Independence Air: Chapter 11 soon? November 2004

Continued high fuel prices and weak yields are beginning to take their toll even on LCC–type airlines in the US, with ATA becoming the first to file for bankruptcy on October 26.

Not even the best of the airlines can make a profit at $50 a–barrel oil prices in the current domestic revenue environment, as indicated by JetBlue’s warning that it will incur a net loss in the fourth quarter.

Recent weeks have seen renewed speculation about Independence Air, formerly Atlantic Coast (ACA) and now a unit of FLYi Inc, which has seen very low load factors and horrendous cash burn since launching its regional–into–LCC transformation in June (see Aviation Strategy, July/August 2004). There are fears that the Washington Dulles–based CRJ operator could be forced to file for Chapter 11 in January, when $80m of aircraft lease payments become due (excluding $18m that is currently expected to be paid by Delta).

Independence Air was extremely well funded to start with, with cash reserves of $345m at the end of June. But the reserves dwindled to $198m by September 30 and, in analysts' estimates, are likely to fall to $100–125m by year–end.

The company posted a significantly larger than expected net loss of $82.7m for the third quarter. The operating loss margin was 88.6% — one analyst thought it was probably the worst margin ever reported by an airline.

In addition to the revenue environment and fuel (FLYi had no hedges in place), the airline blamed the losses on continued high transition costs associated with the departure from United Express and the re–branding and launch of the new operation (currently 39 cities and 600 daily departures, with 87 CRJs). Also, FLYi currently has an overhead supporting a much larger operation (3Q costs were $228m, revenues $120m).

FLYi has also attracted less traffic than it had predicted, due to unexpectedly intense competition from United and others. Because of that and its own significant capacity addition, its load factors remained in the mid–40s through September, subsequently recovering to the low–50s.

Consequently, the airline has announced several liquidity–preserving measures. First, it is negotiating with lessors about reducing and/or deferring aircraft lease payments. It is also pursuing the sale or refinancing of certain of its owned aircraft and parts (including four CRJs).

On the revenue side, FLYi has made one major change to its business strategy: abandoning the plan to sell tickets only through its web site and 800 number, and making tickets available through the global distribution systems, beginning with Galileo in early November. This will increase costs, but the airline decided that it was necessary to attract business traffic.

FLYi is also reducing capacity in some major business markets, including Atlanta, Boston and New York, where it has operated hourly services.

It is switching the capacity to the north–south winter markets.

That said, FLYi’s top executives remain confident in the unusual business model.

They insist that the plan needs a large number of RJs — after all, 78% of its Dulles markets compete with legacy carrier CRJs (rather than LCCs' 150–seaters).

FLYi also has high hopes for the A319, which will give it access to attractive new markets and help boost connecting CRJ load factors.

It has received the first two of 28 ordered A319s, but their introduction slipped past the planned November 3 start–up due to certification delays. FLYi could benefit if US Airways liquidates (80% route system overlap) or if United pulls back at Dulles. However, a Chapter 11 filing by Delta could saddle FLYi with lease payments on 30 328JETs that it has just started returning to Delta — potentially another Chapter 11 trigger for FLYi.