fare airline, but low fares are widespread. We offer low fares with a unique network targeting secondary airports where we can offer really great convenience to the people who reside nearby. We combine that with a great operational experience so that you’re on time, and we have people who are actually friendly and like to be around other people.

I don’t think we’re really trying to position ourselves in a way that’s necessarily in between the legacies and the ULCCs. We’re trying to offer great low fares, great convenience, but deliver it exceptionally well, and that’s what we’re doing. Through the first 10 months of 2024, Avelo is No. 1 in on-time performance, and we delivered the lowest flight cancellation rate in the industry. In 2023, we also achieved the lowest flight cancellation rate and ranked No. 2 in on-time performance. These results, combined with our exceptional bag handling, are major contributors to Avelo’s high customer satisfaction, exemplified by our world-class Net Promoter Scores (NPS), which are consistently in the 60s.

We’re selling simple, basic short-haul air transportation from Point A to Point B. Yet, what we do, we do really well, so people know what they’re getting. As a result, people are extraordinarily happy because they feel like they’re getting incredible value.

Jetrader: Avelo has grown its fleet with nearly 20 Boeing 737 NGs acquired from the secondary market. What are your plans for fleet expansion, and how have the rising values and lease rates of 737 NGs and their engines impacted your strategy for acquiring additional aircraft?

AL: We love the Boeing 737 NG. The airframe and engine combination is second to none. We have 20 today, we have more commitments on the horizon and we’re working on several other transactions.

Certainly, it’s been a bit of a challenging market these last 18 months with the widely known issues around Boeing’s production levels. We plan to continue adding Boeing 737NGs. The supply of quality used aircraft has gone up significantly in the last several months, and pricing is starting to soften. But it’s still higher than it was two years ago, and still a very firm market.
 

Jetrader: Your fleet primarily consists of aircraft from operating lessors. How are you financing your aircraft currently, and do you anticipate exploring other acquisition or financing sources in the future?
 

AL: We’re early in our journey. We’re three and a half years into this, but we’ve had three straight quarters of profits. This third quarter will not be profitable. It is our weakest quarter thanks to September always being the worst month for airlines, and especially with our focus on leisure customers and sizable Florida exposure. However, we expect a very strong fourth quarter and will have a nicely profitable year.

As a startup, our cost of capital is high, and cash is always tight. However, we’re making great progress, and as we continue to improve our financial results, there will be a time when we will transition to buying airplanes, and that’s something we’ll look forward to doing.

I like midlife aircraft. I’m a big believer in having balance sheet flexibility to be able to fly when you believe it makes sense, instead of being forced to fly more to drive low costs mainly through utilization. There are two approaches to success in the low-cost airline arena. One is to get brand-new airplanes and just fly the crap out of them and drive costs down that way. This is the Frontier and Spirit approach. Then there’s the approach that we took at Allegiant with the MD-80, which may not have the same efficiencies, but offers a really low capital cost airplane. You can create a business that has enormous flexibility and extremely low fixed costs in an industry that typically comes with high fixed costs. I prefer the flexibility we get with 737NG aircraft and the ability to create our own efficiencies.

Jetrader: Avelo’s network predominantly focuses on East and West Coast routes, with fewer flights in the central U.S. How do you see your route map evolving, and what factors will drive your decisions on future destinations?

AL: One of the things I learned at Allegiant was to always have optionality. I’ve seen from experience how things can change very fast.

When we were deciding on a headquarters location, it wasn’t about where we thought we would start our operation. Where you think you’re going to start the company may make tons of sense on that day, but maybe two years later, after you raise the money and are ready to go, whatever opportunity you thought might be there might not even exist anymore. The idea was to find a location that had attributes that we thought would be important no matter what, and that’s how we ended up in Texas and in Houston, specifically. We thought middle of the country, easy place to recruit talent, lots of talent that’s already there. Then we thought we would take advantage of whatever opportunities present themselves, and that’s what we’ve done.

We started out in Burbank. We never thought Burbank would be our first base, but during the pandemic, there was suddenly space at an airport that is usually hard to get into, and it’s an airport that I knew well from having lived out West for so many years. I saw a lot of value in it.

Our second base was New Haven, clear on the other side of the country. We didn’t want to start in New Haven because, first of all, the deal wasn’t ready to go. And second, we thought it made more sense to get our people and processes in place at an airport that had less of an operational challenge. So, we started at Burbank, and we knew the next one would be New Haven.

Since then, we’ve added other bases in places where the opportunity made sense. There are also a lot of opportunities in the Midwest that are interesting. So far, though, the best opportunities have been the ones that we’ve targeted. I view each one of these as a self-contained little airline.

They don’t interconnect, and that doesn’t bother me one bit. I like it that way. They have to stand on their own two feet — and each flight does, each airplane, each base, everything has to work independently of each other. It’s a way of keeping everything simple and easy to understand.

Today, we operate six bases serving 49 destinations in the U.S. and abroad.

Jetrader: Avelo has begun operating to nearby international destinations like Mexico and Jamaica. What adjustments have you made to facilitate these operations, and how significant is the international market to Avelo’s growth? Can we expect more distant international routes in the future?

