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Breeze Aviation emerges, ready for launch during tumult

Analysis

One area that has remained opaque during the COVID-19 pandemic is the timeline for planned US start-ups that aimed to debut in 2020 or 2021. Logic would dictate that those plans could be frozen as demand was wiped out, and has only slowly begun to recover. As cases in the US continue to climb, some airlines are tempering their capacity growth. 

But David Neeleman is moving ahead with the launch of Breeze after reaching a deal to obtain the operating certificate of the defunct US regional operator Compass Airlines, and he aims to introduce charter flights in Oct-2020, followed by scheduled services six months later. 

Breeze is also confident of closing a deal to raise millions in equity during Jul-2020, at the same time as most airlines are scrambling to bolster liquidity and are warning of significant downsizing.

It is so far a matter of conjecture why Breeze is working to rush to market when demand remains so shaky, but perhaps the company sees opportunities in the crisis. 

Summary

  • Breeze aims to use the operator's certificate of the defunct US regional operator Compass Airlines to introduce charter flights by YE2020, followed by the launch of scheduled services in May-2021.
  • Breeze aims to enter the market during a highly unstable period, yet seems poised to raise millions in equity during the coming weeks. 
  • The company’s business of serving abandoned markets has not changed, but it is unlikely that the US and aviation will be in a normal environment when Breeze introduces commercial fights in 2021. 

Breeze abandons plans to lease E-Jets from Azul, finds better terms elsewhere 

Breeze had originally aimed to launch in 2020, operating charters before starting scheduled service, but the company has been relatively quiet during the COVID-19 pandemic – until now. 

Breeze and Compass have reached a deal for Breeze to obtain the operator's certificate of Compass, subject to approval from the US Department of Transportation (DoT). If the agreement is approved, Breeze aims to launch charter flights from Compass’ Minneapolis base in Oct-2020, followed by the introduction of scheduled flights in May-2021. 

There has also been a major change in Breeze’s aircraft plans. In a filing seeking approval of the Compass agreement, Breeze stated that it does not intend to lease 28 Embraer 190/195 jets from Azul, a company of which Mr Neeleman is founder and chairman of the board. Instead, the start-up has reached a deal with Nordic Aviation Capital (NAC) for the lease of 15 Embraer E-Jets. 

“The reduction of aircraft used in air transportation due to the COVID-19 pandemic has resulted in a favorable aircraft leasing market”, Breeze said.

As a result, Breeze is leasing 15 E-Jets from Nordic on “significantly better terms that the original term sheet signed with Azul for ERJ-195 aircraft.”

(In early Jun-2020, NAC had applied to the High Court in Dublin to launch a 'Scheme of Arrangement' under the Irish Companies Act. On 9-Jul-2020, NAC received approval from its lenders to implement a standstill and deferral on certain payments of interest and principal on its borrowings for the next six to 12 months. This vote allows the Court to formally approve the scheme, with a hearing likely to occur around 21-Jul-2020.)

Breeze remains bullish on its business plan as demand remains depressed 

Breeze is requesting “expedited consideration in order that air transportation services under the certificate can resume as quickly as possible,” according to the filing, and the company believes obtaining the existing certificate will help it to “be able to deliver on its plan to restore service to underserved markets more rapidly.”

That conclusion appears to run counter to the current operating environment, where capacity and demand remain severely depressed. Data from CAPA and OAG show that for the week of 15-Jul-2020, US domestic seats have been cut by 65%, and United has recently warned that its net bookings are falling. United has also scaled back some of its planned capacity growth in Aug-2020. Delta too has decided to scale back.

Breeze’s calculus in launching charter flights in Oct-2020 is hard to determine, other than the fact that it can skirt the prolonged process of obtaining its own operator's certificate from scratch and gain regulatory approvals more quickly. 

Breeze has not strayed from its original assessment that there are midsize markets in the US that have been abandoned. Previously, the company has concluded that as major airlines have consolidated at fortress hubs, “entire segments of the country have seen their air travel options diminish”, which has led to increased connections and increased travel times. 

See related report: US start-ups race to launch, targeting untapped markets 

According to Breeze, there are numerous examples of regions in the US where seat capacity dropped for the period spanning 2007 to 2017, including some markets that have been hit with decreases as large as 15%. 

According to the filing, Breeze initially plans to indicate commercial service from the US Atlantic Coast to markets in the South, Texas and the Midwest. "Bringing and increasing service to underserved communities is an important part of Breeze's business plan during its first year and beyond," the company stated. 

Breeze works to raise start-up capital as US airlines scramble to build up cash

Breeze estimates that it needs USD61.6 million in start-up capital requirements, which represents approximately three months of regular operations. Neeleman holds 82% of Breeze’s shares, valued at USD19.6 million.

Since Feb-2020 the company has raised USD4.2 million, which includes investments from other Breeze executives. Breeze has estimated that it has USD25.4 million of its estimated start-up capital left to fund.

The company has stated that it is in the midst of raising USD45 million in equity and expects to close a financing transaction in Jul-2020. 

Breeze’s potential agreement to obtain millions in financing occurs as most US airlines are working to build up their liquidity in order to stave off millions in daily cash burn.

Analysts at Cowen & Co have calculated that US airlines have raised USD56 billion in capital year to date (through mid-Jul-2020). “The scramble for cash has been swift[,] with all airlines willing to pay up on debt or issue equity to make sure they can bridge the gap until demand improves”, the analysts concluded in a recent report. 

Breeze is not straying from its plans, even during a historic pandemic 

Breeze is showing a certain level of agility in working to obtain the operator's certificate of Compass in order to launch its operations in a timely manner. The company is launching during a major downturn for the industry that has an uncertain timeline for recovery.

But Mr Neeleman’s track record shows that he is adept at capitalising on opportunities in the market, so doubters do so at their own risk. Breeze remains steadfast in its belief that it can build a position in underserved markets. 

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