The bumpy ride of PEOPLExpress

The deal was: restore daily flights to Boston and New York, and Newport News-Williamsburg International Airport will pay $1.65 million of taxpayer funds to keep PEOPLExpress in the air.

But after two months and a first payment of $650,000 from taxpayers, PEOPLExpress is grounded.

Local officials are still convinced they did the right thing by promising taxpayer support for a start-up business that raised far less money from investors than it said it needed, was paying off six-figure federal tax liens and other IOUs, and never came up with airplanes of its own. Instead, People Express had hired a company that faced big bills and court judgments of its own to fly planes on its behalf.

"It was a risk, sure. But the potential benefit is huge," said Newport News City Manager Jim Bourey, who is chairman of the Peninsula Airport Commission.

The problem, he said, is that the operator People Express hired, Las Vegas-based Vision Airlines, provided two planes instead of the three People Express needed and said it had when it announced the start of service.

Vision is the company that actually receives the subsidy funds. Its agreement with the airport commission — signed just four days before it started flying the People Express service — calls on it to provide daily flights to and from Boston and Newark. It does not say how many planes it will commit to the service or guarantee that it will supply replacement planes if needed.

When one of the two planes in the People Express service was disabled by an accident with a truck on Sept. 19 and the other developed engine trouble, People Express had to suspend all operations.

"We and Vision planned for a third aircraft but it never happened. Sub service was pursued but without success," said Jeffrey Erickson, People Express' chief executive officer, when asked if his company's lease agreement was for three planes and if it provided for replacement aircraft to substitute if any of its planes went out of service.

People Express is hoping to resume flights on Oct. 16, but it needs to find another firm to operate planes first — and it needs to do so after paying out a six-figure sum in passenger refunds with a couple million more in the hands of credit card companies, which don't release funds to airlines until a customer's flight is completed.

People Express is out some money then, but so is the airport commission.

So far, the commission has paid $650,000 to Vision as an advance out of the $1.65 million of federal and local grants committed to the People Express service. The U.S. Department of Transportation has so far approved reimbursing the commission for $581,000 of the grant funds. The commission's agreement gives Vision 30 days to resume service or the deal is off. That means the remaining $1 million won't be paid, while Bourey believes at least some of the $650,000 can be recovered.

The money that's been paid is coming from the federal grant, Bourey said. The $700,000 in local funds is still in the bank. It and the balance of the federal grant, amounting to $1 million in all, are to be paid when Vision has flown for a year, according to the agreement between the airline and the airport commission.

$200,000 owed to IRS

Bourey said local officials knew that People Express owed more than $200,000 to the Internal Revenue Service and $182,000 to a Chicago aircraft leasing firm when they agreed to the taxpayer subsidy.

In addition to checking for liens and judgments against People Express, Bourey said, he and other officials got a good look at People Express' balance sheet shortly before a regional group of economic development officials — the Regional Air Service Enhancement Committee, known as RAISE — voted on the local subsidy. He said they saw a repayment schedule for the tax liens.

Although the money was actually going to Vision, as the operator of the planes, local officials did not get a look at Vision's private financial records, Bourey said. They relied instead on its federal certification as assurance that it had the wherewithal to run the service. Federal aviation regulators look at an air carrier's financial position when certifying it for operation.

Bourey said a check for judgments against Vision found a claim left from an earlier agreement to operate planes for another air service that Vision argued was the other company's responsibility.

A Daily Press search of federal court records also found a $1.7 million federal court judgment outstanding against Vision at the time local officials approved the local subsidy and the airport negotiated its agreement with the air carrier. A federal judge ordered the payment when he found that the company withheld hazard pay to a pilot it hired to fly into and out of Iraq and Afghanistan. Also in effect at the time the subsidy was granted was a federal court injunction to keep Vision from flying its planes out of the country with an engine on which it had missed $93,695 in rent and maintenance payments.

Officials from Vision did not respond to messages left on their voice mails or to email questions about the suspended service, its negotiations with the airport commission or its financial health.

Luring an airline

It's not unusual for communities with smaller airports, particularly if they've recently lost service, to use federal and local taxpayer funds to lure new airlines. The federal money the airport commission is using came directly to it in 2012.

Washington believes in supporting regional air services, and similar subsidies helped bring Frontier Airlines as well as the discount airline AirTran to Newport News-Williamsburg International Airport. It was the gap left by AirTran's departure, and the loss of its service to Boston and New York, that People Express is supposed to fill.

Bourey said that while the $700,000 local subsidy promised for the People Express system is significant, it is smaller than the public support that went to AirTran and less than what airports elsewhere pay to subsidize services.

