Flyi CEO Kerry Skeen attributed the bankruptcy filing to "going independent in what has been described as the most challenging economic environment in airline industry history, including record high fuel prices and extreme revenue weakness." He added that "these circumstances have prevented us and virtually all U.S. airlines from meeting financial goals." On the positive side, he professed his belief that the carrier would be saved because it had a "good, loyal fan base" in the Washington D.C area.
Independence Air, which is based at Washington Dulles International in the Washington D.C metropolitan area, won accolades for its inflight service; however, it's excellent service could not save it from its disastrous financial condition. The carrier never seemed to have a clear direction; first it expanded to western cities with efficient Airbus A319 aircraft, then Independence Air retracted from these cities despite high loads, citing high fuel costs. The root of the carrier's demise was its reliance on fifty-seat regional jet aircraft. These aircraft, which have inherently higher costs per passenger than larger jets, are rapidly being pulled from service by airlines worldwide due to high fuel costs. Coupled with unprecedented low-fares, the load-factors Independence Air had to achieve to turn a profit were nearly impossible in the current climate of the American airline industry.
It would have been nice to see a new independent airline thrive, but the cards were really stacked against them.
Last week, favorite economics blog Marginal Revolution had guest postings by travel-writer/analyst Gary Leff. Besides interesting entries on aviation outsourcing, and the devaluation of Frequent Flier Miles (well worth reading), he too chimed in (pre-bankruptcy) on the problems facing Independence Air:
Fast forward and we have a window into a key driver of the financial disaster that is Washington Dulles-based low fare carrier Independence Air.
Independence Air is the airline formerly known as Atlantic Coast, a long-time regional affiliate of United Airlines. When United entered bankruptcy it sought to reduce its payments to United Express carriers. Atlantic Coast wouldn’t take lower fees, and threatened to go off on its own and start a new airline. Everyone, myself included, thought this was a bluff. It wasn’t.
The airline owned planes and leased its own gates at Dulles, where it was already the largest carrier. It didn’t have the luxury of starting slowly and building up markets. It had to fully utilize these assets on day one. Hence eight flights a day between DC and Lansing, Michigan. (At the time I thought they should at least split their fleet and operate half as a regional feeder for a major airline and only half as a startup low-fare carrier, allowing them to offer fewer flights at least until they built a customer base).
They had planes to fill, and while they advertised heavily in Washington, DC they didn’t want to pay fees to the computer reservation systems like Sabre and Galileo. If customers booked direct on the Southwest website, they’d book direct at flyi.com too! Only not too many customers in Lansing thought of doing so. Even when Independence had the lowest price, Orbitz or Expedia didn’t display it, and customers didn’t book it. $39 fares to Pittsburgh without any advance purchase or minimum stay requirements weren’t enough to fill planes.
Independence Air finally gave back aircraft and started paying for displays in CRS systems. But that only put the lie to their fundamental business model – which is that you can’t be a low cost carrier if you have high costs, and your costs won’t be low if you operate primarily a fleet of regional jets. (While a 50-seat regional jet costs less to fly than a 737, there are also a whole bunch fewer seats to amortize your fixed costs across.)
Definitely read the whole thing.
So running an airline is really, really hard. David Pauly of Bloomberg reminded in a recent column that prior to the last four years, airlines had a cumulative net profit of $18 Billion. Since then they've lost $32 Billion for an industry-wide $14 Billion net loss. Part of the problem is still overcapacity:
Maldutis points out that the industry's dust-up of the early 1990s ended with the deaths of Braniff, Eastern and Pan Am airlines, which allowed the others to raise prices. In the six years starting with 1995, the industry earned $23 billion.
The industry now may have 20 percent to 30 percent more passenger-carrying capacity than it needs, says George Hamlin, a former airline executive and a director at MergeGlobal Inc. in Arlington, Virginia. The excess capacity is the equivalent of one or two major airlines.
Commenting on the Pauly article, Paul Kedrosky found this old Warren Buffet quote:
"If I'd been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public-spirited enough -- I owed this to future capitalists -- to shoot him down."
Then there's this article from the Wall St. Journal on how, via the Pension Benefit Guarantee Group the government may come to own large chunks of several airlines:
The U.S. government is on its way to becoming a big shareholder in the nation's airline industry and possibly in the auto industry.
The Pension Benefit Guarantee Corp., the federal agency that partially guarantees traditional pensions, recently was awarded 7% of U.S. Airways Group Inc. by a federal bankruptcy court handling the company's Chapter 11 reorganization, according to the PBGC's recent filing with the Securities and Exchange Commission. The agency got the shares as compensation for the underfunded pension plans it assumed when the company filed for bankruptcy.
The agency is likely to get an even larger stake -- between 15% and 35% of new shares -- of UAL Corp.'s United Airlines when it emerges from Chapter 11 in February, after 38 months in court protection, according to a PBGC official. And it's likely to get sizable chunks of Northwest Airlines, Delta Airlines and Delphi Corp. -- if, as expected, the companies ask the bankruptcy courts to dump their pension plans on the insurer.
This prospect, rightly, has Houston Chronicle business writer Loren Steffy word about creeping re-regulation.
To add to the jitters surrounding this dwindling space (as if that were necessary) jetBlue announced a secondary offering to sell up to $150 million in new shares. The money will be used to fuel their capital expansion. While some secondaries are irritating, this one looks pretty reasonable. Their growth plans are well known, and it's probably not a bad idea for it to be financed by a mix of stock and debt. Also, the shares are priced right at market-value, so it shouldn't have much of an effect on the stock price. (ED Note: I was flying jetBlue, watching CNBC, when this news was announced, so it was almost as post-modern as when the passengers of that one flight watched their own plane do an emergency landing).
So if you're looking for a moment of extreme negativity in the industry, this may be it. Unfortunately, there isn't a whole lot left to invest in. Even Continental airlines' fortunes have turned seriously bad. But this industry operates in extreme cycles, and it has been down for a long time. If oil prices go down, capacity is stripped, and contracts are renegotiated, perhaps an upsurge will happen in the near future.