"Independence Air Bets on West Coast Flights"

Monday, February 7, 2005

Independence Air Bets on West Coast Flights 
By Bill Brubaker
The Washington (DC) Post


Financially struggling Flyi Inc., parent of low-cost carrier Independence
Air, has been selling aircraft and even spare parts to stay aloft. The
Dulles-based airline reported an $82.7 million loss in its first full
quarter of operation last year, its planes have been flying half-empty, and
it won't say whether it has managed to restructure an $83 million aircraft
lease payment that was due last month.

Yet today, the 7 1/2-month-old carrier plans to announce nonstop service
from Washington Dulles International Airport to five West Coast cities --
Los Angeles, San Francisco, Seattle, San Diego and San Jose -- beginning
this spring.

Never mind that Flyi is fighting to stay out of the airline industry's
Chapter 11 bankruptcy club. 

Never mind that some analysts are deeply skeptical of Independence Air's
chances of surviving as a national low-cost carrier past this summer.

If Flyi goes down it won't be timidly. The company is sticking with the
strategy it pursued from the start.

"This is Flyi's last chance to save the airline in its current model," said
analyst Raymond Neidl of Calyon Securities (USA) Inc. in New York. "Their
whole business plan was ultimately dependent upon feeding long-distance
passengers to the shorter-hop connections at Dulles."

Backed by a full-throttle advertising campaign, Flyi plans to roll out its
West Coast flights with introductory fares of $84 one-way for nonstop travel
and $114 from cities where a connecting flight is needed to get to Dulles.

"This is a big day in our evolution," Flyi Chairman Kerry B. Skeen said in
an interview last week. 
 
The picture of a debt-troubled start-up airline adding transcontinental
destinations served by shiny new Airbus A319 jets may seem contradictory,
but not to analysts who follow the airline industry.

"Sorry to interrupt, but this isn't the first time that somebody has tried
this," said Betsy R. Snyder of Standard & Poor's Corp. in New York. "I mean,
you have plenty of nearly bankrupt airlines" adding routes. Just yesterday,
US Airways, a carrier in Chapter 11 bankruptcy reorganization, began nonstop
service between Washington Reagan National Airport and Atlanta, Chicago,
Cleveland, Dallas, Detroit and Houston. 

"You know it's the nature of the industry, right?" Snyder said.

For travelers, Flyi's announcement could mean good things. Competitors are
likely to match Independence Air's fares, analysts said. The competitors,
led by United Airlines, will be "aggressive," Neidl said.

The West Coast service is necessary, analysts said, if Flyi wants to
complete its transformation from a regional carrier that once served United
Airlines and Delta Airlines to a national airline. The plan is to use the
132-seat Airbuses to feed passengers to its bread-and-butter 50-seat
regional jets. The smaller planes serve markets such as Albany, N.Y., and
Charleston, W.Va. 

Long before Independence Air began last June 16, Skeen called the
acquisition of the Airbus planes critical. Last week, he predicted that the
longer-haul flights will attract new passengers to his ailing airline, which
reported on Friday that it sold only 45.7 percent of its seats in January.
The average "load factor" industry-wide is about 70 percent.

"I mean, this is part of the medicine," Skeen said of the new Airbus
service. "This is the key component of our business model, to have these
larger airplanes serve the best markets out of Dulles."

Today, Flyi uses Airbus planes on only three of its 39 routes -- to Orlando,
Tampa and West Palm Beach, Fla. The carrier plans to use them on new routes
to Fort Myers, Fla., starting on Feb. 17; Las Vegas on March 1; San Diego on
April 14; and Los Angeles, San Francisco, Seattle and San Jose on May 1.
Flyi says it expects to have 12 Airbus planes in its fleet by June and 16
more in 2006.

Bad Timing 

Flyi picked a tough time to start an airline.
 
With fuel prices higher than expected and airlines competing to lure
customers with 1960s-era fares, the parent companies of five carriers --
United Airlines, US Airways, ATA, Aloha and Hawaiian -- are operating under
Chapter 11 bankruptcy protection.

Many of the traditional carriers, such as Delta, American and US Airways,
are mimicking the keep-it-simple, low-fare model developed by Southwest
Airlines and followed by JetBlue, Air Tran and Independence.

Last month, Delta eliminated the long-hated Saturday-night stay-over
requirement for cheaper fares and promised that one-way fares will be no
higher than $499 for coach and $599 for first class.

The large carriers have showed Independence Air no mercy, matching its fares
and offering frequent-flier bonuses in markets where they compete. "It's an
extremely difficult environment out there," Skeen said last week.

Independence Air is attempting to expand on a tight budget.

With only two flights a day going to San Francisco and one a day to the
other West Coast cities, the airline plans to outsource its operations at
these airports to other carriers. Many airlines do so at airports where they
have limited service.

Rick DeLisi, Flyi's spokesman, said Independence Air will send supervisory
staff to oversee the gate and ticket-counter agents provided by other
airlines at the West Coast airports. Ticket counters clearly marked
"Independence Air" will be open only to handle departing flights, he said. 

