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JUNE 14, 2004
Out From Under United's Wing Independence Air goes head-to-head with its former partner For 14 years, Atlantic Coast Airways raked in hefty profits working for United Airlines Inc. (UALAQ ) Flying under the United Express banner, Atlantic provided feeder flights to United's hubs near Washington and in Chicago -- a low-risk business that gave Atlantic Coast a generous share of the old-line carrier's high fares without the stiff costs of marketing and running a reservations system. Now Atlantic is leaving the nest. When a bankrupt United tried to lock Atlantic into a 10-year contract that would have cut its margins in half, the company decided to take its chances alone. On June 16, the carrier -- rechristened Independence Air -- will begin going head-to-head against its old partner at Washington Dulles International Airport. With 36 gates at Dulles, Independence will be flying 300 departures a day -- using mostly 50-seat regional jets -- less than three months after its launch. CEO Kerry Skeen, a 25-year aviation veteran, wants to bring JetBlue (JBLU )-like fares and marketing panache to one of the country's biggest and most expensive airports. But where JetBlue Airways Corp. focused on larger cities, Independence will use its small planes to introduce low fares -- as much as 70% lower than the competition -- and quick turnarounds to dozens of small markets such as Columbia, S.C., and Norfolk, Va., as well as places like Atlanta and Boston. Independence has a big advantage: $350 million in cash from its United Express years. That's more than twice JetBlue's startup capital when it launched in 2000. Says Skeen: "Scale gives us staying power that makes it difficult for a competitor to hit us on all fronts." Yet few airline pros give the carrier much hope for long-term survival, a view that Wall Street seems to share. Since Nov. 19, when Atlantic Coast announced it would transform itself, the carrier's shares have dropped 42% to about $6. Unlike JetBlue, which avoided confronting the majors on their home turf, Independence is barging into United's only East Coast hub. Indeed, 90% of its routes overlap with those of United and US Airways Group Inc. (UAIR ). "Traffic is going to be stimulated, but most of it is going to go to the incumbent carrier," predicts Robert Gordon, professor of economics at Northwestern University. LOOK OUT FOR TED Another drawback: Independence's cost structure looks more conventional than cut-rate. Its cost of flying will be about double Southwest Airlines Co.'s (LUV ). "They're doing a low-fare strategy with a high-cost operation," says Alan Sbarra, an airline consultant with Unisys R2A Transportation Management Consulting. Skeen hopes to spread his costs by using planes more efficiently. But United won't provide any slack: Its low-fare unit, Ted, will maintain 273 daily flights out of Dulles through the summer. The runway is littered with startups brought down by the majors' ruthless pricing. This time, the big airlines are weak. That, plus its bankroll, will get Independence off the ground. How long it can keep flying is another question.  By Lorraine Woellert in Washington, with Wendy Zellner in Dallas Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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