Techies pressing again for direct Silicon Valley flights

March 31, 2012

Ever since Mayor Stephen Goldsmith’s administration in the 1990s, high-tech firms have been clamoring for nonstop flights between Indianapolis International Airport and California’s Silicon Valley.

They insist such flights are vital to coax venture capitalists to “flyover country” to visit and fund promising tech firms here.

direct-flights-graphic.gifThe lack of flights seemed to have become less of a problem in recent years. Local funding sources have grown, and companies like Scale Computing still managed to get funding from venture firms on the coasts, despite inconvenient air service.

But just when it seemed like nonstop air service didn’t matter as much, one of Indiana’s tech icons made it clear the need is as urgent as ever.

“The most important thing we can do collectively is to make sure that we get nonstop flights to places like Silicon Valley and Austin and Boston …,” ChaCha Search CEO Scott Jones told a room full of tech leaders at IBJ’s technology Power Breakfast, earlier this month.

The room erupted in applause.

“… because if we don’t do that, we are stuck in the mud, literally stuck in the mud.”

While enthusiasm remains for nonstop flights, the prospects of landing them may be the dimmest in decades.

One reason is a change in strategy among the battered airlines.

Just a few years ago, they were engaged in heated battles for market share. They added nonstops to secondary cities, even if some of those routes weren’t exactly profitable.

In fact, Northwest Airlines made Indianapolis a focus city. It smelled opportunity starting in 2004 when hometown carrier ATA Airlines filed for Chapter 11.

Among routes Northwest added in Indianapolis was one ATA had flown, to San Francisco—the front door to Silicon Valley.

But in 2008, the economy tanked. Passenger counts tumbled. Northwest was acquired by Delta Air Lines. Jet fuel prices started to soar, making those 50- to 75-seat jets that served routes to medium-size markets such as Indianapolis too costly.

Suddenly, “while your customers may have loved the service, the shareholders sure didn’t,” said Robert Mann, principal of aviation consultancy R.W. Mann & Co., in Port Washington, N.Y.

Now, with even more airline mergers, “what we have is less service, fewer hubs, fuller planes and higher prices,” Mann added.

In other words, said Christofer Matney, the Indianapolis Airport Authority’s air service director, “in the last years, airlines have decided to make a profit.”

Matney and his team have that much more difficult a case to make to risk-averse airlines about resuming nonstops to California or to other venture hotbeds.

“When oil is over $100 a barrel, it’s very difficult for any airline to justify flying over their hubs just to get to California” nonstop, said Mike Wells, president of the Indianapolis Airport Authority board.

Pampered priorities

Venture types from California can still get here. Maybe now it requires traveling through Chicago O’Hare, first.

So what’s the problem?

As Jones tells it, the frequent lament from venture executives is that “not only do we need flights, they can’t be commuter flights. It’s got to be like sitting up front in business class with Wi-Fi and it needs to be two flights a day, in both directions.

“They need to be able to get up in the morning, wake up in their own bed, come here, do a board meeting or an interview and then get home for a late dinner or to tuck in the kids back in Silicon Valley.”

Seasoned business fliers accustomed to connecting flights surely would scoff at such demands by these pampered venture executives.

But that’s just the way it is, explained Jones.

“When I was on the road for ChaCha two years ago … 65 to 70 of them said, ‘We can’t get there from here. So we’re not going to invest in your company. We’re not going to put money in. We’re not going to be on your board. We’re not going to fly there.’”

Jeff Ready, co-founder and CEO of Scale Computing, said ChaCha’s experience is not an exception.

“It’s more than just a convenience for the investors. I know the same experience. Talk to 100 investors. Forty or 50 of them say, ‘No, because you’re in Indiana.’ And for those that then do invest, that means that the company, like us, is going to raise money at probably a 30- to 50-percent discount in valuation because there’s fewer people putting money in, which hurts us.”

Skin in the game

But if tech firms want nonstop flights to boost the odds of getting venture investment, they will have to do a little investing of their own.

“How do we get everyone together? Scott [Jones] himself cannot buy all the tickets,” said the airport’s Matney.

Not only do firms need to provide some level of commitment to use a nonstop flight before an airline is likely to commit, they may also need to provide financial assurances.

A new, nonstop route can cost an airline $40 million to establish. An airline wants some degree of assurance it can make money on that investment.

One scenario is that businesses could contribute to something similar to a line of credit. If a minimum level of performance isn’t reached, say after the first year, the airline could draw on it.

“Airlines,’’ said Matney, “want risk mitigation.”

Jim Jay, president of the tech initiative TechPoint, has worked with Matney and with the airport’s chief financial officer, Marsha Stone, to crunch numbers.

“We know we have enough people flying from here to San Francisco. But we’ve not received enough written commitments from companies pledging their ticket purchases to such a flight,” Jay said.

Airlines aren’t the only ones with expectations.

“If you’re going to appeal to a business customer, you’ve got to fly a minimum of three times a day,” Mann said, as a general rule of thumb.

Many airlines these days are flying aircraft on domestic routes that hold about 150 passengers. At three flights daily, you’re talking about 450 passengers a day.

Airlines want to fill at least 80 percent of these seats, so at least 360 people need to use the route each day.

Not only that, but airlines need to make sure a new nonstop flight doesn’t cannibalize too many passengers from existing fights to its hubs, Mann explained.

The economics of a nonstop flight from Indianapolis to San Francisco could look better, however, if the West Coast flight became part of, say, an Indianapolis-San Francisco-Shanghai route.

Other ideas

Or, might a vacation airline save the day?

Allegiant Air, for example, flies nonstop to a number of major destinations. Its economics are better in that it also sells other vacation-related perks such as hotel lodging and rental cars.

The downside is that frequency of service to a destination is usually less—in some cases just two flights a week. Nor does Allegiant offer the kind of onboard perks some business travelers would demand.

Another possible scenario: Bring a startup carrier to Indianapolis International.

There already are proposals. Former ATA Airlines employee Christopher Allen has proposed Legacy Travel Club, which would fly refurbished MD-83 aircraft.

Legacy would fly not just to vacation destinations to the south but also to West Coast tech hot spots. In fact, Allen said, nonstop service to San Francisco is a priority, as he’s heard the cries from tech leaders.

The MD-83s would offer meal service as well as Wi-Fi and perks such as monitors that would allow passengers to view the plane flying via cameras attached to the plane’s belly.

Allen’s business plan requires about $5 million to get started. So far, he’s not found enough investors.

He said he has reached out to Jones but has not heard back from him.

How about chartering a jet to make runs out west?

No, said Jay. “We want the market to support the flights versus providing a subsidy to get it off the ground. Some municipalities have made commitments to airlines to buy empty seats; we don’t believe that is the way to go.”

Michael Huber, the city’s deputy mayor for economic development, said the city and airport officials are in talks with “multiple airlines” about luring nonstop flights here.

“One of the biggest obstacles obviously is the price of fuel right now,” Huber said.

Whatever the airline industry’s troubles, Indianapolis has become a more compelling place for investors on the tech coasts to check out, local tech entrepreneurs argue.

Mike Langellier, who just sold his financial software firm MyJibe to Utah-based MoneyDesktop, said Indianapolis’ underlying tech infrastructure has vastly improved in recent years. There’s new talent, more capital and better networking that tends to accelerate product development.

But negative stereotypes persist.

“I was in Puerto Rico a couple weeks ago. There was a guy from New York. When I told him I was from Indiana, he made the stereotypical ‘fly-over’ comment: ‘Where’s that? Why are you in Indiana? I fly over there on the way to Silicon Valley.’”

Added Langellier: “I wanted to punch him.”•


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