"The Next JetBlue?"

Thursday, June 10, 2004

The next JetBlue? 
Independence Air's new low-fare service will use small jets to bring
discounts to new markets.
By Chris Isidore
Cable News Network (CNN)


NEW YORK (CNN/Money) - Independence Air will attempt to become the next
big thing in discount airlines by flying small jets. 
   
Owned by regional feeder airline operator Atlantic Coast Airlines
Holdings (ACAI: Research, Estimates), Independence is set to start
flying June 16 using the 50-seat regional jets it has been flying under
the names "United Express" or "Delta Connection." 

The airline's plans will bring the first taste of discount air fares to
a number of secondary markets in cities from Columbia, S.C., to Lansing,
MI, to Portland, ME -- where it doesn't make sense to use the larger
aircraft the other discount carriers fly. 

The smaller jets also allow Independence to have a greater frequency of
flights, something desired by business travelers who pay somewhat of a
premium for making last-minute reservations. 

"Business travelers make the decisions based on schedule, leisure
travelers do it based on price," said Independence Air spokesman Rick
DeLisi. "We think we can be very competitive in both areas." 

Not so fast

But many analysts have doubts about Independence Air's strategies,
wondering if the smaller aircraft can work in the low-cost, low-fare
model. The regional jets, or RJ's as they're known, have a higher cost
per mile flown by each paying passenger due the smaller capacity. And
some customers prefer not to fly on the smaller aircraft. 

"I think it's pretty risky what they're doing," said Ray Neidl, airline
analyst with Blaylock & Partners. "I'm a real fence sitter here -- I'm
real skeptical you can run a low cost carrier using regional jets." 

If Independence Air is a success, it will change the assumptions about
the business model for low-fare airlines, and could bring the lower
fares to much more of the country than now served by the discount
carriers. 

And even if it ultimately proves a failure, Independence Air is likely
to shake up the airline industry, especially on the East Coast, for much
of the next year or two, as competitors react to its fares and the
sudden increase in capacity with their own round of fare cuts. 
 
"Atlantic Coast's metamorphosis into Independence Air is one of the most
interesting developments in the industry today and will be a highly
disruptive event," said UBS airlines analyst Robert Ashcroft. 

It's not just the smaller markets that are gaining a bigger discount
carrier presence with Independence's debut. 

It will serve such major airports such as Newark Liberty Airport in the
New York area and Chicago's O'Hare International Airport, neither of
which has much in the way of low-fare service, as well as major airports
with only limited low-fare airline operations such as Boston Logan
Airport and Dulles International Airport outside of Washington D.C.,
which will serve as its hub. And it could start transcontinental service
soon after it gets some bigger jets later this year. 

Losses projected

Independence will start by reaching five cities out of its Dulles hub,
but by Sept. 1, as it moves to end its feeder services, it plans to be
reaching 35 cities with 300 departures a day at the airport using its 87
regional jets. 
 
It has orders with Airbus Industrie for 27 A319 jets, which are roughly
comparable in size to jets used by discount competitors such as
Southwest Airlines and JetBlue Airways. But it will only have four of
these planes delivered this year and another 18 in 2005, meaning the
regional jet fleets will carry the bulk of the traffic during its first
years of operation. 

The airline is projecting losses through the second quarter of next
year, a change from the profits it's been able to post in the face of
the post-Sept. 11 industry downturn. 

However, analysts, who are generally bullish about low-fare airlines'
competitive advantages over older carriers, have doubts Independence can
return to profitability by the third quarter 2005. 

Neidl has a 'hold' recommendation on Independence Air, which makes him
one of the more bullish analysts on the stock. The First Call consensus
12-month price target for Atlantic Coast Airlines is $5.00, or roughly
18 percent below current prices. And shares are down about 40 percent
over the last six months, making it one of the worse performers in the
battered airline sector during that time. 
 
One key factor that even skeptics admit works in favor of Independence
Air is a strong balance sheet. The holding company had $350 million in
cash and cash equivalents on the balance sheet in its most recent
earnings report, more than twice the reserves that JetBlue had at its
launch. Even some of those with 'sell' recommendations on the stock
expect the company to use its reserves to eventually reach
profitability. 

"Atlantic Coast has got cash, clever and motivated management and (we
project) staying power -- but also many competitors trying to strangle
it at birth," wrote Ashcroft, who has a "reduce 2" rating on the stock.

Attached Photo/Graphics:

Independence Air, the newest low-fare airline, will start operations
June 16 using 50-seat regional jets never tried before by a discount
carrier.

Cheaper and Cheaper Skies

independence.jpg

cheap_airlines.jpg