Markets watch for weakness as Independence takes flight

 - April 3, 2007, 8:22 AM

The new discount-fare incarnation of Atlantic Coast Airlines known as Independence Air on June 16 launched revenue service with the first cadre of Bombardier CRJs reassigned from ACA’s soon-to-be-defunct United Express operation. Designed to avoid competing directly with ACA’s remaining United Express flights and place Independence Air on solid footing at a time the investment community watches intently for signs of weakness, the first wave of routes from Washington Dulles International Airport to Newark, N.J., Chicago, Raleigh-Durham, N.C., Boston and Atlanta performed as advertised during their first days of operation. How the new airline manages to sustain itself after the likes of Southwest, JetBlue and United boost pricing pressure will take much longer to gauge.

Last month Atlantic Coast withdrew 30 of its 87 CRJ200s from the United Express system, redeploying the 50-seat jets on nine routes ranging in frequencies from five to nine per day and offering Web-based fares from $39 to $79, rising to a high of $169 for non-restricted tickets. Of course, at an optimistic seat-mile cost of 15.8 cents on a 350-mile trip for the CRJ, a more intriguing test of Independence Air’s business plan will not only come on the routes it flies head-to-head with Southwest and JetBlue, but on such comparatively small-market destinations as Huntsville, Ala., and Portland, Maine.

Southwest doesn’t fly from its Washington-area home airport–Baltimore-Washington International–to six of the nine routes on which ACA chose to launch Independence Air last month. In the other three–Chicago, Raleigh-Durham and Norfolk, Va.–Southwest charged $94 to $140, $49 to $80 and $49 to $79, respectively, for a round trip flight on June 16. Meanwhile, Independence fares from Dulles ranged from $79 to $163 for Chicago O’Hare (Southwest flies to Midway), $49 to $79 for Raleigh-Durham and $39 to $92 for Norfolk, Va. On average, Independence charged somewhat less for lowest-fare tickets and somewhat more for the most expensive.

ACA hasn’t disputed the conventional wisdom that it will have to charge some $20 more than Southwest to compensate for its cost disadvantages. In rebuttal, it claims the wealthy population living in Independence Air’s Northern Virginia/Washington catchment area will pay a few extra dollars to avoid having to drive 50 miles or so to BWI Airport.

Of course, Independence Air’s new fleet of Airbus A319s, scheduled to start arriving at Dulles in September, will allow it to compete on more equal footing with Southwest’s Boeing 737s on routes between large cities. But in small- and medium-size cities, Independence faces a stern test with the CRJs, which have yet to prove their mettle in low-fare applications.

A study recently released by Washington, D.C. consultant Velocity Group called the approach “fraught with risk,” due mainly to the potential for the scale of the operation to drain resources. ACA’s schedule for removing its CRJs from United Express service shows the last leaving on August 4. Another risk involves the airline’s need to stimulate traffic growth to levels that will allow it to add enough frequency to profitable levels. But the study, commissioned by ACA, expressed optimism on that score, based on some precedents set by the defunct Air South in Columbia, S.C., Midway Airlines at Raleigh-Durham and Canada’s WestJet Airlines at such small communities as Kelowna, British Columbia.

After undergoing refurbishment with leather seats and new paint, all CRJ200s will enter the Independence Air system on a staggered schedule lasting into next year.
In its first-quarter SEC filing, the company estimated its cash holdings of some $425 million will allow it to meet its capital needs and debt-service requirements until the end of next year’s first quarter, after which time it will have to stem the losses it expects to accumulate into next spring.

Marketing and advertising costs will account for a large portion of those losses–up to $30 million. “Independence Air’s most difficult task may be to market itself against aggressive low-cost rivals,” said the Velocity report. Furthermore, it said, if Richard Branson opts to base his planned discount-fare Virgin USA at Dulles, “that choice likely would kill both Independence Air and Virgin USA by reducing fares to unsustainable levels.”