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)^[6]) 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 (PSA). 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.^[7][8]

At the time, all significant US airlines but one were tightly regulated by the Civil Aeronautics Board (CAB), 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^[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.^[8]

In October 1967, Air California took delivery of two more Electras, for a total of four.^[13] 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. ^[14][15]

Financial distress leads to first failed PSA merger, 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.^[16][17] 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).^[18] 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.^[19] In July 1971, WCC pumped $2.5mm into Air California, buying shares that increased its stake to 81%.^[20]

In April 1971, Air California provided flight attendant training to Southwest Airlines during its startup phase.^[21]

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 (USNB), largest bank in that city^[23] and the 10th largest in California.^[24] Smith was highly controversial, accused of lining the pockets of his family and friends through self-dealing (including with WCC, USNB and others) of making illegal campaign contributions, and more.^[25][26] WCC made a loss, its first in 11 years, in 1971.^[27]

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 ("Fiesta") 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. ^[28]

Second failed PSA merger, parent company bankruptcy & scandal

In mid 1972, WCC agreed to sell Air California to PSA.^[29] WCC told the CPUC that Air California showed no signs of making money and WCC would not further support it.^[30] In February 1973 the CPUC agreed, against heavy opposition, including from its own legal staff,^[31] to allow the merger to proceed.^[32] But by then the merger also faced opposition from the US Department of Justice on anti-trust grounds.^[33] 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.^[34] 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,^[35] 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.^[36] 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.^[37] In October, USNB was seized by the FDIC, knocking out the foundation of Smith's empire.^[23] In February 1974, WCC filed for Chapter X bankruptcy.^[38] 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.^[39] The bankruptcy dragged on for eight years, with WCC selling pieces of itself along the way, until it was finally liquidated in 1982.^[40] 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.^[41] In effect, the CPUC became a kind of 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."^[42] 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.^[43] 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.^[44]

Orange County Airport duopoly and financial stability

Since its parent company was mired in bankruptcy, it was timely that Air California's fortunes took a turn for the better, becoming solidly profitable from 1973 onward. In this, Air California was helped not only by the CPUC, but also by its duopoly at Orange County Airport. From 1967 until late 1980, the only two carriers at Orange County were Air California and Bonanza Air Lines (and Bonanza's successors, Air West in 1968 and Hughes Airwest in 1970). This was driven by lack of facilities. It's hard to overstate how important this was: in the mid-1970s, Air California relied on Orange County Airport for up to 75% of its passengers.^[45] In 1979, the FAA determined that this was, unsurprisingly, discriminatory, leading to the airport opening to other airlines.^[7]

In February 1975, Holiday Airlines collapsed, with Air California and PSA both getting emergency CPUC authorization to back fill for Holiday at Lake Tahoe Airport, which the CPUC required be flown with Electras.^[46] Air California acquired three.^[47]

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.^[48] In 1977-78 Air California added two 737-100 aircraft from Aloha.^[49] But Air California ended the 1978 flying to Reno, Nevada; it was no longer an intrastate airline.^[50] With out-of-state expansion spurring it on, Air California ended 1979 with 11 737s and had 16 at the end of 1980, but by then the Electras were gone.^[51][52]

In October 1980, Air Florida announced it had purchased interests in the to-be-reorganized WCC from two WCC creditors.^[53] This kicked off a bidding war for post-reorganization WCC, which Air Florida ultimately won in November for $47mm.^[54] WCC at the time owned only Air California, plus a Puerto Rican tuna cannery, but Air Florida would have to wait until WCC completed its reorganization and in the meantime, the WCC trustee was still in charge, with a mandate to get the best deal for WCC investors. The losing bidder in the WCC auction thus bid for Air California at a price that would give a better return for WCC investors. And when the dust settled on that auction in May 1981, the new group won, with a bid of $61.5mm, $57.5mm of which was financed by Wells Fargo.^[55] This was AirCal Investments, a vehicle for two Orange County real estate developers, William Lyon and George Argyros. WCC's trustee didn't bother to hide his satisfaction with the outcome. He preferred local ownership. He had been angered by the surprise bid by Air Florida to buy WCC, had in fact put Argyros and Lyon together in the first place, when each had separately inquired.^[56][57]

The airline that Lyon and Argyros bought came, as of April 6, 1981, with a new name (AirCal) and a new image. Landor Associates did the new livery, Mary McFadden did the new uniforms.^[58]

