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 The Brancatelli File

joe THE DUMBEST AIRLINE
IN AMERICAN HISTORY


BY JOE BRANCATELLI

November 10, 2005 -- I consulted the Library of Dumb Dead Airlines--that's a couple of big file cabinets in my attic--after hearing that Independence Air had filed for Chapter 11 bankruptcy on Monday after less than 18 months of flying.

I went to the Library to refresh my memory on some of the dumb ideas that have made it aloft over the years. There was Western Pacific, which thought it could survive by selling its fuselages as flying billboards. There was Branson, which only flew to the Missouri resort town. Freedom Air wanted to be the airline for in-flight smokers. There was SkyTrain and Jet Train and Jet World and Sunworld. Airlines started by travel agents (Tahoe and Ultrair) and carriers launched by displaced pilots (Pride and Kiwi). There was a conga line of carriers named National, Midway, Braniff, Eastern and Pan Am, each one predicated on the theory that adopting the brand of an already-failed airline was the key to success. There was an airline founded using old Japanese prop planes (MidPacific) and one or two named after an old widebody jet (TriStar). There were sybaritic luxury airlines (Regal, McClain, MGM Grand), misbegotten discounters (Leisure Air, Eastwind, Air South) and even an eponymous carrier started by a disgruntled founder of Southwest (Muse).

But Independence Air beats all of the crashed-and-burned carriers in the Library of Dumb Dead Airlines. It is, in fact, the Dumbest Airline in American History.

In slightly less than 18 months, Independence has gone from profitable regional carrier to failed start-up. It has blown a huge horde of cash and destroyed a company that just three years ago this week was selling north of $15 a share. It has flown the wrong planes to the wrong places with the wrong schedules at the wrong prices. It has failed in big cities and small towns. Failed flying North to South and East to West. Failed flying big, new jets and small, old ones. And it did it all while defying the first-guessers who judiciously warned that Independence's business plan, such as it was, could never fly.

Independence Air isn't dead yet--it hopes to keep flying during the higher-cash-flow holiday period and its bankruptcy filing envisions a court-supervised auction of assets in 60 days--but it will go to the head of the Dumb Dead Airline list the moment its final flight touches down at its Washington/Dulles hub.

Because Independence Air was created with the dumbest aviation concept of all time: We got planes. We got gates. What the hell…

The gruesome tale of Independence Air starts with the bankruptcy of United Airlines in December, 2002. At the time, an airline named Atlantic Coast handled the United Express flying from United's Dulles hub. It also flew as a Delta Connection carrier. Atlantic Coast had earned 31, 29 and 19 cents a share in the first three quarters of 2002, making it one of the nation's few profitable airlines.

When United started squeezing its independent commuter carriers for concessions in 2003, however, Atlantic Coast resisted. Unlike the other commuter carriers in the United Express stable, Atlantic Coast could resist. Atlantic Coast, not United, owned the planes (a fleet of 100 50-seat regional jets) and all of the United Express gates at Dulles. Negotiations went badly because it turned out that United had a hammer of its own: Only United could end the contract between the two carriers.

Logic, that most elusive of commodities in the airline business, dictated that the bankrupt big carrier and the profitable small one would somehow work things out. After all, they needed each other and there was a Gordian knot of entangled interests. Atlantic Coast would be nowhere without United's reservations network and traffic and couldn't quit the contract even if it wanted to leave. And United's international hub in Dulles would be disrupted if it lost Atlantic Coast's planes and gates.

As the months dragged on, corporate egos were bruised and lawsuits were filed. United even brought in the commuter industry's pre-eminent bottomfisher, Jonathan Ornstein of Mesa Air, to make a ham-fisted buyout offer for Atlantic Coast. Even in the charged atmosphere of the moment, a deal could still have been done.

Yet logic did not survive the bruised egos, lawsuits and buyouts. Instead, United and Atlantic Coast chose mutually assured destruction. In April, 2004, United released Atlantic Coast from its contract and hired as many as six replacement carriers. It also built a new set of gates at Dulles.

For its part, Atlantic Coast took its gates and planes and created Independence Air. The audacious concept: Build a low-fare airline at Dulles and use Atlantic Coast's repainted, refurbished regional jets (RJs). Management also placed an order for new Airbus A319s and decided travelers could only buy seats directly from the new carrier, dubbed Flyi for short.

