When Flyi [FLYI], the parent of Independence Air, announced its third quarter loss of $82.7 million late last month, it carefully avoided any conversation about a bankruptcy filing. As the new low-fare carrier filed its third quarter numbers with the U.S. Securities and Exchange Commission (SEC) last week, it was no longer being coy.

If the carrier cannot strike a deal for lower aircraft lease payments before January, "it will be forced to consider commencing a bankruptcy case under Chapter 11," according to the filing.

"The company believes that is has sufficient liquidity to fulfill all of its obligations arising prior to the lease payments that are due in January 2005. The company is in negotiations with various parties to provide sufficient liquidity to make these payments."

It faces an $83 million lease payment on its fleet of 87 Bombardier [BBD] CRJ 200s in early January.

The "unprecedented high jet fuel costs" coupled with intense competition, which has reduced its anticipated passenger head count, has caused Flyi to burn more cash than its business plan had envisioned. Flyi "cannot sustain the losses it currently projects for the fourth quarter 2004 and the full year 2005 without additional liquidity." The carrier estimates that its long-term debt at year's end will be $240.7 million compared to $133.9 million on Dec. 31, 2003.

Prior to the latest SEC filing, one analyst estimated that by Dec. 31 the carrier will have about $100 million in cash on hand. Flyi ended the third quarter with $197 million in cash and short-term investments. It started the year with a cash balance of $397 million.

In trying to preserve its cash and strike a better deal, Flyi missed $8.7 million in pre-delivery deposits due to Airbus in October. Airbus has since notified Flyi that if the payments were not made by Nov. 10 the carrier would be considered in default of its purchase agreement. Flyi "has sufficient cash to make the overdue payments but it is engaged in discussions with Airbus regarding the terms for acceptance of future aircraft deliveries," according to the filing.

At press time, neither side was saying if the payments had been made.

The first two A319s are now sitting at Dulles as Independence awaits certification from the Federal Aviation Administration to fly the larger plane. The first Airbus flights to Florida were to have begun earlier this month. Flyi told the SEC it does not know when it will receive the FAA certification.

In addition to its discussions with Airbus and the CRJ leaseholders, Flyi is seeking new lease payment terms for its fleet of 30 Dornier 328Jets, once used for Delta Air Lines [DAL], and 30 BAe Jetstream 41s, once used for United Airlines [UALAQ].

To raise additional cash, Flyi is negotiating the sale of four CRJs, one Dornier and aircraft spare parts. It is also considering an early exit from some of its CRJ leases.

On the positive side, Flyi last month received a $4 million payment from United, which closes the book on a code-share contract dispute.

>>The 10-Q filing can be found at http://www.sec.gov/Archives/edgar/data/904020/000095013304004184/w68562e10vq.htm <<