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Independence Air has trouble gaining altitude
by
Brett Lieberman
Virginia Business
February 2005
Passenger’s
rave about the friendly staff, love the roundtrip fares
that run as low as $58 and praise the frequent flights
that have brought competition to small and medium markets.
Yet Kerry Skeen’s bid to transform Atlantic Coast
Airlines from a feeder carrier for United Airlines into
the next Southwest Airlines or Jet Blue has hit major
turbulence and the outlook is grim.
Barely
six months in business, Independence Air is struggling
to fill seats on its 50-seat regional jets. It reported
an $83 million third quarter loss and a Chapter 11 filing
could come any day. Even worse for Skeen, CEO of Washington
Dulles-based corporate parent Flyi Inc., he could be
forced to return to flying for United. “I thought
it was a very difficult model from the very beginning,”
says analyst Raymond Neidl of New York-based Calyon
Securities, who recently rated Independence Air as a
potential takeover target.
Such skepticism from Wall Street has been born out.
After earning $82.8 million last year as Atlantic Coast
Airlines flying routes as United Express as well as
charters, the company’s losses have soared beyond
projections. The company predicted a $25.7 million loss
in the second half of 2004, and more than tripled that
during the third quarter alone. By the end of January,
Independence had eliminated 150 of its 560 daily flights,
laid off some employees and agreed to return as many
as 20 of its jets to a creditor — nearly a fourth
of its fleet — in an attempt to avert a bankruptcy
filing.
Even during the heavily traveled holiday season, Independence
filled only 54.7 percent of its seats in December, far
below the industry average of 70 percent. Skeen’s
bid to become the next big low-fare carrier couldn’t
have come at a worse time. United and US Airways are
in bankruptcy court, and several other carriers could
join them. Passenger levels have only recently returned
to pre-9/11 levels, and the industry has blamed higher
fuel prices for hundreds of millions in losses.
Independence officials acknowledge a few missteps. To
save money, the airline did not allow passengers to
book tickets through online reservation systems other
than its Web site. The company also overestimated demand
from some smaller markets. Independence Air has belatedly
remedied those errors, cutting some flights and joining
the major online booking systems to make it easier for
business travelers.
The airline also underestimated the competition. United
flew routes at a loss as it cut fares to match Independence’s
price even before the new airline launched. “We
have a clear cost advantage, but when competitors who
are in Chapter 11 price their services at well below
their costs, that is a much different competitive scenario,”
says Independence spokesman Rick DeLisi.
Independence has begun flying larger Airbus jets on
routes to Florida. It also has raised some fares and
will offer non-stop service to Las Vegas from Dulles
beginning March 1. All the turmoil has benefited passengers
in some markets. Since the airline’s launch, fares
at Dulles have dropped 30 to 70 percent. The Washington
Area Airports Taskforce estimated in June that departures
by low-fare carriers would account for half the daily
departures at Dulles in 2004, up from 4 percent a year
earlier. The change would save fliers $300 million this
year.
Critics believe Skeen’s vision was too ambitious.
Independence went into too many markets too quickly.
“You can’t just throw a bunch of seats into
a bunch of markets and have good capacity,” says
Neidl of Calyon. Yet DeLisi argues the airline had little
choice. United proposed changes to Atlantic Coast’s
contract that would have reduced the amount of money
that the carrier would be paid, cutting guarantees and
greatly expanding its financial risks.
Once the decision to launch Independence was made, the
carrier had to decide what to do with its 83 planes.
“The choice was to fly them or park them,”
DeLisi says of the decision to fly so many routes. “There’s
no question that what we’re doing is completely
unprecedented and paves a new path in a number of areas,”
he says.
Filing Chapter 11 could also help cut costs by cutting
the size of its fleet.
When it can fill seats, Independence scores well. About
85 percent of passengers surveyed by the carrier say
they would fly Independence again compared to at best
30 to 35 percent when it flew the same routes for United.
“You can’t really beat them coming in here,”
says Tom O’Reilly, who has flown Independence
since its inaugural flight from Buffalo in July.
O’Reilly’s recent $100 roundtrip ticket
from Buffalo to Dulles was at least one-third cheaper
than other airlines. To get a similar fare, he would
have to fly into Baltimore-Washington International
Airport and then drive to Virginia.
With daily departures to 38 cities, Independence has
quickly grown to be the busiest carrier at Dulles, where
it is the only locally based carrier. It has 4,317 full-
and part-time employees. Though few projections have
panned out regarding fuel prices, competition or capacity,
Independence could still have a bright future with or
without ties to United. “These guys are perfectly
capable of pulling this off,” says Darryl Jenkins,
an airline management professor at Embry-Riddle Aeronautical
University. They just need to make some money, no small
feat in the airline industry.
Independence’s choices are relatively easy —
cut costs, stop hemorrhaging cash, raise fares or check
their egos in the overhead compartment and go back to
United.
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