There were millions of things wrong with this plan, as everyone from Independence's well-wishers to its enemies were quick to point out. In fact, Atlantic Coast's stock dropped more than 20 percent on the day the Independence Air plan was unveiled.

The market understood what everyone except Atlantic Coast's management understood: Flyi had no passenger base of its own. It had no identity. Hubbing at delay-plagued Dulles was risky because United was not about to abandon its hub, US Airways was still a large player in Washington and JetBlue Airways was building capacity there. The decision to restrict ticket sales cut out travel agents, third-party Web sites and the big computerized reservation systems. Worse, RJs were impossibly inefficient and expensive to operate in the manner that Independence was proposing. Most estimates peg the RJ disadvantage at 30 percent per seat mile compared to the larger jets preferred by traditional discount airlines. Launching a low-fare airline with high-cost planes was beyond hubris. It was fiscal insanity.

Worst of all, however, Independence had no place to fly. One example is my own home airport, Stewart/Newburgh, in New York's Hudson Valley. When Atlantic Coast flew as United Express, it couldn't fill the three 19-seat flights it operated each day between Stewart and Dulles. Yet Independence Air launched Dulles-Stewart service with six 50-seat flights or 300 seats a day.

For all intents and purposes, Independence Air was dead on the day it launched, June 16, 2004. At its frenzied height, it operated 600 flights a day and flew to 46 cities. It blackened the Eastern skies with suicidally large schedules to places like Huntsville, Alabama; Lansing, Michigan; Charleston (West Virginia and South Carolina); Albany, Buffalo, Syracuse and Rochester, New York; Cleveland, Columbus and Dayton, Ohio; and airports throughout the Carolinas, the Border States and Florida.

Fares plummeted to as low as $29 one-way thanks to endless fare sales, yet Independence Air had months when it was filling fewer than 50 percent of its 50-seat aircraft. By the end of last year, Independence was hemorrhaging cash and gyrating like a top: It began selling seats through all the normal channels, fiddled with schedules, lopped cities off the route map, reworked fares and mortgaged what future it still had.

When the Airbus A319s began arriving last November, there were no seatback television monitors (Independence had promised in-flight TV service, but then couldn't afford to equip the planes) and nowhere to fly the planes. First they flew to Tampa and Orlando, markets already saturated with low-fare seats. In March, Independence launched a desperate West Coast expansion: Airbus flights to Los Angeles, San Diego, Las Vegas, San Jose, Seattle and San Francisco. The problem with going West? Transcon routes were also saturated with low-fare seats. Independence's coast-to-coast fares dropped to $69 one-way. The transcon routes were dumped even before Independence trooped to the bankruptcy court on Monday.

Over these past 18 months, whenever observers would criticize Independence Air's basic concept and its day-to-day execution, an E-mail would come from someone in the airline's management. The gist of the defense: We had all these planes. What else could we do?

What could Atlantic Coast have done? Swallowed its corporate pride and cut the best deal possible with United. Or pursued commuter-jet flying with other airlines. Or even liquidate when it severed its relationship with United. Liquidation last year would have guaranteed Atlantic Coast shareholders a nice little payout. Now they'll be wiped out in the bankruptcy.

In fact, creating a dumb airline like Independence Air has helped no one. Not the small cities that were seduced into supporting Independence by the chimera of unsustainable low fares. Not Atlantic Coast's employees, who accepted huge concessions to help launch Independence, took more concessions this week to keep it flying and will soon lose their jobs anyway. Not the million members of Independence's iClub frequent-flyer program, which will almost surely disappear without a trace. And certainly not business travelers at large, who knew a hopeless airline concept when they flew one.

Last November, six months after Independence launched, I suggested that the airline was trying to "make low-fare lemonade from a couple of crates of flying lemons." A year later, Independence's lemonade stand is on the verge of disappearing. According to Monday's bankruptcy filing, it has just $24 million in unrestricted cash after launching with a $300 million war chest. It hasn't yet reported results for the fiscal third quarter, which ended in September, but it racked up more than $370 million in losses during the first 12 calendar months it operated as Independence. Logical extrapolation suggests that Flyi has lost at least $500 million during its 18-month odyssey.

In other words, Independence Air's place as the Dumbest Airline in American History is now secure.

Copyright © 1993-2005 by Joe Brancatelli. All rights reserved.