If the parent of Independence Air [FLYI] does not make a critical interest payment by March 14, the struggling carrier could be forced to seek Chapter 11 bankruptcy protections.

Even as it introduces more Airbus destinations, Flyi is trying with mixed results to restructure its lease payments on its fleet of 50-seat RJs. The carrier on Feb. 15 disclosed to the U.S. Securities and Exchange Commission (SEC) that it missed an interest payment due that day on a long-term note. The terms of the note grant the carrier a 30-day grace period before declaring a default. Flyi said it would be able to make the payment, provided it has completed its restructuring efforts.

The carrier did not disclose the size of the interest payment. Flyi has not released its 2004 financial report. Thus it has not updated investors on the size of its cash balance.

Not only did Flyi miss the payment, but it has had one Bombardier [BBD] CRJ 200s repossessed for its failure to make a lease payment. The carrier was also sued in late January by an aircraft owner for a missed lease payment. It is not clear if these incidents involve the same plane or two different aircraft lessors.

In light of the most recent disclosures, Wall Street analysts are now predicting that there is a greater than 50 percent chance the carrier will seek Chapter 11 protections. However, UBS Securities analyst Robert Ashcroft believes that if Flyi can successfully pull off the restructuring it should be able to avoid another liquidity crisis - and the threat of bankruptcy - for another 12 months.

Calyon Securities analyst Ray Neidl said the only way Flyi can avoid bankruptcy is if its returns to its roots as a regional feeder. While the Flyi did apply for a United Airlines [UALAQ] code-share contract now held by Air Wisconsin, a decision still has not been made on that bid. And, there are mixed theories if United would ever do a deal again with Flyi after their earlier divorce.

Should Flyi go bankrupt, Neidl predicts that Independence will dump the RJs and focus on its budding Airbus routes.