Stripped of John Wayne Airport advantage; financial distress

After unbroken profitability while WCC was in Chapter X, AirCal under Lyon & Argyros was immediately unprofitable.^[56] 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, as they noted, 15 years of trying.^[69] AirCal had entered LAX in 1980.^[70], its LAX penetration assisted by a late 1980 strike at PSA.^[71] AirCal was no longer protected by the CPUC or the SNA duopoly. Further, jet fuel prices increased from 40 cents/gal at the beginning of 1979 to over a dollar in 1981,^[72] related to the 1979 oil crisis.^[73]

There was another factor: AirCal was squeezed at its SNA base, its historic source of profits. From 1970 to 1985, SNA capped daily average jet departures to 41/day,^[74] with AirCal having 27 during the duopoly period that ended 1980. But the FAA insisted other airlines be accommodated. As other airlines entered, incumbent frequencies were cut to accommodate them. AirCal was the biggest incumbent, so was the biggest victim; AirCal’s average daily SNA frequencies dropped over the course of several years from 27 to 12.5. ^[75][76] Many airlines wanted a piece of SNA and were even willing to buy MD-80s (then the quietest narrowbody available) to do so. For instance, Frontier’s decision to get MD-80s was SNA-driven.^[77]

AirCal came close to failure, but was saved by a combination of cost savings, with substantial layoffs, a 10% wage reduction for those who remained, a realignment of its route network, concentrating on increasing frequency on important routes like LAX to San Francisco. ^[78] Lyon took over the CEO position himself. During this period, the historic Hughes Airwest network was being eliminated, as Hughes successor Republic withdrew from the west coast. Western Airlines intrastate service was also shrinking. AirCal was also substantially recapitalized, with the combination of an initial public offering with Lyon & Argyros converting debt they’d loaned the airline into equity. This relieved the airline of a substantial debt load.^[55][79]

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 obviously compatible with the 737-100/200s. ^[80] The last of the MD-80s were gone by early 1986.^[81] SNA noise limits basically forced AirCal into buying BAe-146s; new 1985 flight limits had a looser limit for aircraft below a certain noise level, and the BAe-146 qualified. That would have given PSA a substantial advantage unless AirCal also got the aircraft, so it ordered six.^[82]

In the fourth quarter of 1985 the string of profits was upset due to the entry of Continental West into California.^[83] 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.^[84] Additional capacity cratered west coast fares once again, leading to 1986 being once again unprofitable. In June 1986, AirCal created a holding company for the airline, ACI Holdings.^[85]

In November 1986, AirCal accepted a purchase offer from American Airlines for $225mm, $90mm of which would be split by Lyon & Argyros. American was in the midst of a hub expansion program, then building new (now defunct) hubs in Raleigh, Nashville and San Juan. Building a west coast presence from scratch at the same time was considered a bridge too far for American, so it bought rather than built. Another factor was that Frank Lorenzo's Texas Air was also interested and American was eager to block it.^[86] AirCal had achieved a 1985 market share on the LA Basin to SF Bay corridor market of just under 33%, second to PSA which had just less than 49%. AirCal had expanded up the coast to Canada and Alaska and as far east as Chicago with a fleet of 39 aircraft.^[87] American’s purchase closed May 1, 1987 and AirCal was merged out of existence on July 1.^[88][89] AirCal's long-time rival, PSA, was likewise swallowed by USAir.

In April 1967, Air California was operating 48 nonstop Lockheed L-188 Electra propjet flights a week from Orange County (SNA) to San Francisco (SFO). It added Orange County (SNA) to San Jose (SJC) and Oakland (OAK) 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.^[90]

Destinations in May 1987

AirCal's May 1, 1987, system timetable listed the following destinations shortly before it was merged into American Airlines:^[68]

• Anchorage, AK (ANC)
• Burbank, CA – now Bob Hope Airport (BUR)
• Chicago, IL – O'Hare Airport (ORD)
• Long Beach, CA (LGB)
• Los Angeles (LAX)
• Oakland, CA (OAK)
• Ontario, CA (ONT)
• Orange County, CA – now John Wayne Airport (SNA)
• Portland, OR (PDX)
• Reno, NV (RNO)
• Sacramento, CA (SMF)
• San Diego, CA (SAN)
• San Francisco, CA (SFO)
• San Jose, CA (SJC)
• Seattle, WA (SEA)
• South Lake Tahoe, CA (TVL)
• Vancouver, B.C., Canada (YVR) – only international destination served by the airline

Previously served destinations

Air California/AirCal previously served these destinations during its existence:

• Fresno, CA (FAT)
• Las Vegas, NV (LAS)
• Monterey, CA (MRY)
• Palm Springs, CA (PSP)
• Phoenix, AZ (PHX)