Independence Air Bankruptcy Should Benefit Industry
By Ann Keeton, Of DOW JONES NEWSWIRES
CHICAGO -(Dow Jones)- To no one's surprise, FLYI Inc. (FLYI), which operates low-cost airline Independence Air, filed for Chapter 11 bankruptcy protection in Delaware Monday.
As former regional contractor Atlantic Coast Airlines, the airline was a partner with United Airlines, a unit of UAL Corp. (UALAQ), and Delta Air Lines Inc. (DAL). The carrier last year became an independent airline with a hub at Dulles International Airport outside Washington D.C.
But, in a tough competitive environment, and with rising fuel cost, the airline's business plan never got off the ground.
Analysts said Monday that the airline's plan in bankruptcy - to auction off its assets - will benefit East Coast competitors.
Analyst Gary Chase at Lehman Brothers said Monday that, with domestic airline capacity expected to shrink 3% or more in 2006, he is changing his view on the sector to positive from negative.
The FLYI bankruptcy is different from other airline bankruptcies, he wrote, because there won't be a protracted reorganization. FLYI plans to sell its assets by Jan. 5, 2006.
"We see two possible outcomes," Chase wrote Monday. "The first would be for existing industry players to purchase selected assets of the company and grow into some of the void created by FLYI in Washington." Two likely buyers would be JetBlue Airways Corp. (JBLU) or AirTran Holdings Inc. (AAI). Or, Chase wrote, several potential startup airlines may look at acquiring FLYI's assets, which include its legal operating certificate, facilities, aircraft and trained employees.
The biggest beneficiaries of the bankruptcy, Chase wrote, are US Airways Inc. (LCC), AirTran, JetBlue and Southwest Airlines Inc. (LUV).
FLYI said Monday it will continue to operate normal passenger service. The airline said it needs to conserve cash while it finds a buyer.
The carrier operates a fleet of 62 aircraft, including 50 regional jets, with more than 3,200 employees.
In a statement, Chief Executive Kerry Skeen said high fuel prices and weak revenue prevented the airline from meeting its operational goals. During its short lifetime, the airline struggled to fill seats of its regional jets, even though fares were competitive with low-cost rivals.
Analyst Ray Neidl at Calyon Securities said investors have been expecting a FYLI bankruptcy, since the shares have traded below $1 for some time.
"We did not believe that FLYI's model of using regional jets as a low-cost airline was ever feasible," he wrote, because of the relatively high cost of operating a regional jet. "The only way we saw any potential value for stockholders was if the company went back to being a regional feeder airline."
The FLYI bankruptcy will benefit direct competitors, Neidl wrote, but he isn't optimistic about long-term capacity reduction in the U.S. Current capacity reduction will be replaced by regional jet flying, or the expansion of low-cost carriers, the analyst wrote.
imp: :laugh:
