Eight years ago, before the TSA began scanning passengers' privates as a matter of course, Wade Eyerly was working as an advance man for Vice President Dick Cheney, traveling 27 days a month on last-minute, one-way tickets. Naturally, that buying pattern put him at the top of every screener's watch list. So even though he could get close enough to the vice president to hug him (assuming the veep did hugs), he couldn't board a plane without a pat-down. "Clearly, something was wrong with the system," Eyerly says today. "And when something is that wrong, we should fix it."
In Eyerly's mind, fixing air travel meant starting an airline that opts out of the TSA and tickets altogether. The result is Surf Air, the first all-you-can-fly carrier. For $1,000 a month, members will be able to travel anywhere on Surf Air's system as often as they'd like. Beginning at the end of 2012 (pending FAA approval), the airline will link four California regions--Los Angeles, Santa Barbara, Monterey, and the San Francisco area--using eight-seat planes outfitted like private jets. From there, it plans to expand regionally and then nationally, connecting short-hop city pairs such as Seattle-Portland or Dallas-Austin and avoiding congested hubs in favor of small airfields with no waits and no bureaucrats.
With its regional focus and fleet of puddle-jumpers, Surf Air poses little threat to the current titans of the skies. Despite a growing number of consumer complaints, the past three years have been among the best in the U.S. airline industry's history--it raked in a record-breaking $10.5 billion in operating profits in 2010, according to the Bureau of Transportation Statistics, and $7.1 billion last year. But Surf Air does raise a big question: In a hopelessly sclerotic industry that nevertheless produces billions in profits, why aren't more companies taking a run at the incumbents?
Working in Surf Air's favor is that unlike previous upstarts such as JetBlue--whose founder raised $128 million at the outset to buy jets--it's the first airline launched like an app. Eyerly and his brother Dave (a pilot and former TSA employee) took their idea to MuckerLab in Los Angeles and graduated last spring with $4 million in venture capital, led by Santa Monica's Anthem Venture Partners. They borrowed their business model from Netflix, and all bookings will be handled via apps and online. The actor-musician Jared Leto, who has invested in Surf Air, compares the airline to Uber, the taxi-summoning service.
Technically, Surf Air isn't even an airline. The FAA considers it a charter service with permission to fly on regular schedules, so it will be exempt from TSA scrutiny. Surf Air will fly where airlines don't--from Santa Monica Municipal Airport, say, rather than LAX. As Eyerly points out, 90% of America's nearly 20,000 airfields operate well below capacity. "It's an interstate highway system without any cars," he says.
Surf Air clients will encounter no friction before flights. An iPad-wielding concierge will greet them at the airfield. Then they will walk to the plane--a Pilatus PC-12, which has the legroom of a Learjet but consumes considerably less fuel. Besides flying as often as they wish, members can travel at the last minute without penalty. Echoing Netflix's DVD subscription model, the only limit is the number of one-way reservations members may hold at a time (six).
Surf Air plans to launch with no more than 500 members, each paying $1,000 a month. Membership will be capped for three months as the airline gets a handle on passenger behavior. "You're looking at an airline built for frequent fliers," says Eyerly. "There's no data that says what will happen when their per-flight costs drop to zero. The only way to get it is to fly."
There does seem to be a market--nearly 50,000 "supercommuters" regularly fly or drive between the Bay Area and Los Angeles, according to New York University's Mitchell Moss. And even cynical aviation analysts concede the all-you-can-fly model has merit. "It's an interesting experiment," says Teal Group vice president Richard Aboulafia, although the price doesn't make sense to him. "Profits would be eaten up fast," he says. Other analysts predict the price will rise as Surf Air tweaks its model.
Cutting costs is what created an opening for Surf Air in the first place. The major carriers are saving money with what is, at the moment, a winning formula: fewer routes, tighter planes, and hidden charges. As the experience for passengers has worsened, profits have swelled. U.S. carriers effectively break even on airfares while earning nearly all of their profits from nickel-and-diming passengers; in the first half of 2012, ticket and baggage fees totaled more than $3 billion. These are a textbook example of what Bain & Co.'s Fred Reichheld has labeled "bad profits"--the kind earned from abusing customers rather than creating value for them. The upside of bad profits, Reichheld writes, is that sooner or later they will inspire someone to disrupt them--consider how Blockbuster's punitive late fees created an opening for Netflix. Yet few entrepreneurs are trying to take advantage of the pent-up frustration with air travel.
The reason is that major airlines pounce when they see turf worth having. As ill-fated air-taxi pioneers like Pogo, DayJet, and SATSair learned nearly a decade ago, once an upstart begins having success with an underserved route, larger carriers will come in, often operating at a loss, and push them out. "Your model has to scale immediately and be disruptive out of the box," says DayJet founder Ed Iacobucci. "Otherwise, the airlines will come down hard on you."
