Air California


Air California, later renamed AirCal, was a U.S. airline company headquartered in Newport Beach, California that started in the 1960s as a California intrastate airline. The airline's home airport was Orange County Airport, now known as John Wayne Airport.
Air California was the "other" California intrastate carrier, counterpart to better known Pacific Southwest Airlines. The two airlines had very different origins. PSA was the product of a highly competitive, lightly-regulated earlier period in California intrastate airline history, while Air California was born into a later, far more regulated California environment. The California regulator explicitly aimed to ensure Air California's success by shielding it from PSA competition, in particular at Orange County Airport, from which PSA was excluded. Air California was further protected by Orange County itself. From 1967 through 1980, Orange County ensured Air California was one of only two mainline airlines to have access to Orange County Airport, a lucrative duopoly that allowed Air California to prosper.
Air California/AirCal had a series of unusual owners. From 1970 to 1974, it was under the control of C. Arnholt Smith, a San Diego powerbroker, later convicted of fraud. From 1974 to 1981, it was controlled by Smith's former holding company Westgate-California Corporation, while WCC was in an extended period of bankruptcy run by a court-appointed trustee. From 1981 to 1987, AirCal was controlled by two California real estate developers, who, despite the turbulent nature of the industry at the time, made a success of the airline, before selling it to American Airlines.
Following the federal Airline Deregulation Act in 1978, Air California expanded beyond its namesake state. The airline was renamed AirCal in 1981 and merged into American Airlines in 1987. By that time, AirCal flew as far east as Chicago and as far north as Seattle, Anchorage, and Vancouver, BC. But less than four years later, American gutted the former AirCal network, leaving little to show for its purchase.

History

Startup

Air California originated in a December 1965 meeting in Corona del Mar by William Myers, Alan H. Kenison, Mark T. Gates, Jr., William L. Pereira, Jr. and Lud Renick to discuss air service from Orange County to San Francisco, with the idea of Air California as the result. At the time, air service from Orange County Airport was minimal. The population of Orange County in 1967 was about 1.2mm, up from only 216,000 in 1950; Orange County was the fastest growing in the country. Air travel in California was then dominated by Pacific Southwest Airlines. Air California was designed to do what PSA would not: serve Orange County. Airport officials had asked all major west coast carriers to serve Orange County Airport and none were interested.
At the time, all significant US airlines but one were tightly regulated by the Civil Aeronautics Board, an agency of the Federal government. PSA was the exception, its intrastate status made it exempt from CAB oversight. It had used that freedom to grow from nothing in 1949 to a jet carrier in 1965, taking market share away on its California routes from much larger but less efficient carriers regulated by the CAB. Air California was designed to be like PSA but centered on Orange County. Air California was incorporated on 12 April 1966 and the same month, applied to the California Public Utilities Commission to be a California intrastate airline for its first route, from Orange County Airport to San Francisco Airport at a fare of $14.85. The CPUC approved the application in September, requiring a minimum of five frequencies per day. In December, Air California had an initial public offering and the airline launched its first services January 16, 1967, using two Lockheed Electra aircraft. Total capital raised prior to the first flight was $5.3mm, including $2.5mm from the stock offering.
In October 1967, Air California took delivery of two more Electras, for a total of four. San Jose and Oakland were added. In 1968, the airline added two DC-9s to the fleet, but by year end both the DC-9s and the Electras had been phased out in favor of six 737-200s. Ontario and Burbank were added.
In April 1967, Air California was operating 48 nonstop Lockheed L-188 Electra propjet flights a week from Orange County to San Francisco. It added Orange County to San Jose and Oakland flights around the beginning of 1968.
By May 1968, the airline was operating 92 flights per week from SNA to SFO, primarily using Douglas DC-9-10 twin jets, as well as 50 flights a week from SNA to SJC, with most continuing on to OAK.
By 1976, Air California was operating nonstop intrastate jet service between Orange County and San Francisco, San Jose, Oakland, Sacramento, San Diego and Palm Springs; between San Diego and Oakland and San Jose; between Ontario and Oakland and San Jose; and between Palm Springs and San Francisco, San Jose and Oakland.

