Seed Fund for Airline Lined With Public Cash

By GEORGE HOHMANN

Private investors are expected to risk only $800,000 of the seed money needed for a startup airline here while $2.2 million is being lined up from organizations that are funded, at least in part, with public money.

It’s no surprise that the West Virginia Jobs Investment Trust is likely to be involved. The trust, which has been asked to invest $1 million, is the state’s venture capital fund. Its mission is to try to create jobs by investing in startups.

But the investment is a new kind of risk for the Charleston Convention & Visitors Bureau and the Central West Virginia Convention & Visitors Bureau, which have each pledged $500,000, and the Charleston Area Alliance, which has committed $200,000.

The convention bureaus get their money from the tax on motel rooms. The bureaus have traditionally promoted tourism by publishing brochures and calendars and promoting the area to convention planners. The only business they’ve owned is Charleston Magazine, which the Charleston bureau started in 2002 and sold to the Central bureau in 2004. The Manahan Group, a marketing and public relations agency, bought the magazine in 2006.

The Charleston Area Alliance is a nonprofit organization. It gets 25.9 percent of its $1.7 million annual budget from government grants, including money from the Kanawha County Commission and the cities of Charleston and South Charleston; 24.6 percent from member dues and events; and 16.5 percent from rents and leases.

The money the Alliance has committed to the startup will come from profits made on the sale of lots at the Southridge Business Park, which the Alliance developed.

The Alliance was created in 2004 when the Business and Industrial Development Corp., the Charleston Renaissance Corp. and the Charleston Regional Chamber of Commerce merged. The Alliance promotes business and economic development in the Kanawha Valley and sponsors community revitalization programs. The chamber lobbies the Legislature on business issues.

Although the Alliance has not traditionally owned businesses, it does have extensive experience as a landlord. It has built business parks; erected shell buildings and recruited tenants to fill them; and operates a business incubator on Smith Street.

In 1992 it partnered with the Parkways Authority to buy and remodel a building at 200 Kanawha Blvd. E. The goal was to attract an insurance claims processor, the Capital Area Services Co., also known as CASCI, and 600 jobs. That effort succeeded. Last year the Alliance used a $2.3 million loan to buy the Parkways Authority’s share of the building.

Now the Alliance has committed to investing in one startup – the airline – and is considering another.

The Mid-Atlantic Technology Research and Innovation Center, known as MATRIC, has asked the Alliance to become an investor. Although MATRIC is a nonprofit organization, it is re-working its business plan as it tries to create jobs by harnessing the brainpower that Union Carbide Corp. brought to the Kanawha Valley over the decades.

The Alliance extended MATRIC a $500,000 line of credit several years ago. MATRIC wants the Alliance to turn the credit line into an ownership position. It’s an inherently risky proposition. Not only is MATRIC a startup, it is investing in research that may or may not yield profitable products.

The airline investment also has risk. It has been estimated that the U.S. airline industry lost between $33 billion and $35 billion in the four years following the Sept. 11, 2001, terrorist attacks. Yet some airlines have managed to be profitable.

Alliance President Matt Ballard said, "When Money Magazine turned 30, they went back and looked at the most profitable stocks. The most profitable of all was Southwest Airlines, which posted a 25.99 percent year-over-year return. So while some people have dubious impressions of airlines, you can make money on an airline. That’s been proven by Southwest, JetBlue and others."

The airline planned here "has a very different, very innovative business plan," Ballard said. "So it has a different path, a different chance to succeed than the legacy carriers."

South Charleston native John Weikle, who started Skybus Airlines in Columbus, Ohio, is behind the startup here.

Richard Ross, executive director of the state Jobs Investment Trust, said that with all startups, "the first thing we look at is the people involved." Ross said he thinks the startup planned here meets the quality criteria because Weikle is behind it. Weikle "has a great reputation and great ability," Ross said.

When the trust makes an investment, "our intent would be to collect dividends and realize a profit through an initial public offering or a sale," he said.

"We come at it from the perspective that if we’re going to make an investment and the company only survives a year, it doesn’t do anybody any good," Ross said. "We want longevity, self-sustaining. We require it to have a job benefit. If a company can’t sustain itself it’s living off the public trough and that’s not what the Jobs Investment Trust is all about.