Surf Air may soon discover this for itself. Already, a former Google engineer named Shawn Simpson has quietly formed Boutique Air, relying on the same FAA loophole, the same market (northern California and the Pacific Northwest), and the same strategy (flying to small airports with small planes).
Perhaps a new model of air travel requires a more fundamental disruption. Bruce Sawhill, a physicist who worked for Iacobucci, suggests that one cost bottleneck is in the cockpit--two pilots for a half-dozen passengers is too expensive. "Something like DayJet will work under certain circumstances," Sawhill says, "but it will only work big-time when planes are electric and robotic." Anyone want to book a ticket on Drone Air?
COLOGNE, Germany – DramaFever, an online video platform specializing in foreign-language programming for North American viewers, has closed a further round of funding, picking up $6 million in investments from AMC Networks, German media giant Bertelsmann and Mexico’s NALA Investments, the holding company backed by that Azcarraga family that founded Spanish-language media conglomerates Univision Communications and Grupo Televisa.
Other key investors in DramaFever in this latest round include Allen DeBevoise, chairman and CEO of gaming entertainment network Machinima, and Matt Coffin, founder of LowerMyBills.com.
DramaFever co-founder Seung Baktold THR that the company sees the investors less as a source of capital than as future strategic partners as DramaFever looks to expand, both in North American and internationally.
“The money is nice but the real reason we did this we these partners is because we want to build our business,” Bak said. “Within North America, we want to acquire more content and expand our reach. Internationally, we are looking at new territories with Europe, South America and Australia high on our agenda.”
AMC, whose flagship U.S. cable channel airs such cult series as Mad Men, Breaking Bad and The Walking Dead, has also been actively building a global network based on its Sundance Channel. Germany’s Bertelsmann, which owns FremantleMedia, makers of American Idol, is one of the largest producers of TV content worldwide. NALA’s previous media investments included a substantial stake in Twilight producer Summit Entertainment.
DramaFever launched in 2009 as an online platform offering East Asian films and TV shows, with English subtitles, to a North American audience. Unlike more art house-focused video sites such as MUBI, DramaFever is unabashedly mainstream, selecting its programming largely based on local box office or ratings success. According to its own figures, DramaFever claims two million unique advertising-supported visitors a month, 75 percent of which are of non-Asian descent.
Bak told THR he hopes to leverage the new partnerships to expand DramaFever’s U.S. offerings to include Spanish and other non-Asian foreign language programming. Bak said Latin American content and Bollywood films are two content areas he’s looking to expand first. Bak did not give specific information about DramaFever’s international expansion plans, except to say he hopes to take the video platform to selected international territories “within the next 12 months.”
To help facilitate its expansion, DramaFever has brought on Sandy Grushow, a former chairman of Fox Television Entertainment Group, as a strategic advisor.
Lions Gate Entertainment Corp. (LGF) acquired "Twilight" producer Summit Entertainment LLC for $412.5 million in cash and stock, uniting two of Hollywood's largest independent studios.
Most of the purchase was funded with cash from Summit, Lions Gate said yesterday in a statement. Both film labels, run from Santa Monica, California, will remain active producers and the company expects to save money by combining some tasks.
The accord gives Lions Gate, maker of the "Mad Men" TV show and Tyler Perry films, the last installment of "Twilight" and library rights to the first four teen vampire movies. Ticket sales, home videos and TV rights may generate as much as $1 billion in free cash flow through 2012, Benjamin Mogil, a Stifel Nicolaus & Co. analyst, wrote on Jan. 9.
"The transaction is a net positive for all parties, but consolidation in the sector is reflective of the significant challenges in the industry," said Amir Malin, managing principal of Qualia Capital LLC, a media investment company.
The announced terms suggest Lions Gate used about $240 million in cash from Summit.
The balance was financed with $55 million of Lions Gate cash, $45 million from new Lions Gate convertible notes, $50 million of Lions Gate common stock and an added $20 million of cash or stock to be issued at Lions Gate's option within 60 days, according to the statement.
"We think it solidly positions us," Lions Gate Vice Chairman Michael Burns said in an interview. "It extends our reach dramatically. It increases the size of the library."
The new company will realize savings from consolidation of support operations, Chairman and Chief Executive Officer Jon Feltheimer said. Details were still being worked out, he said.
Summit’s top executives, Co-Chairman and Chief Executive Rob Friedman and Co-Chairman and President Patrick Wachsberger, said in an interview they will continue to run Summit.
