August 10, 2008

Little Airline Fills Vital Role



Walk through Mitchell International Airport's terminal and you see signs of the peak summer travel season: long lines of passengers waiting to check in for their flights, skycaps lugging in bags from the curb, and the constant tapping on computer keyboards by airline counter agents.

It's a busy place -- except at the far southern end of the terminal, where Great Lakes Airlines operates its counter.

There are no lines, none of those fancy electronic ticket kiosks, and no screening equipment for luggage. Just one employee, looking a bit lonely, waiting for someone to check in for the flights offered from Milwaukee by Great Lakes: two trips daily to Rhinelander, in northern Wisconsin, which then continue to Ironwood, Mich., and two trips daily to Manistee, Mich. All the flights are on 19-seat turboprop aircraft and last around an hour or so.

It may not be glamorous. But the airline's corporate parent, Great Lakes Aviation Ltd., has managed to eek out a profit so far this year, even as Midwest Air Group Inc., Northwest Airlines Corp., AirTran Holdings Inc. and other carriers are reducing flights and laying off employees to stem the tide of red ink.

Great Lakes also is the newest airline at Mitchell International, where the carrier began service in June. That was just weeks before Oak Creek-based Midwest Air, operator of Midwest Airlines and Midwest Connect, announced it would cut flights by 40%, eliminate jobs by a similar share, and seek steep wage cuts from its remaining workers after being walloped by record-high jet fuel prices.

What makes Great Lakes profitable are the subsidies it receives from the U.S. Department of Transportation for providing what the federal government deems "essential air service" to small communities. During the first three months of 2008, Great Lakes posted operating revenue of $25.9 million, with $7.2 million coming in the form of federal subsidies, according to the company's latest quarterly financial report.

Essential air service "is our niche market," said Monica Taylor, Great Lakes director of sales and marketing.

Serving niche market

Other airlines fly essential air service routes. But Great Lakes serves the most communities under the program, according to Department of Transportation records.

The company uses only turboprop aircraft: 27 Beechcraft 1900D planes, which seat 19 passengers, and six Embraer Brasilia EMB 120 aircraft, which have 30 seats.

Those are good planes for flying short routes to small airports because they're relatively inexpensive to lease. Also, turboprop planes are more fuel efficient than jets -- a factor that becomes especially important as the price of oil stays high.

Great Lakes, based in Cheyenne, Wyo., operates hubs in Denver, Albuquerque, N.M., Phoenix, Kansas City, Mo., and St. Louis, from where it flies to such destinations as Page, Ariz., North Platte, Neb., Dodge City, Kan., and Decatur, Ill.

The company, with about 1,000 employees, also has code share agreements with United Airlines and Frontier Airlines at the Denver and Phoenix hubs.

That means a customer who buys a Great Lakes flight from Moab, Utah, to Denver can add a United flight from Denver to Chicago on the same ticket. Those code share agreements make it easier for Great Lakes to serve as a "feeder" airline to United and Frontier.

Entry into Milwaukee

The airline's entry into Milwaukee came after Midwest Connect dropped flights to Escanaba, Iron Mountain, Ironwood and Manistee -- all Michigan communities that were part of the essential air service program. Midwest Connect did not seek to renew its program contract with the Department of Transportation because it was phasing out its use of turboprop planes in favor of regional jets.

Great Lakes added Manistee and Ironwood as subsidized destinations from Milwaukee. The Ironwood service is not a direct flight because it includes a stop in Rhinelander, which Great Lakes added to make some additional money, Taylor said.

West Allis resident Fran Kowalkiewicz is among those happy to see a direct flight from Milwaukee to Rhinelander, where her daughter and grandchildren live. She flew in June, paying around $200 for a round-trip ticket, including taxes and fees.

The one-hour flight was "very smooth and on time," said Kowalkiewicz. "It's a great service. I definitely will be doing it again."

The drive from Milwaukee to Rhinelander would cost a lot less -- around $65 in gas, for a car that gets 30 miles to the gallon. But the drive also takes over four hours each way, and Kowalkiewicz doesn't own a car.

Manistee Mayor Cyndy Fuller said area residents, including business travelers, are thrilled to have service to Milwaukee restored. Manistee is a four-hour drive from Detroit Metropolitan Wayne County Airport, and 90-minute and two-hour drives to smaller airports in Traverse City and Grand Rapids, respectively.

"When you get used to (local air service), it becomes a need," said Fuller. She plans to fly to Milwaukee in November, and connect with a flight to Philadelphia.

Federal program

For the flights to Rhinelander/Ironwood and Manistee, Great Lakes will receive $3.3 million annually in federal subsidies, according to the Department of Transportation.

Under the program, an airline submits a bid to provide essential air service. The carrier estimates its fare revenue and asks the Department of Transportation to provide additional money to cover the company's expenses -- and a 5% operating profit margin.

If the carrier is selected, it signs a two-year contract to provide the service and receive the subsidies. But there's no guarantee that the subsidized airline will come out ahead, Taylor said.

The biggest unknown is the price of jet fuel. If it rises beyond what the carrier's bid estimated, then the airline simply has to eat those higher costs. The subsidies do not increase during that two- year contract, Taylor said.

As a result, Great Lakes could find itself "locked into a two- year losing contract," she said. In those cases, an airline can seek to terminate the contract, which is then put up again for bid.

However, if costs decline, then Great Lakes can earn a higher profit than it expected, Taylor said.

The company in its first quarter earned the thinnest of profits: 1 cent for each share of stock, or $210,739. Great Lakes will report its second-quarter earnings within the next week or so.

In Milwaukee, passenger traffic was lower than expected when Great Lakes began its flights in June, Taylor said. Since then, it's picked up a bit.

"We're getting there," she said.


Great Lakes Aviation Ltd. is based in Cheyenne, Wyo., despite having a company name that alludes to the Upper Midwest. Great Lakes was incorporated in 1979 and began its first scheduled passenger flights in 1981 between Des Moines and Spencer, Iowa. The airline's name refers to Iowa's Great Lakes region in the northwestern part of the state. In 2000, the company moved its headquarters from Spencer to Cheyenne after the state of Wyoming provided funding to build a new maintenance facility and corporate headquarters for Great Lakes.

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