Delta, United Ends ACA's Contracts

As Delta Air Lines [DAL] closes the door on its four-year relationship with Atlantic Coast Airlines [ACAI], the door may be opening for Skyway Airlines. The Milwaukee-based carrier is negotiating to fill some of Atlantic Coast's routes.

BothDelta and United Airlines [UALAQ] last week took steps to end their respective code-share partnerships with Atlantic Coastas the Dulles-based regional airline finalizes details to launch Independence Air

The United announcement had been expected ever since Atlantic Coast last July rebuffed United's revised-and-lower-yielding feeder service contract. Whether Delta would be willing to maintain a relationship with Atlantic Coast once the low-fare Independence Air was launched had been the unknown variable as the industry and Wall Street debated the merits of Atlantic Coast's revised business plan.

Even before Delta announced its decision, a Standard & Poor's rating team re-affirmed Atlantic Coast's B- rating and "negative" outlook. However, analyst Betsy Snyder maintains that the carrier's internally generated cash and equipment financing will be sufficient to meet its capital spending needs. The company had a Dec. 31 cash balance of $298 million.

Skyway's Opportunity

Atlantic Coast has been flying for Delta Connection since August 2000 out of Delta's Boston and Cincinnati hubs. Atlantic Coast has been using 30 Fairchild Dornier 328JETs to service the routes.

Citing diverging business models, Delta Connection CEO Fred Buttrell said in a prepared statement that terminating the contract is in the best interests of both airlines. In addition, the move will avoid a conflict with the Delta pilots' labor agreement. The termination notice of its fee-per-departure contract last week triggers a 180-day transition period.

Ever since Atlantic Coast announced its plans last summer to reject the United contract and form a low-fare airline (CRAN, Aug. 4, 2003), Atlantic Coast said it was willing to continue the Delta contract if that carrier wanted to. "We had anticipated Delta's decision for some time and understand their reasons for ending the code-share relationship," said Atlantic Coast CEO Kerry Skeen.

Under the terms of the Delta contract, Atlantic Coast has the option of asking Delta to assume the leases on the 328JETs. Atlantic Coast said it is exploring its options concerning the 32-seat regional jet. Atlantic Coast said it might enter into a fleet transition with Delta just as it did with United. In Delta's statement, it said the aircraft are expected to remain in the Delta fleet.

If Atlantic Coast transfers the 328JETs to Delta, it may open the door to Skyway. A subsidiary of Midwest Airlines [MEH], Skyway said it was in discussions with Delta to operate the 328JET fleet. Skyway currently flies 10 328JETs as Midwest Connect operating as a feeder service for its parent. After Atlantic Coast, it is the second largest U.S. operator of the 328JET.

"With our experience operating the 328JET, we're in a unique position to grow our operations by assuming responsibility for operating Delta Connection's 328 fleet," said Jim Rankin, Skyway's CEO.

Taking on the Delta responsibilities would be a new venture for Skyway. Up to this point it has not flown routes for other carriers. "Skyway has been evaluating opportunities to operate aircraft for other airlines, which would be a shift in Skyway's business model. These discussions represent the first step toward such a shift," Rankin said.

To prepare for the termination of the Atlantic Coast contract, Delta is shifting planes and flights. Atlantic Coast will no longer fly out of Boston and New York but instead will consolidate all its operations in Cincinnati by July. Comair, a Delta subsidiary based at the Cincinnati airport, will move aircraft to the Northeast to fill the Atlantic Coast void. The move will also increase the size of the aircraft operating in the Boston market from 32 seats to 50 because Comair flies CRJs.

Independence Air launch set

Atlantic Coast will begin a transition on June 3 to end its United Express service on Aug. 4. On June 3, 30 50-passenger CRJs will leave United service and begin a two-week makeover into Independence Air jets. Atlantic Coast will also retire 17 BAe Jetstream 41s. On July 6, another 30 CRJs will leave the United fleet. On Aug. 4, the final 26 CRJs and five J-41s will be taken out of United service.

All the J-41s will be retired from service while 86 regional jets will be transformed in the initial core of the Independence Air fleet. Each Bombardier [BBD] CRJ will be refitted with new leather seating and interiors. The exteriors will sport the new sky blue and white dots theme already heavily promoted on the airline's Web site.

By the end of the summer, Independence Air will be flying more than 300 flights a day from Washington Dulles International Airport to 35 destinations. The carrier plans a major media event in May to announce its initial schedule and fare structure, said spokesman Rick DeLisi.

Independence Air will operate two types of aircraft. The existing regional jet fleet will service smaller communities as a traditional hub-and-spoke operation with frequent non-stop service to Washington. The second aircraft type will be the Airbus 319, which will enable the carrier to fly 132 passengers to vacation destinations, such as Florida, as well as provide transcontinental service. DeLisi said Airbus destination cities would not be revealed until 60 days prior to the start of the service. The first Airbus is due to be put into service in November.

Independence also announced that it has increased its order of Airbus aircraft by two. Four Airbus 319s will be flying by year's end. Independence now plans to have 18 in service next year with the addition of two planes that will be leased by International Lease Finance Corp. Five more are expected in the first quarter of 2006.

The Airbus aircraft will be outfitted with the leather seats and 20 channels of live satellite TV on every seat back. The planes will be configured into one class.

United's new partners ready

As had been expected, United rejected its contract with Atlantic Coast because the Dulles-based airline refused to negotiate a new pact for a lower fee. When it announced agreements last month to bring three new airlines into the United Express family, United lined up enough aircraft to fill the void Atlantic Coast would create with its departure (CRAN, March 15).

Chautauqua Airlines, Republic Airlines and Shuttle America, which are newly-announced partners in United Express, will operate out of Dulles and Chicago O'Hare.

Existing partners Air Wisconsin, Trans States and Mesa [MESA] will also serve O'Hare and Dulles, with SkyWest [SKYW] serving O'Hare as well.

>>Contact: Rick DeLisi, Atlantic Coast, (703) 650-6019; Betsy Synder, Standard & Poor's, (212) 438-7811.<<