http://www.washingtonpost.com/wp-dyn/articles/A51336-2003Jul26.html
By Keith L. Alexander and Sara Kehaulani Goo
Washington Post Staff Writers
Monday, July 28, 2003; Page E01
Atlantic Coast Airlines plans to sever its 14-year bond with United Airlines and become a low-fare airline that could increase competition for price-conscious travelers in the Washington region.
The plan would mean refashioning a regional carrier dependent on United for most of its passengers and revenue into an independent airline during one of the travel industry's worst slumps. Atlantic Coast officials concede that the plan is risky and costly, but that it provides the best hope for the company's long-term growth.
Under the plan, Atlantic Coast would no longer operate regional United Express flights. It would develop its own brand and market itself as a competitor to such airlines as Southwest, Air Tran and JetBlue. Its hub would be at Dulles International Airport, where Atlantic and most of its 4,800 employees are based. Atlantic Coast is the largest regional jet operation at Dulles and dominates the airport's A terminal, which was built for the carrier in 1999.
The plan is contingent on United rejecting its current contract with Atlantic. As recently as Thursday, United chief executive Glenn F. Tilton said negotiations on a new contract were continuing.
With the venture to be announced today, Atlantic would effectively end those negotiations. United and Atlantic have been trying to renegotiate the contract since United filed for Chapter 11 bankruptcy protection in December.
United officials, who did not learn of the Atlantic's plans until last night, declined to comment.
The relationship with United has been highly beneficial to Atlantic. The fees United pays to Atlantic are the primary reason Atlantic remained profitable after the Sept. 11, 2001, terrorist attacks that crippled most of the airline industry.
Kerry B. Skeen, Atlantic Coast chairman and chief executive, said Atlantic decided that the terms United has been proposing for a new contract aren't acceptable. Under bankruptcy court rules, United can either accept Atlantic's existing contract or get out of it with a judge's approval.
As a stand-alone airline, Atlantic would compete with not only United, which says it plans a low-fare airline of its own, but also JetBlue and Air Tran, both of which also fly out of Dulles.
The airline already has baggage handlers and because the majority of its bookings will be done via its Web site, the airline is expected to hire only a few reservation agents. That should help the carrier keep its costs down.
Skeen cited the marketing challenge that Atlantic faces. Outside of the Washington area, travelers know the airline primarily as United Express. Now, Skeen is contemplating whether the airline may need a catchier brand name other than Atlantic Coast. Creating a new identity means the airline would have to spend millions of dollars to promote itself and its fares. "Our advertising budget will be bigger than most national carriers' budgets," Skeen said.
Skeen said Atlantic's plan has been considered for two years as an alternative to the United agreement. Most of Atlantic Coast's jets are small and fly to smaller cities, unlike Southwest's, Jet Blue's and Air Tran's. Atlantic plans to add big jets to its fleet in a few years. Skeen said the airline had only two choices; either accept United's lower offer or do something else.
By using smaller planes, Skeen said, Atlantic Coast could be profitable in such markets as Rochester, N.Y., Charleston, S.C., and Savannah, Ga., where bigger airlines have a hard time making money with larger jets. "This is a niche that has not been done. This is a niche that is not being exploited," Skeen said.
Skeen said Atlantic Coast plans to offer one-way, walk-up fares of about $150 to destinations for which other airlines charge more than $400.
United accounts for 85 percent of Atlantic Coast's revenue and was the founding partner when Atlantic was formed in 1989. United pays Atlantic Coast to run United Express flights mostly out of Dulles and Chicago's O'Hare International Airport.
Under a contract negotiated in 2000, United pays Atlantic Coast a fixed fee for each departure, no matter how many passengers are aboard or what they paid. United wants to reduce the fee to a level it said is more in keeping with the low-cost future of the industry. Atlantic, Skeen said, declined to accept United's terms.
Despite its failure to reach an agreement with Atlantic Coast, United recently agreed to long-term, lower-cost contracts with other regional carriers, including Trans States Airlines, Mesa Air Group, Sky West and Air Wisconsin.
Even if United agreed to keep the contract, "United is not risk-free" for Atlantic, Skeen said. He cited United's continuing employee-relations problems and the long-term risks to United business whether it emerges from bankruptcy or not.
Skeen said that operating as a low-cost carrier was "much more attractive for our shareholders and employees."
