Freebrd
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Update 1: Independence Air Retools Amid Struggles
10.27.2004, 06:05 PM
Just four months after its launch, Independence Air is right up there with some of the largest U.S. carriers - in survival mode.
Its planes less than half full despite dirt-cheap fares, Independence Air said Wednesday it will overhaul its ticket distribution system, cut capacity in some markets and negotiate with lenders in order to preserve cash necessary to avoid bankruptcy.
The airline's parent company, FLYi, Inc., announced third-quarter losses Wednesday of $83 million, or $1.82 a share. A year ago the carrier, then known as Atlantic Coast Airlines, turned a $23 million third-quarter profit. It operated at the time as a regional carrier for UAL Corp.'s United Airlines, which is in Chapter 11, and Delta Air Lines Inc., which is struggling to avoid it.
This summer the company embarked on a risky transformation, remaking itself into a low-fare carrier based at Dulles International Airport. The airline is unique among low-fare carriers, with a fleet comprised largely of small, 50-seat regional jets, which generally cost more to operate on a per-person basis.
The airline's stock dropped more than 50 percent last week after UBS Securities analyst Robert Ashcroft warned that the company might have to file for bankruptcy as soon as January and said "it's clear to us that FLYi's business plan isn't working." On Wednesday the airline's stock fell 24 cents, or 15 percent, to $1.40 a share on the Nasdaq Stock Market.
The airline believed that round-trip fares as low as $58 would generate sufficient demand to fill 600 daily departures to 39 East Coast cities, including many smaller airports like Lansing, Mich., Portland, Maine, Charleston, W.V. and Dayton, Ohio.
Company chief executive Kerry Skeen acknowledged on Wednesday, though, that the airline simply hasn't drawn as many travelers as it expected.
The airline's load factor, a measurement of how its planes are, dropped from 45.5 percent in August to 44.4 percent in September. The average airline load factor is about 72 percent, according to government statistics.
As a result, Skeen said Wednesday the airline will abandon its plan to sell tickets only through its Web site and its 1-800 number. The airline will now make its tickets available through the Galileo system, which is used by travel agents, and hopes to make deals with other distribution networks.
The airline had thought it could cut costs by several dollars per ticket by bypassing the distribution networks. But Skeen said Wednesday that corporations and business travelers - the key demographic in many of its markets - still book flights traditionally.
Skeen acknowledged in a telephone interview Wednesday that the use of such distribution systems is a major strategy change, but said it was necessary "to help get our product on the shelf."
Skeen also said the airline was cutting capacity in underperforming markets, reducing daily departures from 16 to 10 in Newark, 16 to 12 in Boston, 17 to 13 at New York's JFK airport, and 14 to nine in Raleigh.
Again, the airline had initially touted its frequency of flights as a key to making its hub-and-spoke system work, by offering frequent connections and getting a better utilization rate out of its aircraft.
Skeen pointed out that the reductions are in the airline's larger markets, and said the company has been most successful in some of the smaller markets that have never had a low-fare airline, and that Independence Air is indeed generating additional demand in those markets with low prices.
Soaring fuel prices have exacerbated the airline's woes, as has competition from other airlines that have matched its fares.
In fact, other airlines have criticized Independence Air for recklessly implementing an unsustainable business plan that is hurting all airlines that operate on the East Coast, including bankrupt US Airways Group Inc.
AirTran Holdings Inc. chief executive Joe Leonard said Wednesday that Independence Air's pricing strategy cost Air Tran $5 million to $6 million in the third quarter because they were forced to match its prices.
"We do think Independence Air's strategy is not sustainable, so hopefully that will correct itself early next year," Leonard said. "To be flying an RJ (regional jet) at $59 fares I think is one of the silliest things I think I've ever seen. An RJ is a very high-cost airplane."
But Skeen said he is as confident in the airline's business plan as he was before the airline's launch. He noted that the airline has only been flying in half of its markets for only a few months.
"We are operating in a very difficult environment. Fuel costs and the overall industry outlook is a lot worse than when we announced our plan," Skeen said. "But in terms of our business plan, we're still very confident."
Still, the company's chief financial officer, Richard Surratt, acknowedged Wednesday that the airline would at least listen to proposals from traditional carriers who might seek FLYi as a regional partner, like its former relationship with United.
"If somebody did call, we would be remiss not to consider that," Surratt said.
In its conference call with analysts Wednesday, Independence Air declined to give analysts guidance on its cash projections for the coming months, saying the company was meeting with creditors to see if it can reduce upcoming payments, particularly as a large aircraft payment looms in January.
Skeen refused to speculate Wednesday on the possibility of bankruptcy.
"Our focus is working real hard on strengthening our liquidity, and hopefully we'll be able to do that" in the coming months, he said.
