Three years after the passage of the Airline Deregulation Act in 1979, the US airline industry was in the midst of upheaval as many of the legacy carriers that long dominated the commercial skies since the second decade of the century were under siege from free market forces. Unshackled from the strict regulation of the Civil Aeronautics Board, airlines now had a free hand to adapt and adjust to the demands of the US travel market. Now you would think this would be a great thing, but a lot of the majors weren't adapting. And their attempts to adjust to the market were under attack from a new legion of airlines that hadn't been seen in the US market before- the start up. National Airlines found itself swallowed up by a now-bloated Pan Am in an effort to build an instant domestic network for what was once America's "Chosen Instrument". Eastern Airlines found itself under attack by a brash low-cost upstart called PeoplExpress. American began to build the first "fortress hub" in the industry at its new base at Dallas/Fort Worth. Western and United found themselves under attack by PSA's breakout of the intrastate market in California. Labor strife reigned at Texas International and a resurgent Air Florida found its operation cast into doubt after a tragic crash in a blizzard at Washington National Airport. And most telling of what the next several years would bring, Braniff International Airways shut down for good that same year, a victim of overexpansion and bad business decisions reaching back into the 1970s. An airline with a storied history and legacy going back to the 1920s simply shut down to the shock of the industry.
It was amidst this chaotic marketplace that a bored and poorly performing college student in accounting at the University of Utah sensed opportunity. In 1982 David Neeleman had been reading pieces in the Wall Street Journal regarding Braniff's shutdown as the first convulsion to wrack the incumbent airlines in a newly deregulated market. Long an underperformer in school (thanks to what we now know today as attention-deficit disorder), Neeleman did have a gift for numbers and customer service groomed from his earliest years working for his grandfather in a small Salt Lake City market. With a shift in the airline marketplace, Neeleman found there were opportunities for smaller carriers like Southwest and Midway Airlines who as smaller entities, were nimble to adjust to marketplace and could operate tightly-knit employees for lower costs. He approached his father, Gary Neeleman, telling him "Dad, I think we should get into the airline business." To which the elder Neeleman responded "How on Earth do you think we could do that? Airplanes cost money!"
Neeleman pointed out that his father was absolutely right- to start an airline is a insanely capital-intensive venture. What Neeleman proposed to his father was to get into the airline business via the back door through the package tour business. Arranging packaged tours was far less capital intensive as the various parts of the package, from airfare, hotel, and so on, were already out there, they only had to be combined in a single package to make it easy for the consumer to travel to exotic locales for vacation with the least amount of hassle possible. In the days before internet booking, package tours were usually the most convenient way for the average American to jet away for a few days or more.
Developing his business plan and arranging for investors, Neeleman found out from a college classmate that she know someone who bought four hotels in Hawaii and converted them into condominiums. However, with a recession taking place, the owner found it difficult to sell the units- Neeleman saw an opportunity- he could rent out the condos for customers wanting a quick escape. He literally cold-called the owner with a sales pitch: pay me your maintenance fee, $100 per empty unit per week, and I'll fill them all up with vacationers. He would mark up the price for renting them and collect the difference. Neeleman then placed an ad in the Salt Lake City papers that brazenly pitched "$50 a night for your own condo in Hawaii!"
The response was amazing, the condos were getting filled and David Neeleman was getting $250 a week off each rental he set up. Making $1000 a day, school got very uninteresting, very quickly, so he dropped out during his junior year at the University of Utah to run his business full time.
Although his condo rental business was booming, there was one problem that always nagged at him- his customers always had a difficult time getting good airfares out of Salt Lake City to Honolulu via the various Pacific gateways of the established majors. Figuring he could do better buying blocks of seats on charter or budget airlines, he set out see which airline could best meet the needs of his customers for an inexpensive flight to Hawaii. The cheapest he could find?
The Hawaii Express. They were a small charter that flew only 2 DC-10s (and at one time a single 747) out of LAX to Honolulu. The Hawaii Express was founded and run by a Hawaii-based businessman, Michael Hartley. Hartley had his start in the airline business going back to 1975 when he started an intrastate commuter airline in Hawaii, Island Pacific Airlines. Island Pacific operated a small fleet of Cessna 402s out of Honolulu and in 1978, his airline was acquired by fellow commuter rival Air Hawaii. During the same period, Hartley and his wife also ran a large FBO operation at HNL. In 1981 he seized upon the opportunity brought about by deregulation start The Hawaii Express to offer cheap fares between Honolulu and Los Angeles.
Neeleman now had a cheap condo in Hawaii and a cheap airfare to Hawaii for his customers and he formed a travel company called Independent Flight Services to handle the booking arrangements with The Hawaii Express (or "Big Pineapple" as it was billed in its ads). All his customers had to do was find a way to Los Angeles from Salt Lake and the overwhelming number of them would make the long drive to LAX since Neeleman's package was so inexpensive. In less than a year, he was doing eight million dollars in sales and had 20 employees. He upgraded from his modest family car (he had two children at that point) to a BMW sedan. Each flight had a sizeable block of seats set aside just for Neeleman's customers.
In 1983, barely over a year after he began, it all unravelled with little warning. United Airlines and Western Airlines both had the lion's share of passenger traffic between California and Hawaii for quite some time and both took a very dim view of Michael Hartley's low-fare interloper that was skimming increasing amounts of traffic from their flights. A vicious price war ensued and a dissident board ended up sacking Michael Hartley for failing to respond aggressively and wisely to the onslaught by United and Western. In less than eight months, The Hawaii Express shut down in bankruptcy and with the airline went hundreds of thousands of dollars of deposits Neeleman's company put down for seats on each flight. He had no money left to refund his customers' deposits and he in turn had to declare bankruptcy. In the book Blue Streak Neeleman states "And I had a hundred thousand dollars in the bank and no debts and if I only had several thousand dollars more, I could have saved the company." Neeleman was also on the verge of signing on with a different charter airline fly direct from Salt Lake City to Honolulu. The need for a large cash cushion definitely made a powerful impression on the 24-year old David Neeleman.
Overnight, the Neelemans lost everything. Home, assets, car. He went back to working as a cashier in his grandfather's small store, stocking shelves at night- the very job he held before going to college. He resolved to never go back to the airline business again. David's father, however, saw that his son was probably meant to do more and introduced him to a family friend, June Morris. She owned the largest travel agency in Utah. She made him a deal- work for me for six months, if you don't like it, no hard feelings.
The rest, is history. With June Morris he ended up founding Morris Air (which ironically had Salt Lake City-Los Angeles as its busiest route) and when Morris Air was bought by Southwest in 1993, Neeleman ended up working with the one man who he admired immensely- Herb Kelleher. After leaving Southwest amidst a personally conflict with everyone at Southwest except Herb, Neeleman went on to found Westjet in 1996 and you know where he ended in 2001- launching JetBlue. Neeleman's experience with The Hawaii Express was formative, though. He vowed to never be undercapitalized again (when he launched JetBlue, it had amassed an industry-leading over $100 million in capital before even leaving the ground). He learned that the deregulated marketplace, while it favored start up carriers, also gave the legacy carriers the ability to respond aggressively. Today Michael Hartley is the CEO of Cheaptickets.com. June Morris still sits on the board of Southwest Airlines. JetBlue, regardless of one's opinion of them, has definitely made a mark on the industry. And it all began with some empty Hawaii condos and a little known charter airline.
Source: Blue Streak: Inside JetBlue, the Upstart that Rocked an Industry by Barbara Peterson. Portfolio Trade, 2006.