Darryl Jenkins, head of George Washington University's Aviation Institute, said that if Atlantic Coast succeeded, its fare structure could have ripple effects along the East Coast, where Skeen said Atlantic would initially fly.
"We're going to see a big change in the competitive nature in the airline industry on the East Coast," Jenkins said. "It will be interesting to see if other regionals are as brash as this one. . . . We've been going through this evolution of the business, and this is going to force yet more changes."
Leo Schefer, president of the Washington Airports Task Force, said airlines besides United would be directly affected by Atlantic Coast's venture. US Airways, which emerged from Chapter 11 this year as a slimmer airline focused on the East Coast market, already competes with the flights that Atlantic Coast operates as United Express.
An independent Atlantic Coast would probably force lower fares and competition with US Airways, particularly in mid-size markets.
"I see nothing but a win-win out of this, particularly for the consumer," Schefer said.
Skeen said the venture would make Dulles a more attractive airport for passengers looking for low fares. Baltimore-Washington International Airport overtook Dulles as the busiest airport in the region largely because of the popularity of BWI's dominant airline, Southwest.
Southwest, the biggest airline to remain profitable after the Sept. 11, 2001, plans to add flights at BWI.
"Dulles lost a lot of traffic to BWI. The region is growing, but you have people going to BWI for fares and pricing," Skeen said. "We're going to make people use Dulles."
Atlantic Coast said it plans to continue operating as a regional operator for Delta Air Lines. Delta provides about 15 percent of Atlantic Coast's revenue.
Keeping costs low is crucial to Atlantic's plan.
Atlantic Coast's costs were about 18 cents per available seat mile in the first quarter of this year. Skeen said that should drop to about 15 or 16 cents per available seat mile.
To keep costs down, the airline plans to sell tickets primarily through its Web site. That would also mean the airline won't have a need to hire hundreds of reservation agents. And the airline already has its own customer service agents and baggage handlers at many of the airports it service.
The new strategy will also need the cooperation of the airline's employees, especially its three unionized groups, the flight attendants, pilots and mechanics. Skeen said the airline would not have to lower its employees' pay, nor would it have to lay off hundreds of workers in an effort to reduce costs.
Instead, Skeen said, the airline would operate more flights, which he said would make better use of the company's planes and reduce costs. Southwest follows a similar strategy. "This will not be on the backs of employees," Skeen said.
By Keith L. Alexander and Sara Kehaulani Goo
Washington Post Staff Writers
Monday, July 28, 2003; Page E01
Atlantic Coast Airlines plans to sever its 14-year bond with United Airlines and become a low-fare airline that could increase competition for price-conscious travelers in the Washington region.
The plan would mean refashioning a regional carrier dependent on United for most of its passengers and revenue into an independent airline during one of the travel industry's worst slumps. Atlantic Coast officials concede that the plan is risky and costly, but that it provides the best hope for the company's long-term growth.
Under the plan, Atlantic Coast would no longer operate regional United Express flights. It would develop its own brand and market itself as a competitor to such airlines as Southwest, Air Tran and JetBlue. Its hub would be at Dulles International Airport, where Atlantic and most of its 4,800 employees are based. Atlantic Coast is the largest regional jet operation at Dulles and dominates the airport's A terminal, which was built for the carrier in 1999.
The plan is contingent on United rejecting its current contract with Atlantic. As recently as Thursday, United chief executive Glenn F. Tilton said negotiations on a new contract were continuing.
With the venture to be announced today, Atlantic would effectively end those negotiations. United and Atlantic have been trying to renegotiate the contract since United filed for Chapter 11 bankruptcy protection in December.
United officials, who did not learn of the Atlantic's plans until last night, declined to comment.
The relationship with United has been highly beneficial to Atlantic. The fees United pays to Atlantic are the primary reason Atlantic remained profitable after the Sept. 11, 2001, terrorist attacks that crippled most of the airline industry.
Kerry B. Skeen, Atlantic Coast chairman and chief executive, said Atlantic decided that the terms United has been proposing for a new contract aren't acceptable. Under bankruptcy court rules, United can either accept Atlantic's existing contract or get out of it with a judge's approval.
As a stand-alone airline, Atlantic would compete with not only United, which says it plans a low-fare airline of its own, but also JetBlue and Air Tran, both of which also fly out of Dulles.
The airline already has baggage handlers and because the majority of its bookings will be done via its Web site, the airline is expected to hire only a few reservation agents. That should help the carrier keep its costs down.