Cutting Back 

Independence Air is cutting at least one costly investment from its original
plan. The airline will not offer the live satellite TV it had promised to
install in every Airbus seatback by early this year.

"That is one casualty of our financial situation," Skeen said. "We opted not
to install the TV product that costs about $1 million an aircraft. But by
the time we start service it is possible that we may have an alternative
product."

Flyi, with about 4,000 employees, has been laying off workers, although it
declined to say how many.

Analysts debate whether Flyi has done enough to cut costs. And some seem
frustrated by the limited information from Flyi. 

"There has been radio silence," S&P's Snyder said. "It's been very difficult
to get information. I mean, they don't return phone calls. They don't return
e-mails."

DeLisi said Flyi is being prudent, not offering analysts and the media
"speculative information during this period of restructuring."

Flyi did announce last month that it had reached agreement with a major
creditor, GE Capital Aviation Services Inc., to return as many as 20 of its
83 regional jets. Ten of these jets were taken out of service Feb. 1, DeLisi
said. Flyi eliminated 150 of its 560 daily flights, mostly in and out of
Dulles, at the end of last month. In early January, service from Dulles to
Dayton, Ohio, and Lansing, Mich., was dropped. 

Flyi said GE Capital also agreed, subject to "a number of conditions," to
restructure lease payments on 27 more regional jets and to give the airline
a five-year, $19.5 million loan.

Robert N. Ashcroft, an analyst for UBS Investment Research, saw the GE
Capital agreements as a positive development. "Flyi may have just bought
itself a new lease on life of six or even 12 months," he wrote in a research
note.

Analysts said they wonder, though, what Flyi has done about the $83 million
aircraft lease payment that was due last month. The company had said last
fall it may be forced to file for Chapter 11 bankruptcy protection if it
could not restructure those payments. 

"Well, January has come and gone and we have heard nothing about what's
happening there," Snyder said.

Skeen declined comment on whether those payments have been renegotiated. "We
just remain in discussions with our aircraft lenders and lessors to
restructure our obligations," he said. "And that's where we are right now."

Skeen also declined comment on United's invitation to Flyi and other
carriers to bid on a contract to operate feeder flights at Dulles. Some Flyi
investors have urged the company to return to its roots as a regional feeder
for larger airlines.

And asked whether a Chapter 11 filing may be in the cards, as some analysts
have predicted, Skeen said: "I can't comment."

After a few more no-comments, Skeen said with a laugh: "I know I'll sound
like a broken record." 

The airline will have to reveal more when it releases its earnings for the
fourth quarter of 2004. Flyi has not said when it will do so.

"I have no idea how much cash they are burning through, what's happened to
the leases they were renegotiating and how that helps their operating costs
and helps them conserve cash," Snyder said. "There are still a lot of
unanswered questions as to how they performed in the fourth quarter and how
that will affect their long-range strategy." 

Survival Strategies 

Skeen agreed with analysts that the airline must sell more seats -- the 45.7
percent load factor in January was below the airline's expectations -- and
not just at rock-bottom prices. A recent Flyi sale offered $44 one-way seats
to anywhere Independence flies.

"January is obviously the low point of the year for all airlines," Skeen
said. "We think we were at a disadvantage this year for January because we
didn't have enough Florida [flights]. We just didn't have the Airbuses here.
On Feb. 1, we started West Palm Beach. Feb 17, we have Fort Myers. So we
only served Orlando and Tampa in January with Airbuses. We think we were
hurt there."

Based on advance ticket sales, Skeen predicted load factors in the "mid- to
high 50s" in February and "north of 60 percent" in March.

"The Airbuses are having a positive impact on the load factors, and that's
exactly what we knew would happen when we designed the model," he said. "So
we continue to make progress even though we are not out of the woods."

Once the $84 one-way introductory seats are sold, Independence's West Coast
fares will begin at $99 one way to Los Angeles and San Diego and $119 to
Seattle, San Francisco and San Jose. Flyi said it will not charge more than
$298 one way for any ticket, even if it's bought at the last minute. 

United offers multiple daily nonstop flights from Dulles to Los Angeles, San
Francisco and other West Coast cities.

On the Dulles-San Francisco route last week, United was charging $1,511 for
a roundtrip ticket booked a few hours before takeoff and $398 for an
advance-purchase ticket for a pair of flights in April.

Asked if United plans to match Independence Air's West Coast fares,
spokeswoman Robin Urbanski wrote in an e-mail: "We are always studying the
industry's pricing movements to stay competitive."

Attached Graphics/Photo:

Flying in the Red: Flyi Profit and Loss (in millions)

Despite its precarious financial state, Independence Air plans to begin
nonstop service to five West Coast cities in the spring.

Going West: Flyi announces new West Coast Service.

fly1_020705.gif

independance air.jpg

flyiWest.gif