Monday, August 11, 2014

Members-Only Surf Air to Buy More Planes: Luxury Carrier Arranges $65 Million Pact to Finance Growth

The Wall Street Journal
By Susan Carey

Aug. 11, 2014 12:09 a.m. ET

Membership at Surf Air has more than tripled to 900 this year. Pictured, one of its Pilatus planes. 
Surf Air


Surf Air, a members-only luxury airline in California, has been making headway with its unusual business model: unlimited flying on its scheduled, in-state flights for a monthly fee. Now, the startup intends to significantly expand with firm orders for 15 new planes financed by a $65 million debt facility arranged almost by accident.

The Santa Monica company, which has raised $17 million in seed capital from a number of venture-capital firms and individual investors, took wing in June 2013, flying three used Swiss-built Pilatus Aircraft Ltd. planes, single-engine turboprops that seat seven passengers, from small airports in Los Angeles, San Francisco, Santa Barbara and Truckee, Calif. The number of members has grown to more than 900 from 250 this year, with another 350 on the waiting list, said Jeff Potter, the chief executive. Founding members enrolled for $1,350 a month; the fee will rise to $1,750 on Sept. 1.

To meet the demand, Surf Air has ordered 15 new Pilatus PC-12 NG aircraft and taken options on 50 more. The planes have a list price of $4.6 million, according to the manufacturer, and with eight passengers and two pilots, they can travel 800 nautical miles without refueling. Fitted out in high style with interiors designed by BMW, BMW.XE +2.59% the planes are pressurized, can cruise at 30,000 feet and even have an enclosed lavatory, although Surf Air warns that it's best used only in emergencies.

Mr. Potter, former CEO of discounter Frontier Airlines and membership-only vacation-destination Exclusive Resorts, was recruited early this year to work out the early kinks, which are manifold for a startup in this industry. He said demand so far shows that growth opportunities await on routes to other California cities, including Carlsbad, Sacramento, Palm Springs, Monterey, Oakland, San Jose and Orange County.

Once Surf Air wins regulatory approval to fly on interstate routes, Mr. Potter said, it may expand to another region in the U.S. Possibilities include Texas, Florida and the Northeast. The company also offers "friends and family" and corporate plans.

In all cases, Surf Air will serve small, private airports, sparing members the hassles of driving to, parking at and enduring security lines at large airports. Surf Air's Los Angeles flights land at Hawthorne Municipal Airport and its San Francisco flights at San Carlos Airport.

The company faces plenty of competition. Commercial airlines have more frequent, often cheaper flights, but can't match Surf Air's use of small, luxurious airports, concierge check-in and lack of security screening. Charter operators and fractional programs offer on-demand, private travel but at much higher prices.

PlaneSense Inc., a Portsmouth, N.H., fractional program that also operates the Pilatus PC-12, charges its clients $324,000 for a 1/16th share of a plane, good for 50 or 70 hours of use per year, along with a monthly management fee of $4,869 and an hourly flight charge of $745.

Early Surf Air members are enthusiastic. Mark Alioto, CEO of a software company, said he makes frequent trips between San Francisco and Los Angeles. "I hated the airline experience so much that I drove once a week," he said. "I put 50,000 miles on the car in a year." When he read about Surf Air's startup plans, he put himself on the waiting list three different times to make sure he was accepted.

"It's not cheap, but it's not out-of-this-world expensive," Mr. Alioto said. "The first couple of times, it was disorienting because it was so easy. " And he's not put off by flying with strangers. "The people you meet on the flights are so interesting," he said. "It feels like a flying TED talk."

A few months ago, the company started working to raise debt financing to pay for new planes. By happenstance, White Oak Global Advisors LLC founder Andre Hakkak was trying to charter a plane for an annual ski trip with friends this winter. He called Surf Air and "it spiked my curiosity that there were no planes available for me," he said. He got hold of Sudhin Shahani, the chairman, and "we started yakking away" about the company's business plan.

Less than two months later, White Oak, a private debt firm in San Francisco, provided the $65 million loan secured by the new aircraft, covering the bulk of the financing for the 15 firm orders. "It wasn't like we were the only guys at the table," Mr. Hakkak said. "We were late to the party, so we moved fast." He said he still hasn't found a charter plane for his ski trip.

Source: http://online.wsj.com

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