Market Trends

Emerging Players Aiming for Sky-High Profits: The Rise of Avelo and Breeze Airways

In an era freshly recuperating from the heavy blows dealt by the global pandemic, the aviation sector has beheld the fruition of its grit and perseverance, with the venerated league of foremost U.S. airlines reaping the harvest of profitability. Two ingenious upstarts, Avelo and Breeze Airways, which boldly set sail amid the turbulent tides of the pandemic in 2021, are now declaring their anticipations of joining this elite echelon of profitable entities.

An Ambitious Takeoff During Challenging Times

In the shadows of a health crisis that left the aviation industry in upheaval, Avelo and Breeze Airways, two entrepreneurial ventures in the realm of low-cost air travel, embarked on their journeys. Born at a time when air travel demand plummeted to depths of 30% below what was once normal, these newcomers have since then broadened their operations at an astonishing rate.

By masterfully charting out routes that knit together cities often overlooked by larger carriers, these airlines have adopted a David versus Goliath strategy. This has paid off significantly, with Avelo favoring pathways through Los Angeles' Hollywood Burbank Airport, while Breeze favors more discreet airstrips like Islip, Long Island, instead of the bustling metropolis of New York City.

Andrew Levy, CEO of Avelo Airlines, illustrates the arduous task of scaling up in an industry overshadowed by titans. Delta, American, United, and Southwest collectively command the skies with an approximate three-quarter monopoly over the U.S. market. Notwithstanding, Avelo unveiled that it served 2.3 million customers in 2023, operating flights at over 80% capacity. Breeze Airways, concurrently, boasted ferrying more than 2.8 million travelers with 77% of its seats filled, an impressive feat considering its nascent stage in comparison to Southwest Airlines's behemoth numbers over 137 million passengers in the same year.

Despite the nascent stage of their development, success gleamed on the horizon for Avelo with its inaugural profitable quarter in the latter months of 2023, coupled with projections of enduring profits into 2024. With a notable surge in revenue at $265 million in 2023, an astonishing 74% elevation from the previous year, the airline seems poised for financial altitude.

CEO Levy acknowledged that their profit turnabout was expected earlier but conceded that the unforeseen rise in fuel costs, the ripple effects of rampant inflation, and geopolitical strife such as Russia's invasion of Ukraine have all postponed their ascent into profitability. Breeze, helmed by its optimistic leader David Neeleman, is similarly charting a course towards its premiere profitable year in 2024.

Pioneering Nontraditional Routes: A Strategic Edge

Embracing the mantle of low-cost carriers, Avelo and Breeze have aligned themselves with the likes of Frontier and Allegiant. Their modus operandi consists of offering bare essentials within their base fare and conducting flights from secondary airport bases, a formula that caters to cost-conscious travelers. Avelo is currently commanding about 50 destinations from six bases, including Tweed-New Haven Airport in Connecticut and Delaware's Wilmington Airport.

In a bold expansion beyond the continental U.S., Avelo went on to conquer the skies of Puerto Rico in 2023 and enunciated plans to extend its reach to other international territories in the near future. Meanwhile, Breeze Airways, a product of Neeleman's seasoned expertise in aviation with past endeavors like JetBlue Airways and Azul, has strayed from major hubs favoring about 50 airports including New York's Westchester County Airport and Ohio's Akron-Canton Airport.

Neeleman's Breeze Airways engineers unique offerings such as cross-country flights from smaller cities like Hartford, Connecticut to prominent destinations like Las Vegas and Los Angeles. And with sights set on international services by 2025, Breeze's trajectory is one poised for expansive growth.

The aspirations of these fledgling airlines have taken wing, with Avelo announcing about 75 routes from an initial 11 shortly after launch, and Breeze marketing around 180 routes, a significant climb from the 16 it boasted during its inception summer.

Competitively Priced Travel with a Twinkle of Luxury

Strategically, Avelo and Breeze court the thrifty traveler by offering base fares that in some instances scale the economy of double-digits. However, they maintain the now common industry practice of upcharges for amenities like checked luggage and advanced seat assignments. Breeze's enticingly economical fares grant passage with only a personal item, nevertheless, they also market first-class seats and extra legroom options, escalating the travel experience for those willing to indulge in added luxuries.

With neither airline including a carry-on bag within their barebones fare, they embody the transformation of the modern airfare landscape, one where additional fees are not solely characteristic of budget carriers but are also embraced by the majority of larger airlines.

Navigating the Turbulence of Operational Costs

Confronted with the formidable increases in industry-wide costs, Avelo and Breeze's commitment to maintaining low airfares lends a heightened severity to these challenges. Issues such as the stark deficit of pilots following the pandemic and amplifying labor costs riddle their flight path with complexity.

In recent years, the pirating of pilots by large airlines offering generous salaries has further strained the resources of smaller carriers. But Neeleman's Breeze is not idling on the runway of despair. With a robust cadre of first officers primed for captainship, the carrier designs an alleviation plan for this occupational shortfall.

Moreover, the aviation sector's battle with tardy aircraft deliveries and the arduous task of procuring thousands of vital replacement parts continuously casts a shadow over these soaring ambitions. Avelo's cargo hold of troubles includes delayed deliveries of leased used Boeing 737 aircraft, a stumbling block acknowledged by CEO Levy.

However, Breeze conveyed intentions last month to intensify its fleet with 10 more Airbus A220 aircraft, envisioning to transition entirely to the A220 for its commercial service by the conclusive stretch of 2024. Currently, with 22 A220s in flight and an anticipated total of 32 by year’s end, Neeleman's airline boasts a fleet pulsating with promise.

As Avelo and Breeze tread closer to profitability, they weigh the prospects of publicly listing. Every course correction, strategic direction, and expansion strategy aims to archive a level of sustained profitability—a prelude to a potential Initial Public Offering (IPO) or an alternative exit strategy like a merger or acquisition.

Levy stands adamant that Avelo's compass is set toward being "IPO ready," expressing no intrigue toward selling the airline. Yet, the skies of the airline industry have witnessed other low-cost carriers opt for mergers as a tactic to challenge the dominion of the big four carriers. An exemplar of such strategic merges was the intended unification of JetBlue and Spirit to construct the fifth-largest airline in the U.S. Despite this merge being overturned by federal judiciary, its intent showcases the maneuvers within the industry.

The plans to combine forces announced by Hawaiian Airlines and Alaska Airlines reveal a continuation of the strategy, albeit their brands remaining distinctly separate. Amidst these industrial tides, both Levy and Neeleman echo a sentiment of ample space for multiple players in the low-cost airline arena, affirming a belief in the vitality of competition for the benefit of travelers.

In the final analysis, as etched by industry consultant Henry Harteveldt, the thrumming engines of competition in the skies enhance the journey for all—ushering in an era where the public reaps the reward of choice and affordability.

Throughout these narratives of progress and ambition, CNBC's Leslie Josephs has rendered invaluable insights into the unfolding story of Avelo and Breeze Airways. It is a tale of aspiration, adversity, and the undying quest for profitability within an industry that never ceases to reach for the skies.

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