AL: When I bought XTRA, we had scheduled authority, and we had flag authority. We’ve been able to exercise these rights since day one. We have done a lot of international charter flying, but that’s supplemental to our scheduled service. It was important to us to get going on international scheduled service and there’s a lot of opportunity there to fly to places you can reach with narrowbody aircraft.

One of our values is to keep it simple, and international does add an element of complexity. But we think it’s worth it, and we’re excited about it. This month, we started service to Montego Bay and Cancun. Over time, we’ll add more international destinations. I imagine it will mostly be centered around beach market offerings in Mexico and the Caribbean, but we could certainly extend and do more than that. It’s an exciting growth element for our company.

Jetrader: Avelo frequently operates seasonal routes and less-than-daily services. What are the opportunities and challenges associated with this approach, and how does it impact your overall strategy?

AL: If you come back to the whole balance sheet management and less expensive aircraft, that’s part of what enables you to be effective at managing these seasonal patterns where there are times when you fly and times when you don’t. That’s as normal as breathing to me.

One of the advantages we have is our cost structure. We’ve been able to develop a brand that I think stands for great value, and we have a lot of promoters out there because of the operational performance we deliver. All those things are very important, but maybe our single biggest advantage is our agility — our ability to move very quickly and be very flexible in how we run the business.

So, going in and out of a route seasonally, to me, just makes sense. You take what the market gives you. Markets work to a certain extent, but you can always push it to where it tips over because you’re doing too much, whether it’s a route or a hub or a base or whatever. They all have their natural point that it makes sense, and if you try to do more, you go upside down.

A great example is Western Pacific back in the 1990s. They tried to make Colorado Springs into a Denver alternative airport hub, and it just didn’t work. They were trying to make it into something it wasn’t.

Could they have made it work with four or five airplanes? Maybe? But they pushed it too hard. That’s something I’ve taken away from seeing that and many other examples out there. You’ve just got to take what’s there.

Something that’s small and seasonal, there’s nothing wrong with that. You just have to accept that it’s small and seasonal. That’s something we’re built to do. I don’t really think twice about it. It does have some operational challenges, but it’s well worth it. It’s a lot less expensive than flying airplanes around when you can’t get compensatory revenue, because that’s where you lose a lot of money in this industry.

Jetrader: How is Avelo managing industrywide challenges like pilot availability and rising wages?

AL: Without a doubt, we’ve had challenges with keeping pilots. The way that we’ve managed goes back to what I mentioned before about our flexibility. One of our key advantages is being agile and moving very quickly, and that’s what we’ve done. We’ve increased pilot compensation four or five times since we started flying, not even four years ago. It was important that we did that because the worst thing you could do is not have enough pilots. We were constantly trying to find a level that would arrest attrition, knowing that you could never make it go away entirely.

The cost of attrition is so high, and it’s not just the training costs of an individual pilot that’s very expensive; the bigger cost is that you’re forced to carry extra pilots because you don’t want to be short, and so you’re basically carrying this big insurance policy of overstaffing because you don’t know how many are going to leave.

That was a painful experience, but now we’re on the other side of it. Our attrition has slowed down to basically zero, and now we’re able to grow into the excess pilot group that we have in place today. We’ve done it by offering a very strong compensation package. We’re not leading the industry in compensation, but we’re not that far away, either.

We also offer a quality of life that few others can, where you get to come home every night and sleep in your own bed because of the nature of our network. The other unique benefit we offer, that can only come from being small and early-stage, is that you get a really high seniority number. If you believe that we’re going to be here and be a much bigger company in 10-20 years, that’s going to have value for the rest of your career.

As a result, we are a very popular destination for pilots. On top of it all, we have a unique people-oriented culture. Whether it’s our Crewmembers, as we call every employee, or our customers, we communicate a lot. Much of that is by design, and I think we’ve executed well on creating that positive culture.

Jetrader: How do you view the overall health of the aviation industry? What is your perspective on the future of the industry?

AL: I think the industry outlook is mixed. If you focus on the U.S. market, the industry is not healthy right now. Post-pandemic, even the companies doing the best at the moment – Delta, United and Alaska – are not performing at levels comparable to the years going into the pandemic. Every other airline is performing materially worse. Pick whichever one you want to look at, whether it’s Spirit, Frontier, Allegiant, Southwest, JetBlue, or Hawaiian. That’s not a very healthy industry.

Quite honestly, even the larger carriers that are performing well, had massive benefits that have come from the pent-up travel demand and post-COVID euphoria, which is receding. At the same time, companies like United, to their credit, were really smart in how they managed their fleet to maintain a significant number of widebodies.

The other airlines, particularly foreign airlines, over time, they’re going to build back up their widebody fleet, and I think United’s advantage there is going to start to diminish on a relative basis. Although they’re in a great position now and for the next couple of years, those advantages are fleeting.

