Avelo was near the top of my list of airlines that might end up making this year’s “Airlines We Lost” post, but now, that’s no longer the case. After a very dicey first quarter, the airline has turned in better results. It has also raised cash, and it is now buying a fleet of 50 Embraer E2s with options for more. This doesn’t mean I am suddenly bullish on Avelo, but it does mean that I don’t expect it to go away anytime soon.
You might recall that the airline’s first quarter was absolutely, incredibly, impressively terrible. Avelo saw its stage length-adjusted unit revenue plunge by more than 27 percent. With a need for cash and no immediate prospects, it turned to flying for a contractor doing Immigration and Customs Enforcement (ICE) deportation flights. That created controversy on its own, even though it didn’t have much of an impact until summer anyway. But as CEO Andrew Levy explained to me in a recent interview, Q1 was an anomaly. In fact, it was really January and February that were the problem. March was a little weaker because of the shift of Easter into April, but January and February were downright awful.
As Andrew sees it, this was a confluence of all sorts of different problems, some that hit Avelo harder than others.
- tariff talk that started up in earnest in early Jan hurt demand across the board, but…
- … consaumer sentiment in the Northeast where Avelo concentrates its flying was the worst in the country by far
- massive growth in seats in the Conecticut market (Hartford, New Haven, and Westchester) by over 16 percent, which Andrew says was the biggest growth in seats in the US
- seat growth led to a unit revenue decline that was greater in that market than any other, Boston metro was second, says Andrew
- because of decisions the airport made in New Haven, the end result was a “horrific experience” for customers at the airport
- at the very moment in time when people are hearing about this horrific experience flying out of New Haven, there are tons of seats at other airports with really low prices making it easy to switch
- away from New Haven, Avelo started up new flying from new bases and Q1 is tough for a ramp-up
Some of these things reversed themselves, but others took work. Andrew said that the “single biggest change was putting some sanity back into [New Haven].” That did get straightened out with the airport. And then things started to improve. I guess travelers have short memories.
The latest Department of Transportation (DOT) data is for Q1, but Q2 will be coming very soon. Andrew gave me a preview saying that the airline made money in April, though May was bad. He said it “looked like the old May prior to COVID” which was more of a shoulder season than summer. But then summer kicked in, and the airline made money in June and July. When we spoke, the books hadn’t been closed on August yet, but he said it was right around breakeven and might post a profit.
Compared to the depths of despair in January and February, this sounds like great news, but there are details we still don’t have. How profitable was the airline? We don’t know. Just running a small profit during the peak season is not going to make this airline work.
So, Avelo has now given up on its original West Coast network. It already pulled out of Santa Rosa when it took on the ICE flying, and now it has left Las Vegas and Burbank as well. Even though one airplane was taken out of Concord (Charlotte) to fund ICE flying, it will now put another airplane back in there and resume growth. New Haven continues to be the crown jewel, but it’s not clear to me what if anything else truly works. Still, in its most recent schedule extension, the growth seems to be in the Wilmingtons (NC and DE) along with Concord and Lakeland. Avelo wants to serve small secondary airports with easy in and out. I couldn’t believe when I was told that Concord is actually more expensive to serve than Charlotte once you include fuel costs, but Avelo is still committed.
This strategy was apparently good enough to attract an investment. Andrew is very secretive and says they won’t disclose who invested or how much. The only thing we know is that it is the largest raise since the Series A round of funding. The Series B raise was $42 million, so it had to be north of that. This alone takes Avelo off of imminent death watch, but it doesn’t fix the airline. It just gives more cushion to find a sustainable path forward.
Two days later, however, we learned that Avelo has now placed a giant order for 50 new Embraer E195-E2 aircraft that will have somewhere around 140 seats onboard. So, it’s going to spend that money. This is slightly smaller than the eight B737-700s in the fleet but significantly smaller than the backbone 14 B737-800s. It is a marked change from the original strategy of low-cost used aircraft with more seats to higher-cost new aircraft with fewer seats.
The natural question, of course, is whether or not Embraer was involved in the money that Avelo raised. Did it directly fund this itself? Did it work with another company that would give give the funds if Embraer was involved? What other financial shenanigans are possible? We don’t know, and we likely won’t know. All Andrew would say is that the investor did know about the Embraer order.
With this all locked in, Avelo now seems ready to grow. This first airplane won’t come until 2027, and it will take six years to take full delivery. This is not a fleet replacement. The B737-700s will go away, but there will be room for a dual fleet with both around 50 E2s and probably somewhere near 25 B737-800s. There is some flexibility in that, however, depending upon how the business grows.
Andrew is extremely excited about this airplane despite the added cost and complexity of a dual fleet. It sounds like he feels confident in filling airplanes profitably during peak times today. The hard part is trying to figure out how to lose less money in the off-peak. And having a smaller, more efficient airplane in the E2 is apparently his answer. He said they plugged in the ownership and operating costs of the E2 into 2024 results, and the airline goes from “breakeven to solidly profitable.”
Avelo likes the bases it has, and it will initially focus on growing those. But eventually, this airplane is expected to help open new opportunities because of its short-field performance. Andrew thinks that fields with 4,000 to 5,000 foot runways will be possible. At least in the beginning, it’ll be focused on the East Coast where the existing operation is.
I can’t help but think of something like Bridgeport in Connecticut with its ~4,700 foot runway. That’s too close to New Haven, but there are probably more of those around. They certainly have their own ideas, though some of them aren’t even Part 139 airports, so significant work will have to be done to enable actual commercial service. But that’s down the line.
To sum things up, Andrew said this:
We have four and a half years of data to support our view of the world, the combination of small easy-to-use airports with low every day fares, industry-leading reliability, offering a simple basic product on short-haul flights. We believe without a shadow of a doubt that this works.
They may believe that, but consider me still skeptical. This is an airline that has shown it can in the good times make some kind of profit, but in the bad times it can lose it all and more. I’m not so sure I agree that this new fleet with solve all of Avelo’s problems. But at least now there is breathing room for the airline to try once again to prove it can be a success. It’s just a very big “if.”