But while the Peninsula's subsidy for People Express was in the midrange of what communities put on the table, it differed from the Frontier and AirTran support, and from what most other communities do to woo airlines because People Express was a start-up, Bourey said.

In addition to the subsidy, the airport commission waived fees totaling $1.90 per passenger that it charges other airlines, as well as landing fees, its minutes show. And the bulk of the $269,000 that the commission spent on advertising and marketing in June was for People Express.

Erickson would not comment on the company's financial position, but the airline has reported that it carried 55,000 passengers in its first two months, when it was offering fares as low as $56 to New York and Boston.

The break on fees along with the federal and state grants come to almost $2 million — roughly one-third of the $6 million that People Express raised in its first stock offering.

And that $6 million is less than one-third the amount People Express told investors in 2011 it needed to launch its service, according to a document included in court records in a lawsuit over a trademark dispute.

People Express started pitching its story to investors months before Chesapeake businessman Michael Morisi's February 2012 announcement that he planned to launch the airline from a base in Newport News that would eventually employ 1,000 people.

Morisi began his career — which he has said ranged from work as an assistant conditioning coach for the Washington Redskins to airline operations — with a job at the old People Express before it merged with Continental Airlines in the 1980s.

The idea of relaunching the airline started as a joke on the Facebook page of a group of the old People Express' alumni, he has said. An overnight drive to New York and a two-and-a-half-hour meeting with an investor in aviation businesses brought the idea to life and started a fundraising effort.

By October 2011, that effort had generated a grand total of $250,000 from six people, according to a filing with the U.S. Securities and Exchange Commission.

The filing began a three-year fundraising effort. When it ended this year, People Express had raised roughly $6 million from 140 investors, company CEO Erickson said in an interview last week.

The memorandum People Express prepared for investors in 2011 said the new airline would need $19.4 million to cover start-up expenses.

People Express told investors it expected to start with three airplanes and to have a fleet of five planes after seven months of operation. By then, it said, it would be well on its way to a first-year profit of $4.7 million on sales of $77.9 million.

At its current standard fares, that would mean carrying more than twice the number of passengers it flew with its customer-wooing discount fares in its first two months.

$10,000 fine

When Morisi announced in February 2012 that People Express was going to fly again, the company also began marketing discount fares on future flights — more than a month before it applied to the Federal Aviation Administration for authority to operate. It paid a $10,000 fine when federal officials objected.

Though the company applied for FAA certification in March, it is not currently undergoing the agency's certification process, spokeswoman Alison Duquette said.

Instead, it is operating under a so-called "wet lease" with Vision – which basically means Vision is paid for the use of the planes, their maintenance and insurance and the crews that operate them.

People Express opted for the Vision leases after the purchase of an Idaho-based charter airline that it announced in June 2013 fell apart.

People Express gave no details about the purchase terms for Xtra Airways, though it had access to $565,000 from local governments to finance the deal. The money was held in an escrow account for People Express to use.

It was also in June 2013 that People Express and Xtra borrowed $250,000 from a Chicago commercial aircraft leasing company. In return, Morisi promised to repay money Xtra owed the Chicago firm and signed a promissory note for $171,000, with that sum to be paid by October. It wasn't. In December, a federal judged ordered People Express to pay the note plus interest.

People Express was already having trouble with other bills when it accepted the $565,000 from the Regional Air Service Enhancement Committee to help buy Xtra. (That money has now come back to the Peninsula Airport Commission as a condition to releasing the first chunk of subsidy to Vision.)

In February 2013, the Virginia Employment Commission recorded a lien against People Express for $1,307 of unpaid taxes

And in April 2013, the Internal Revenue Service filed the first of two liens for unpaid taxes, this one for $137,000.

By February of this year, Erickson was saying the Xtra deal was "on the back burner," adding that his focus was nailing down funds to start flights.

Four weeks ago, the company told the U.S. Securities and Exchange Commission it planned a private sale of up to $5 million worth of shares. It expects the effort to last for more than a year.

Josh Weinshank, director of operations for the Idaho airline, wouldn't comment when asked why the deal fell apart. Xtra Airways, which owns two Boeing 737s, filed a plan to emerge from bankruptcy last month, on the strength of a $3.5 million outside investment.

People Express paid off its tax liens 11 days ago — five days after a Sept. 19 mishap with a truck put one of its two leased planes out of action. Engine problems with the second, and its inability to get hold of any replacement forced it to suspend all operations on Sept. 26.

"They really should have had three planes," Bourey commented. "That's something we will want to see."

Timeline

Key events in the People Express saga:
Aug. 1, 2011: AirTran says it will end its daily service to New York and Boston in March 2012.