There are two things that have changed: The first is the amount of cash the federal government gave the airline industry and the way it was doled out are going to be far reaching for the next decade or two. This put the larger carriers in a position where they’re almost too big to fail. They have more debt, too, but they are stronger than they’ve ever been. The other change is that for the large airlines the vast majority of their money is coming from incredibly lucrative credit card programs. They’re almost like banks that fly airplanes.

Neither of those things sets us up for a very healthy airline industry. It’s already very consolidated with very little competition. From a consumer public policy standpoint, it’s not a healthy environment at all if you have only a handful, or maybe even fewer, airlines that dominate. That’s not good for the consumer. It’s good for the people who are employed by those companies. It’s good for the labor groups that have received enormous increases in wages, but I don’t think it makes for a healthy and sustainable industry.

As you look outside of the U.S., you have a lot of geopolitical forces that are going to diminish the movement of people and goods globally. I don’t think that’s good long-term for the industry. This industry has been about connecting the world and bringing people together. The world is moving apart into blocks. Russia and China are perfect examples of that. If you look at the amount of seats and demand for travelers between the United States and China, it’s fundamentally different than it was pre-pandemic. I’m not sure what can change that in the next 10-20 years. I think there’s going to be more of that.

Obviously, the state of the manufacturing of airplanes and engines is not healthy at all. You have the next-generation engines that have failed to perform. Whether you’re talking widebody or narrowbody, you’ve had engine event after engine event. And then, of course, the problems that Boeing has had have been very well documented.

Jetrader: How do you see it resolving?

AL: You have to have airplanes and engines that work and are reliable. It starts there. You have to have a supply chain that’s stable and strong. I don’t think the airline sector has that today, or at least it’s not as good as it was. Until that gets sorted, it’s hard to say that everything’s going to be great. If the global industry wanted to grow faster, you just can’t do it. You still have all these bottlenecks, whether it’s pilots or other forms of labor at the airlines, or if it’s labor at MROs, or it’s engines that aren’t being manufactured fast enough, which gets into parts and materials.

If you look across the board, certainly at the airline sector, you know the financial returns across the board are not worth the cost of capital. I think that’s true on a global basis. If you just look at the U.S., we went through a period of about a decade of tremendous financial success, where all the sector participants were making a return. Now, post-pandemic, you have this massive bifurcation - some airlines are doing well, but not as well as they used to, and many others who are doing very poorly. Many of them have their own idiosyncratic challenges they need to overcome.

For example, the issues Spirit must overcome are very different than the issues Southwest has, but they each have their own issues. They’re not generating their cost of capital. What’s going to happen is that revenue is going to be required to improve the results, because I don’t see it coming on the cost side. And the way to get revenue higher is really about consolidation, and that could either mean fewer participants, or it could just mean shrinking, and therefore fewer seats. Either way, it has to come from fewer seats, because you can’t magically take pricing up just because you want it to be higher. That just doesn’t work. So, it must be the interplay between supply and demand. Right now, there are too many seats for the industry as a whole to generate a return, and so the weak get pushed out and simply go away, or it consolidates into fewer participants.

Jetrader: Who were some of the mentors or role models who influenced your career?

AL: Maury Gallagher is my mentor from back at ValuJet, the telecom business he later founded and then Allegiant. He has clearly been the most important person I’ve worked with in my life. I’ve had the opportunity to work with a lot of other amazing people: Robert Priddy, Frank Lorenzo, Gil Morgan, Stanley Motta and Pedro Heilbron, just to name a few. But Maury Gallagher has had the most influence in my career and life.

Jetrader: What advice would you offer to those entering the aviation industry today or those who are relatively new to the business? Are there particular skills or mindsets
you find crucial for success?

AL: I look for people who are very team-oriented. I describe an airline as the ultimate team sport. Anything you do in an airline is dependent on others. You can’t operate in silos. So, I seek people who are inclined to be team-first. Those people are not ego-driven. They’re mission-driven. I like people who fit
into that kind of culture. Also, this is an industry that produces enormous amounts of data. So, I always seek people who are incredibly analytical. When you get people who are quantitatively and team-oriented, those are the people I value.

This is also an environment in which you must be comfortable with change, because it’s perpetual change. It’s a dynamic and ever-changing environment. You must be comfortable with that. You must be excited about change – as opposed to dreading it. If you don’t view it that way, then you won’t enjoy it.

Most importantly, on top of everything, is having the intellectual curiosity and always wanting to learn and always wanting to do better. That’s a big part of what we talk about at Avelo: operational excellence and a perpetual desire to always get better. There’s always room for improvement.

Jetrader: Anything else you’d like to share?

AL: One thing that I alluded to, but we didn’t talk about, is I believe an airline is a business like any other. In any business, you need to bring in more cash than you spend. We never lose sight of the fact that Avelo is a business first. The number of dots we put on the map isn’t important.

What’s important is we drive a very good economic return because we want to be able to take care of all our stakeholders. That means our people and our customers, but it also means our investors and our capital providers.

A lot of airlines don’t like to talk about that as much as they should, and they’re sometimes focused on other things that motivate them, especially those people who have this lifelong passion for aviation. That can be a very dangerous thing because you may lose sight of the things that keep you flying and in business over the long haul.