"The issue is, can this airline work with its business plan and business model? If you look around the country and the world, this model has demonstrated a great likelihood of success, even in markets the same size as Charleston."

The trust’s portfolio includes a $2 million ownership stake in Sino Swearingen Aircraft Co. that dates back to 1992. The aircraft manufacturer has built two airplanes and has hundreds of orders but is having problems finding the financing to ramp up production.

Ballard said he hopes Weikle’s startup airline creates jobs; boosts tourism; increases profits for Alliance member such as hotels, restaurants, malls and the airport; lowers airfares for members; makes the region more attractive to prospective employers; and generates a monetary return, so the Alliance can re-use the money for other job-creation projects.

Kanawha County Commission President Kent Carper sits on the board of directors of the Central West Virginia Convention & Visitors Bureau and is a major supporter of Yeager Airport.

"Trust me, we didn’t jump on this – we thought about it, debated it, and we know there is substantial risk," Carper said. "I think at the end of the day the greater risk to our local economy is to do nothing."

"With fuel costs going through the sky and the need to keep and maintain the service we have, what other alternatives do we have?" Carper asked. "And by the way, this is exactly what the business community wants us to do. This has the unanimous support of the business community. They know we’re risking public funds.

"One thing about the public funds we use is, they’re nontraditional funds," he said. "They’re not tax dollars, not property tax dollars. We’ve used money from the convention and visitors bureau that would normally support fairs, festivals, seminars and groups coming to Charleston. That means that money would have been spent. What we did, we directed that hotel-tax money, 90 percent of which comes from outside Kanawha County. The idea of trying to get this startup airline is to dramatically increase that type of activity.

Carper said he and Charleston Mayor Danny Jones took the position that they would try to do something bold to improve the opportunity for travel in and out of Charleston by making air travel more affordable.

The startup airline has the potential to drive down the overall cost of air service by millions of dollars a year, Carper said. "How do we know that? We had a low-cost carrier at one time, so we know the effect."

Yeager Airport Director Rick Atkinson has estimated that Independence Air saved the region’s travelers about $25 million during the 16 months it served Charleston. Independence went bankrupt in 2006.

"There are three ways to improve air service," Carper said. "You can bring in flights from existing carriers. That’s something we’ve done in the past and are working on now, although it’s becoming more difficult.

"Second, you can bring in an existing low-cost carrier. It is incredible what other communities have raised on a regular basis to subsidize a low-cost carrier.

"Third, there’s this novel approach."

The startup hopes to use the seed money raised here to attract $40 million from Wall Street investors to actually commence service. Carper said it’s possible the big money won’t be raised and the seed money will be lost; it’s possible the $40 million will be raised and air service will start; and it’s possible the airline will start, last a couple of years and fold.

"If this proposal works and this airline starts up, there will be a room full of people taking credit for doing this," he said. "If it fails, there will be a handful of us blamed for it. I’m sure I’ll be one of them."

Asked how he will judge whether the investment is a success, Carper said, "I’ll consider it a success if two things happen: They raise the money to start up, and it starts up and performs for some period of time. We’ll have gotten our money back right there and the community will have prospered.

"Just look around at air service today," he said. "Does any of it make sense? The mega-mergers? Airlines charging for a second suitcase and a bottle of water? The airline industry, to me, is almost incomprehensible. But I know we can’t live without it. The citizens of Kanawha County certainly risked more money than this when they built Kanawha Airport 60 years ago. They knew how important air service was 60 years ago. And I know how important it is to keep it today."

Atkinson, Yeager’s director, agreed that the startup involves substantial risk. "But there’s also a potential for a sea-changing economic impact on the whole state," he said.

Skybus has had a big impact on the cities it serves and Ryanair, "which this startup is modeled on, is the most profitable airline in the world," Atkinson said.

Atkinson said he will judge the startup a success "if it flies for one year and comes close to having the capacity and loads projected," because "the convention and visitors bureaus will have their money back in additional hotel/motel taxes."

Tomorrow: The $3 million invested locally falls under investment rules that don’t require much public disclosure.

Contact writer George Hohmann at business@dailymail.com or 348- 4836.

Originally published by DAILY MAIL BUSINESS EDITOR.

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