August 2011: People Express writes an Information Circular for $20 million financing from investors, estimates start-up costs at $19 million.

Oct. 10, 2011: People Express reports that it has raised $250,000 from six investors.

Feb. 13, 2012: People Express founder Michael Morisi says he is launching the airline, with $69 flights to Newark, Providence, R.I., Pittsburgh, Orlando and West Palm Beach, says the airline will eventually employ 1,000. People Express begins marketing air service, with a travel club that will provide discount fares.

March 19, 2012: People Express applies for certificate to operate scheduled air service.

May 9, 2012: U.S. Department of Transportation fines People Express $10,000 for marketing discounted fares before obtaining permission to operate.

Aug. 9, 2012: Morisi says he expects to receive federal certificate as a scheduled airline in early 2013 and to begin flight operations in the spring.

Aug. 15, 2012: U.S. Department of Transportation awards $950,000 grant to Peninsula Airport Commission to be used to attract an airline to offer service to New York and Boston.

Jan. 9, 2013: Regional Air Service Enhancement Committee (RAISE) puts $565,000 in escrow for People Express, to acquire an unnamed charter air service operator.

Jan. 31, 2013: Morisi says he is considering moving headquarters to Pittsburgh.

March 1, 2013: RAISE grants four-and-a-half-month extension of $565,000 escrow agreement to People Express.

March 14, 2013: People Express reports signing purchase agreement for charter firm, but won't name it. It does not use the escrowed funds.

April 23, 2013: IRS files tax lien against People Express for $137,208 of unpaid taxes.

June 5, 2013: People Express says it has acquired Xtra Airways, a Boise, Idaho, charter air service.

June 25, 2013: Morisi, on behalf of People Express and Xtra, borrows $250,000 from a Chicago aircraft leasing firm; the company is a creditor of Xtra. In addition to a promise to pay Xtra's debt to the firm, Morisi signs a $171,000 IOU.

Sept. 18, 2013: People Express and Xtra miss a due date for first $21,000 due on note to Chicago leasing firm.

Oct. 2, 2013: People Express names Jeffrey Erickson CEO.

Oct. 3, 2013: People Express and Xtra miss the due late for the remaining $150,000 due to Chicago firm.

Dec. 11. 2013: U.S. District Court in Chicago orders People Express, Xtra and Morisi to pay the Chicago firm $185,820 for the IOU and accrued interest.

Feb. 27, 2014: Erickson says airline awaiting funding before beginning operations; Xtra purchase "on the back burner."

April 16, 2014: IRS files a second lien against People Express, this one for $71,659.

May 30, 2014: People Express announces daily flights to Boston, Newark and Pittsburgh to begin June 30, with three Boeing 737s leased from Vision Airlines.

June 5, 2014: RAISE approves $700,650 subsidy grant for the People Express service, as required matching funds for a federal grant to the airport to expand service.

June 6, 2014: Newport News Economic Development Authority, as fiscal agent for RAISE, approves by a 6-0 vote the $700,650 grant.

June 26, 2014: Peninsula Airport Commission and Vision sign an agreement promising payments of $1.65 million in return for one year of daily service to and from Boston and to and from the New York area, at Newark Liberty International Airport in New Jersey.

June 30, 2014: People Express service begins.

Sept. 12, 2014: People Express tells U.S. Securities and Exchange Commission it plans a private sale of up to $5 million worth of stock.

Sept 19, 2014: Accident with a truck takes one of People Express' two planes out of service.

Sept. 24, 2014: People Express repays all back taxes; IRS ends liens.

Sept. 26, 2014: People Express cancels all flights, with no public notice, after engine problems idle the only other plane available.

RAISE

The Regional Air Service Enhancement Committee, or RAISE, is a little-known public body formed in 2012, about six months after AirTran announced it was dropping service to Newport News-Williamsburg International Airport. Its mission is to woo new airlines to the airport.

Its members are the cities of Newport News, Hampton, Williamsburg and Poquoson and the counties of Gloucester, James City and York.

Newport News agreed to pay 60 cents per resident per year for the effort. The others pay 40 cents. They've done so for two years now and will continue for three more.

Annual payments amount to:

Newport News: $108,431

Hampton: $54,974

James City: $26,804

York: $26,186

Gloucester: $14,743

Williamsburg: $5,627

Poquoson: $4,860

Each community is represented by a member of its Economic Development Authority board and its director of development. The executive director of the Peninsula Airport Commission and representatives from the Hampton Roads Economic Development Alliance and the Peninsula Council for Workforce Development also sit on the committee. It meets quarterly.

- Source:  http://www.dailypress.com