“We have a business that is very active and ongoing,” Friedman said. “We’re continuing to operate that business. We are working very closely with our colleagues at Lions Gate to make this a seamless merger.”
The owners of Summit formed the studio in 2007 with $1 billion in funding from Merrill Lynch & Co. Last year, the company raised debt financing for movie making and to pay a dividend to owners including Rizvi Traverse Management LLC. Friedman and Wachsberger are also owners.
Summit’s existing $500 million term loan was refinanced and secured by its assets, Lions Gate said yesterday, adding it plans to repay the loan from cash flow before the 2016 maturity.
Closely held Summit had been negotiating exclusively with Lions Gate for more than a week. The studio also held talks with Tom Barrack’s Colony Capital LLC , which owns the the Miramax film library.
The first four “Twilight” films, based on the novels by Stephenie Meyer , have generated $2.5 billion in worldwide ticket sales, according to researcher Box Office Mojo. Lions Gate would also add Summit’s Oscar-winning Iraq war drama “The Hurt Locker” to its library of 13,000 films and shows.
Lions Gate, known for R-rated horror films like the “Saw” movies, is trying to break into the youth-fantasy genre dominated in recent years by the “Twilight” and “Harry Potter” films.
The studio will release the first of four planned films based on Suzanne Collins’s “The Hunger Games” young-adult novels in March. Lions Gate also owns rights to the “Chaos Walking” young-adult books by Patrick Ness.
The company will be able to promote “Hunger Games” sequels in theaters when the final “Twilight” installment reaches cinemas in November, Burns said.
“That’s an enormous increase in reach,” he said.
Hollywood studios just concluded a year in which U.S. cinema attendance declined 4.2 percent to a 16-year low.
Consumer spending on DVD rentals, Blu-ray discs and streaming services fell 2.1 percent to $18 billion in 2011, the industry backed Digital Entertainment Group said this week.
JP Morgan, Barclays Capital and Jefferies were Lions Gate’s financial advisers and led financing arrangements.
To contact the editor responsible for this story: Anthony Palazzo at email@example.com
Evolution Media Capital, a boutique bank created by former Merrill Lynch bankers and Creative Artists Agency, has formed a joint venture deal with the family behind the Televisa media group to identify film, television and sport investments in the US and Latin America.
The deal between EMC and NALA Investments pairs the boutique US bank with Emilio Diez Barroso, great-grandson of the Televisa founder. The aim is to create a pipeline of Latin American film, television and sport deals for US investors.
Mr Diez Barroso said NALA EMC would become a "gateway" for the region creating opportunities for institutional US investors that had previously been limited to wealthy individuals or families from Latin America. "We want to provide an access point for these deals," he told the Financial Times.
"There are big opportunities in Latin America," he added. "But a lot of the [US] companies I talk to have resources committed to Asia – and not Latin America."
The joint venture aims to make it easier for US institutions and other groups to invest in sports and entertainment companies in Latin America, which is becoming increasingly attractive thanks to sharp growth in the region's media sector. This has been fuelled by growing broadband penetration, particularly in Mexico, which recently became one of the first non-US markets chosen by Netflix, the online video group, to launch its film-streaming service.
EMC was created by Robert Stanley and his colleagues from Merrill Lynch's media and sports structured finance group, and CAA, Hollywood's largest talent agency, which represents stars such as George Clooney and Brad Pitt.
EMC has advised on more than $15bn of deals in its home market, ranging from the sale of the Texas Rangers baseball franchise to the purchase of CKX, owner of the American Idol show, by Apollo Global Management, the private equity group.
EMC worked on the recent sale of Paris Saint-Germain football club and advises sports leagues on media rights negotiations: it also structured Sony ATV's $300m of debt financing for its 50 per cent stake in The Beatles library.
NALA-EMC also anticipates deals flowing both ways and wants to introduce Latin American investors to opportunities in the US.
"A lot of the deals we're looking at in film, TV and sports will now be available to investors from Latin America," Mr Stanley said. NALA EMC would "look at everything in the media spectrum," he added. "We will look to acquire distribution rights and content for Latin America."
Mr Diez Barroso has been involved in several big deals in Mexico, including NALA's acquisition of a stake in Volaris, the airline founded by Carlos Slim, and an investment in Transportes Lipu, the largest school bus company in Mexico.
But he has also been active in the US and was an early-stage investor in Summit Entertainment, the film group behind the hit Twilight vampire movies.
Summit is currently in merger talks with Lions Gate Entertainment, producer of the Mad Men and Weeds TV shows. It has also been linked with a possible tie-up with Metro-Goldwyn-Mayer, the Hollywood movie studio which has been restructured and slimmed down following a period in bankruptcy protection.