June Traffic Indexes Down 25 Percent

Atlantic Coast Airlines' [ACAI] transition into Independence Air began in earnest last month, but it remains unclear just how well the new low- fare airline is faring.

Atlantic Coast released it June traffic report, but it was a consolidated report combining all the corporation's activity for United Express and Delta Connection as well its own Independence Air. In fact, the company will not break out the performance for Independence Air until it releases the August traffic report in early September.

By every single traffic report index, business was down at Atlantic Coast in June compared to June 2003:

• Enplaned passengers down nearly 24 percent to 579,582.
• Revenue passenger miles (RPM) down 24.5 percent to 224,478 miles.
• Available seat miles (ASM) down 23 percent to 296,515 miles.
• The planes were less crowded as the load factor dipped 1.6 points to 75.7 percent.

Effective June 3, United Airlines [UALAQ] began a three-prong phase-out of Atlantic Coast as its primary East Coast partner for United Express. On that date, 47 planes were removed from service - 30 Bombardier [BBD] CRJ 200s and 17 BAe Jetstream 41s. Independence Air returned some of the CRJs, now renovated, to service on June 16 with flights to its first five cities. In the last two weeks of June, Independence was scheduled to make 1,554 flights to 10 cities.

Atlantic Coast will stop flying for United Express on Aug. 4 when the last 31 planes are returned. The carrier had been flying 108 planes for United at the start of June.

Because Independence plans to fly Airbus 319s beginning in November, Delta Air Lines [DAL] is also canceling its code-share partnership with ACA. Fellow Delta Connection carriers took over some Atlantic Coast routes on July 1. The Delta mainline pilots contract precludes a Delta Connection partner from flying a mainline aircraft.

While Delta has 180 days to end its relationship, dating from the April notice, a spokeswoman for Atlantic Coast said all the Delta flights would also end on Aug. 4.

Because of the limited information that is expected to be released over the summer, Wall Street doesn't expect to get a firm handle on whether Independence Air will succeed or not until after Labor Day.

A filing Atlantic Coast made earlier this month with the U.S. Securities and Exchange Commission sheds little new light on its financial future. However, it noted that because of Delta's failing financial health, the Atlanta-based carrier may not be willing or able to assume the leases on the 30 Dornier 328Jets used for the Delta Connection service. Without disclosing a cost estimate, Atlantic Coast said it might have to dispose of the 328s on its own. It is directly responsible for three other 328s.

In an e-mail exchange with Atlantic Coast, analyst Ray Neidl, of Blaylock & Partners, reports that the carrier proclaims that "things are going well, the passengers are happy - we will see you in September."

"I don't think you will have a good idea before then," Neidl noted. Little, he added, will be revealed in the second quarter financial report. "Perhaps, in the conference call, but I will bet [Atlanta Coast management] will be non-informative then."

Only two weeks of actual Independence Air operations will be contained in the three-month report. However, the company has predicted that it will lose $8 million to $10 million in the second quarter. In fact, the company does not expect to post a profit until this time next year. (Based on past practices, the second quarter report will probably be released the last week of July.)

If Atlantic Coast posts a loss greater or lesser than its own projections, it will need to explain the difference, said another Wall Street analyst, who asked not to be named.

Even as Independence begins to operate 100 percent of the CRJ 200 fleet, it will still be too soon to tell if the business plan is working since the Airbus phase remains to be implemented. Independence will operate the 132-seat mainline plane on Florida and transcontinental routes. It has ordered 27 A319s.

Over the last six weeks, the competition has targeted Independence Air. United, Delta, US Airways [UAIR] and Northwest Airlines [NWAC] have all dropped their fares at Washington Dulles International Airport or added more flights. Independence's plan has been to offer low fares on frequently flown CRJs to major and secondary markets. Part of the strategy is based on convincing the residents of Northern Virginia and Washington, D.C., to fly Independence out of Dulles instead of battling congested roadways to reach Southwest Airlines [LUV] at Baltimore-Washington International Airport. The Independence fares are about $20 more than Southwest's.

Southwest earlier this month sparked a fare war among the low-fare airlines. While it has not specifically targeted Independence, the new airline is clearly one of several carriers under the gun. For example, a trip to Jacksonville, Fla., in September for a family of four on Independence is $356, but only $236 at Southwest. The Wall Street analyst predicts that a roundtrip savings of $240 will be too much for a Northern Virginia family to pass up. However, the $30 spread - each way - for a business traveler may be a different story.

>>Contacts: Valerie Wunder, Atlantic Coast, (703) 650-6720; Ray Neidl, Blaylock & Partners, (212) 715-6627.<<