First failed PSA merger and sale

As the nearby table shows, Air California's initial financial results were poor. In December 1969 it agreed to a merger with PSA, citing its financial results. Air California shareholders approved the deal, but shortly thereafter, in May 1970, PSA withdrew from the deal, citing a "negative view" by the CPUC. Within a week, Air California's CEO had resigned, and a new buyer surfaced, Westgate-California Corporation. In June 1970, WCC acquired 60% of the carrier, which was approved by the CPUC on the grounds that Air California's future was in doubt. In July 1971, WCC pumped $2.5mm into Air California, buying shares that increased its stake to 81%.
In April 1971, Air California provided flight attendant training to Southwest Airlines during its startup phase.
1967196819691970197119721973
Operating revenue4,3548,84913,68616,14419,72922,90527,023
Operating expense5,2959,99215,54015,95020,30421,90523,956
Operating result1941,0003,067
Interest
Pre-tax net6242,724
Operating margin-21.6%-12.9%-13.5%1.2%-2.9%4.4%11.3%
Pre-tax margin-27.5%-19.9%-17.7%-2.5%-5.2%2.7%10.1%

WCC ownership was a mixed blessing. WCC's owner was C. Arnholt Smith, a powerful San Diego businessman and banker, owner of the San Diego Padres baseball team, a close associate and funder of President Richard Nixon and owner of the United States National Bank of San Diego, largest bank in that city and the 10th largest in California. Smith was highly controversial, accused of lining the pockets of his family and friends through self-dealing of making illegal campaign contributions, and more. WCC made a loss, its first in 11 years, in 1971.
There was one immediate benefit from WCC ownership: Air California was able to take its seventh 737, delivered to WCC and turned over to Air California in September 1970. The eighth was delivered in May 1971. First-class service and Palm Springs made their debut in 1969, San Diego in 1970, though Burbank was suspended. In 1971, Sacramento was added to the network.

Second failed PSA merger, parent company bankruptcy and scandal

In mid 1972, WCC agreed to sell Air California to PSA. WCC told the CPUC that Air California showed no signs of making money and WCC would not further support it. In February 1973 the CPUC agreed, against heavy opposition, including from its own legal staff, to allow the merger to proceed. But by then the merger also faced opposition from the US Department of Justice on anti-trust grounds. For instance, the combination would have had an 81% market share on the Los Angeles Basin to San Francisco Bay market and even higher market shares on individual submarkets. These market shares show how successful were the California intrastate carriers in driving off the far larger CAB-regulated carriers pre-deregulation.
But then, in May 1973, The U.S. Securities and Exchange Commission sued to place WCC in receivership on the grounds of serious malfeasance by Smith, plus the outside auditors withdrew their certification of Air California's accounts for 1971 and 1972, and those of WCC for 1971. Trading was halted in Air California and WCC stocks. Unsurprisingly, almost exactly a year after it had been made, the PSA offer for Air California lapsed. In October, USNB was seized by the FDIC, knocking out the foundation of Smith's empire. In February 1974, WCC filed for Chapter X bankruptcy. Chapter X bankruptcy was eliminated in a 1978 bankruptcy reform, but under it, WCC operated under the control of trustees, who managed it in the interests of shareholders. The bankruptcy dragged on for eight years, with WCC selling pieces of itself along the way, until it was finally liquidated in 1982. Therefore, from 1974 until it was sold in 1981, Air California was in the odd situation of being owned by a bankrupt company run by trustees rather than conventional management.

Survival: the role of the California regulator

Prior to 1979 US airline deregulation, as a California intrastate carrier, Air California was economically regulated by the CPUC, in contrast to most US airlines of the era, which were economically regulated by CAB. Prior to 1965, the CPUC only had the right to regulate intrastate ticket prices. So long as they followed CPUC tariffs, anyone was free to start an intrastate California airline, to enter and leave specific markets and to choose their own frequencies. But in 1965, the CPUC gained the right to regulate airline certification, market entry/exit and service quality for California intrastate airlines. In effect, the CPUC became a kind of mini-CAB for California intrastate airlines.
Air California was unprofitable for the first five years and CPUC regulation was critical to its survival. In 1969 the CPUC said "From the beginning we have recognized the need to protect Air California from destructive competition, at least until it becomes a viable operator." This took four forms: CPUC ensured that other than some minor routes, Air California did not compete with PSA, leaving the carriers with largely non-overlapping route networks. This left Air California free to concentrate its energies on competing with CAB carriers on its routes, which had higher costs. The CPUC approved higher airfares for Air California than for PSA was authorized on similar routes. The CPUC stopped the further new entry of intrastate airlines. in at least one case, the CPUC restrained PSA growth with the explicit goal of helping Air California. In fact, from 1965 onward, the CPUC certified only one other carrier, Holiday Airlines, which for some reason chose to fly only to Lake Tahoe.