Startup
Air California originated in a December 1965 meeting in Corona del Mar by William Myers, Alan H. Kenison (later a founder of Jet America Airlines), Mark T. Gates, Jr., William L. Pereira, Jr. (son of noted architect William Pereira who designed the Theme Building at Los Angeles International Airport (LAX)[5]) 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 despite the county having a population of about 1.2 million and being the fastest growing in the country. Air travel in California was then dominated by Pacific Southwest Airlines (PSA) yet it declined to serve Orange County. Airport officials had approached all West Coast carriers in an effort to attract service to Orange County Airport, but none expressed interest.[6][7] As a result, Air California was designed to do what PSA would not: serve Orange County.
At the time, most major US airlines were tightly regulated by the Civil Aeronautics Board (CAB). PSA was the exception: its intrastate status exempted it from CAB oversight, which only applied to interstate flights[8]. 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 incorporated on 12 April 1966[9] and the same month, applied to the California Public Utilities Commission (CPUC) 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.[10] In December, Air California had an initial public offering and the airline launched its first services January 16, 1967, using two Lockheed Electra aircraft.[11][12] Total capital raised prior to the first flight was $5.3mm, including $2.5mm from the stock offering.[7]
By April 1967, Air California was operating 48 nonstop Lockheed L-188 Electra flights a week from Orange County (SNA) to San Francisco (SFO). Later that year, in October 1967, Air California had taken delivery of two more Electras, bringing its total to four.[13] Service was subsequently expanded to include San Jose and Oakland. In 1968, the airline added two DC-9s to the fleet expanded service to Ontario and Burbank; however, by the end of the year both the DC-9s and all Electras had been phased out in favor of six 737-200s.[14][15]
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.[16]
First failed PSA merger and sale
Air California's initial financial performance was weak. In December 1969 it agreed to a merger with PSA, citing these results.[17][18] 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 (WCC).[19] 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.[20] In July 1971, WCC pumped $2.5mm into Air California, buying shares that increased its stake to 81%.[21] Notably during this period Air California provided flight attendant training to Southwest Airlines during its startup phase.
Second failed PSA merger, parent company bankruptcy and scandal
In mid 1972, WCC agreed to sell Air California to PSA.[27] WCC told the CPUC that Air California showed no signs of making money and WCC would not further support it.[28] In February 1973 the CPUC approved the merger despite heavy oposition including from its own legal staff.[29][30] However the merger faced opposition from the US Department of Justice on anti-trust grounds.[31] The combined airline would have had an 81% market share on the Los Angeles Basin to San Francisco Bay market, with a even higher market shares on individual submarkets.[32] These figures illustrate the extent to which California’s intrastate carriers had displaced the far larger CAB-regulated carriers prior to deregulation.
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,[39] effectively, becoming a mini-CAB for California intrastate airlines.
Air California was unprofitable for the first five years (though it broke even on an operating basis in 1970; see table) 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."[40] This took four forms: (i) 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. (ii) The CPUC approved higher airfares for Air California than for PSA was authorized on similar routes. (iii) The CPUC stopped the further new entry of intrastate airlines. (iv) 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,
Orange County Airport duopoly and financial stability
As its parent company was mired in bankruptcy, Air California's fortunes improved, and the airline became solidly profitable from 1973 onwards. Air California benefited not only from CPUC support, but also from its effective duopoly at Orange County Airport. From 1967 until late 1980, only Air California and Bonanza Air Lines - and its successors, Air West (1968) and Hughes Airwest (1970) flew to Orange County Airport. This exclusivity was highly significant: by the mid-1970s, up to 75% of Air California’s passengers traveled to or from Orange County.[42] In 1979, the FAA determined that this was, discriminatory, leading to the airport opening to other airlines.[6]
In February 1975, Holiday Airlines collapsed, and both Air California and PSA received emergency CPUC authorization to backfill service at Lake Tahoe Airport, which the commission required be operated using Electras.[43] Air California subsequently acquired three.[44]
Intrastate no more, sale to new owners and AirCal
In 1977, still in Chapter X bankruptcy, WCC bought out Air California's minority shareholders and made it a wholly owned subsidiary, in furtherance of its intent to reorganize with Air California as its main business.[45] In 1977-78 Air California added two 737-100 aircraft from Aloha.[46] By 1978, Air California begun service to Reno, Nevada and was no longer a strictly intrastate airline.[47] With out-of-state expansion spurring it on, Air California ended 1979 with 11 737s and had 16 at the end of 1980, while at the same time retiring all Electras.[48][49]
In October 1980, Air Florida announced it had purchased interests in the to-be-reorganized WCC from two WCC creditors.[50]
Stripped of John Wayne Airport advantage; financial distress
After unbroken profitability while WCC was in Chapter X, AirCal under Lyon & Argyros was immediately unprofitable.[53] Headwinds included the debt the two had taken on to buy AirCal, the early 1980s recession, the extended impact of the August air traffic controller’s strike, which limited airline aircraft utilization and growth and the expanding impact of 1979 airline deregulation, which spread competitors into AirCal markets, and vice versa. For instance, PSA finally broke into John Wayne Airport (SNA), after 15 years of trying.[66] AirCal had entered Los Angeles International Airport (LAX) in 1980,[67] initially aided by a late 1980 strike at PSA.[68] By this point AirCal was no longer protected by the CPUC or the SNA duopoly. At the same time, rising fuel costs added further pressure, with jet fuel prices increasing from 40 cents/gal at the beginning of 1979 to over a dollar in 1981,[69]
Final years
AirCal’s fleet remained 737-200s (and two 737-100s), along with seven MD-80s, until it ordered a dozen Boeing 737-300s in 1984, with Boeing agreeing to take back the MD-80s in trade. The 737-300s were even quieter than the MD-80s, and compatible with the 737-100/200s.[77] The last of the MD-80s were gone by early 1986.[78] Noise restrictions as SNA forced AirCal to acquire quieter aircraft. New flight limits introduced in 1985 allowed operational flexibility for aircraft below a specified noise threshold, a category that included the BAe-146s. This would have given PSA a substantial advantage, prompting AirCal to order six.[79]
In the fourth quarter of 1985 AirCal´s run of profitability was disrupted by the entry of Continental West into the California Market.[80] Continental West was a short-lived Texas Air subsidiary created to take delivery of aircraft due to limits placed on Continental by its bankruptcy judge.[81]