Skeen cited the marketing challenge that Atlantic faces. Outside of the Washington area, travelers know the airline primarily as United Express. Now, Skeen is contemplating whether the airline may need a catchier brand name other than Atlantic Coast. Creating a new identity means the airline would have to spend millions of dollars to promote itself and its fares. "Our advertising budget will be bigger than most national carriers' budgets," Skeen said.
Skeen said Atlantic's plan has been considered for two years as an alternative to the United agreement. Most of Atlantic Coast's jets are small and fly to smaller cities, unlike Southwest's, Jet Blue's and Air Tran's. Atlantic plans to add big jets to its fleet in a few years. Skeen said the airline had only two choices; either accept United's lower offer or do something else.
By using smaller planes, Skeen said, Atlantic Coast could be profitable in such markets as Rochester, N.Y., Charleston, S.C., and Savannah, Ga., where bigger airlines have a hard time making money with larger jets. "This is a niche that has not been done. This is a niche that is not being exploited," Skeen said.
Skeen said Atlantic Coast plans to offer one-way, walk-up fares of about $150 to destinations for which other airlines charge more than $400.
United accounts for 85 percent of Atlantic Coast's revenue and was the founding partner when Atlantic was formed in 1989. United pays Atlantic Coast to run United Express flights mostly out of Dulles and Chicago's O'Hare International Airport.
Under a contract negotiated in 2000, United pays Atlantic Coast a fixed fee for each departure, no matter how many passengers are aboard or what they paid. United wants to reduce the fee to a level it said is more in keeping with the low-cost future of the industry. Atlantic, Skeen said, declined to accept United's terms.
Despite its failure to reach an agreement with Atlantic Coast, United recently agreed to long-term, lower-cost contracts with other regional carriers, including Trans States Airlines, Mesa Air Group, Sky West and Air Wisconsin.
Even if United agreed to keep the contract, "United is not risk-free" for Atlantic, Skeen said. He cited United's continuing employee-relations problems and the long-term risks to United business whether it emerges from bankruptcy or not.
Skeen said that operating as a low-cost carrier was "much more attractive for our shareholders and employees."
Darryl Jenkins, head of George Washington University's Aviation Institute, said that if Atlantic Coast succeeded, its fare structure could have ripple effects along the East Coast, where Skeen said Atlantic would initially fly.
"We're going to see a big change in the competitive nature in the airline industry on the East Coast," Jenkins said. "It will be interesting to see if other regionals are as brash as this one. . . . We've been going through this evolution of the business, and this is going to force yet more changes."
Leo Schefer, president of the Washington Airports Task Force, said airlines besides United would be directly affected by Atlantic Coast's venture. US Airways, which emerged from Chapter 11 this year as a slimmer airline focused on the East Coast market, already competes with the flights that Atlantic Coast operates as United Express.
An independent Atlantic Coast would probably force lower fares and competition with US Airways, particularly in mid-size markets.
"I see nothing but a win-win out of this, particularly for the consumer," Schefer said.
Skeen said the venture would make Dulles a more attractive airport for passengers looking for low fares. Baltimore-Washington International Airport overtook Dulles as the busiest airport in the region largely because of the popularity of BWI's dominant airline, Southwest.
Southwest, the biggest airline to remain profitable after the Sept. 11, 2001, plans to add flights at BWI.
"Dulles lost a lot of traffic to BWI. The region is growing, but you have people going to BWI for fares and pricing," Skeen said. "We're going to make people use Dulles."
Atlantic Coast said it plans to continue operating as a regional operator for Delta Air Lines. Delta provides about 15 percent of Atlantic Coast's revenue.
Keeping costs low is crucial to Atlantic's plan.
Atlantic Coast's costs were about 18 cents per available seat mile in the first quarter of this year. Skeen said that should drop to about 15 or 16 cents per available seat mile.
To keep costs down, the airline plans to sell tickets primarily through its Web site. That would also mean the airline won't have a need to hire hundreds of reservation agents. And the airline already has its own customer service agents and baggage handlers at many of the airports it service.
The new strategy will also need the cooperation of the airline's employees, especially its three unionized groups, the flight attendants, pilots and mechanics. Skeen said the airline would not have to lower its employees' pay, nor would it have to lay off hundreds of workers in an effort to reduce costs.
Instead, Skeen said, the airline would operate more flights, which he said would make better use of the company's planes and reduce costs. Southwest follows a similar strategy. "This will not be on the backs of employees," Skeen said.
