Profit-leader ACA builds its case for new low-fare venture

 - August 11, 2008, 9:33 AM

During a quarter in which all the big publicly traded regional airlines turned a handsome profit, it came as little surprise that Atlantic Coast Airlines led the pack, as the Sterling, Va.-based carrier prepared to embark on the most ambitious, and perhaps riskiest, undertaking in its 14-year history. While fellow United Express carriers SkyWest and Air Wisconsin accept revisions to their fee-per-departure contracts that result in suppressed yields but further flying opportunities with 70-seat jets, ACA has refused to acquiesce, a stand largely reflected in its impressive profits for the second quarter, but one that will most likely result in the end of its relationship with United Airlines.

After months of fruitless negotiations for a new code-share deal with United, ACA essentially gave up trying and chose to pursue a new plan to become an independent low-fare carrier based at Washington Dulles Airport. The plan involves the continued use of ACA’s 85 fifty-seat Bombardier CRJs on routes of up to 1,000 miles and a new fleet of either Boeing 737s or Airbus A320-family jets for transcontinental routes. However, ACA said it will likely cancel delivery of the final 34 CRJs it holds on firm order, a contractual option it may exercise if its United relationship ends.  

In any case, ACA’s Delta Connection operation will remain in full effect, it said. ACA would not issue a firm start date for the independent operation because its plans still hinge on its assumption that United will reject the partners’ United Express agreement, an option United enjoys under a bankruptcy court ruling. However, Atlantic Coast CFO Richard Suratt ventured “a best guess” of next year’s second quarter. Until that time, said ACA, it intends to fulfill its obligations under the current contract, for which it successfully negotiated an upward rate adjustment for this year.

The rate adjustment contributed mightily to ACA’s profits for the quarter, adding $7.3 million in after-tax revenue to the balance sheet. More significant, however, proved a reversal in charges for the delayed retirement of some of its Jetstream 41 turboprops as a result of the uncertainties surrounding its United contract. The credit totaled $20.4 million after taxes–not quite half of its net income for the quarter. The company now plans to retire its 27 J41s next year. The company also recorded $900,000 in after-tax compensation from the government under the Emergency Wartime Supplemental Appropriations Act. But even without the unusual charges and credits, ACA would have reported net income of $17.2 million, compared with $14.1 million during the same period last year.

ACA chairman and CEO Kerry Skeen said the results for the quarter help place ACA in a strong position to proceed with its ambitious plans for a low-fare operation. “I don’t think anyone would dispute that the low-fare platform is the best place to be to have earnings and then be able to boost earnings,” said Skeen. “I think AirTran’s results for the quarter provide further proof that this is the right place to be. We will be operating in a hub where we will have the number-one ranking, not number two as AirTran has in Atlanta or Frontier has in Denver, for example.

“With our planned level of frequency, we expect our position at Dulles to translate into a much healthier competitive posture when you compare it to the other hub low-fare airlines,” added Skeen. “There has been some discussion that no one has done low fares with RJs before, but where I believe the thinking goes awry is in the assumption it can’t work. The reason it hasn’t been done is that there were more attractive uses, such as growing fleets with the major carriers. Now that the risk profiles for those applications are changing, coupled with the economic benefits of our business case, we think it’s very compelling to use CRJs in the manner we’ve outlined.”

Skeen also answered skepticism surrounding its CRJs’ 15-cent seat-mile costs, explaining that the RJs will serve markets airlines such as AirTran cannot even entertain entering with narrowbodies. “The trick is matching the machine with the mission,” said Skeen. “AirTran may have a lower CASM with its 717s, but they don’t have lower departure costs than we do, which means we can serve many markets they can’t. And the ones they could possibly do with one or two trips, we’ll be able to do with six, eight, 10 or even 12 trips.”

Of course, ACA’s CRJs will also serve as connecting vehicles for the airline’s proposed narrowbody fleet, in essence acting as sort of its own regional fleet. Skeen said he expected the board to decide on a narrowbody acquisition “within a few months,” and that, if United does not release ACA from its contract by the middle of next year, ACA might open the new operation without the CRJs.