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Monday, September 20, 2004

Independence Air Will Fly To Florida With New A319s

Independence Air [FLYI] will begin flying new Airbus 319s to Orlando and Tampa on Nov. 3 as the second phase of its new low-fare service that was first introduced in June.

After operating 14 years as a traditional regional carrier providing lift for United Airlines [UALAQ] and Delta Air Lines [DAL], the company formerly known as Atlantic Coast Airlines will fly its last code-share assignment on Nov. 2. At that time it will park its fleet of Dornier 328Jets that it has been flying for Delta.

As Atlantic Coast began phasing out its United contract in June, it began flying its refurbished Bombardier [BBD] CRJ 200s as Independence Air. The United contract was completed in August and Independence now flies routes to 36 cities out of Washington Dulles International Airport. It is flying more than 600 daily flights using its 87 50-seat regional jets.

With the launch of the Airbus service to Florida, Independence Air will be flying three daily-round trips to both Florida cities from Dulles. The first A319 in the Independence livery, configured to carry 132 passengers, arrived earlier this month.

Independence has leased 28 A319s, which will be delivered through 2006. Three more are on tap to be delivered this year. With a new plane arriving about once a month, the carrier will be starting service to a new destination or expanding frequency on current routes on the same once-a-month frequency, CEO Kerry Skeen told CRAN. He does not anticipate an announcement of the next destination until the first planes are actually flying to Florida.

Orlando and Tampa were selected because the two cities are among the most popular destinations from the Washington market, he said.

At the same time, Independence will shift some of its RJ capacity from Northeast routes to also fly to Florida. It will fly two daily non-stop routes to each Florida city from Knoxville, Tenn., Greensboro, N.C., Huntsville, Ala., Greenville, S.C., Columbia, S.C., and Charleston, S.C. By bringing the 12 RJ flights daily into each Florida city, Skeen said the carrier could better utilize its gates and counters in Florida. Ground crews in Orlando will get a break-in period with RJ flights starting on Oct. 13 from Knoxville and Columbia.

Initiating the Airbus service with Orlando and Tampa is the right move, analysts noted.

"Winter season between the Northeast and Florida is prime season," said George Novak, a senior research scientist at the George Washington University Aviation Institute. "It is a logical choice for its timing and the aircraft."

Kevin Schorr, the research director of Campbell-Hill Aviation Group, is betting that the first expansion beyond Orlando and Tampa will be Florida's third most popular destination - Fort Lauderdale.

For a limited time, Independence is selling the seats on the Florida-bound Airbuses at $64 for a one-way ticket, excluding taxes. A quick check of the Internet finds United flying its low-fare carrier, Ted, out of Dulles for as low as $74, including all the taxes. Southwest Airlines' [LUV] lowest Internet fare out of nearby Baltimore-Washington International Airport (BWI) is $79, excluding taxes.

"When you start competing against other low-cost carriers, you can't go much cheaper and pretend to be making money," said Adam Pilarski, a senior vice president at Avitas, a Chantilly, Va.-base aviation consulting firm. "The question is, 'Will they get people to fly with them and will they be successful?'"

Independence from the start has been targeting suburban Washington customers who have been driving to BWI to catch Southwest flights. For the most part, the Independence fares have been slightly higher than Southwest's, a premium to avoid traffic gridlock.

The price is a "smart strategy," Novak said. "They are going to have to fill those planes at $64-a-seat. They are going to have to have load factors in the 80-90 percent range. It is about as low as you can go on a working business model and still have it make sense. They are doing this in prime season so they should have success in filling up those planes."

Schorr predicts that Ted will reduce its prices to match those of Independence. "United will be able to get a few dollars more because of its frequent flyer program and Ted will have more flights. Delta will also match fares in an effort to try to beat them out of the market," he said.

"As anybody in this industry knows, Orlando and Tampa are probably the two lowest fare markets to fly. Travelers to these markets go with the lowest fare regardless of who is the carrier. You need to fly an aircraft that has low cost per available seat mile (CASM) and you don't get that flying a 50-seat regional jet. The Airbus gives them the ability to fly those markets with a low-cost aircraft and it gives them the ability to compete with airlines already flying those markets, specifically Ted.

"Delta tried flying RJs from [Reagan Washington] National down to Florida and they backed out. This is solid proof that flying to a big Florida market with a small jet is not a great strategy," Schorr said.

The Airbus allows Independence to attract new customers - the leisure travelers. While the low fares to the carrier's first 35 cities have been designed to stimulate traffic, the bulk of those cities are business destinations, Novak said. "The business flyers don't hesitate to get on most planes. The casual flyer is more careful about their aircraft. They believe that bigger is better. I think they are expanding their reach to the casual flyer with the larger planes and the fares."

Ever since Skeen announced in July 2003 the formation of a new low-fare airline based on his RJ fleet, a mainline jet has been part of the business plan.

"It is a big part of our story to get the Airbus in the air as soon as we can," Skeen told CRAN. "The Airbus will bring some very good markets into Dulles to connect with our RJs."

The Airbus "is very critical to their fleet because the 50-seat regional jet on a unit cost basis is one of the most expensive planes to fly," Schorr said. "Using the Airbus brings down the costs system wide. Using the Airbus allows them to connect into Dulles [and] on to Florida from Northeast and Mid-Atlantic locations."

At a company celebration last week to mark the arrival of the first Airbus, Independence had a large map of the continental United States on display. While lacking specific destinations, there were broad westward arrows arcing from Dulles to the West Coast. Skeen would not discuss his plans for transcontinental flights.

"If I were going to launch an east-west route, it would be in the summer," Schorr said. However, flying an east-west route can be "some of the least optimal flying" because at most a plane can only do one-and-one-half round-trip routes per day. It would be better to add in a short leg to maximize the plane's air time, he said

As Independence enter the transcontinental market, Schorr said, "they will be going head-to-head with United, which has established hubs at Dulles, San Francisco and Los Angeles. There is no question they will fight vigorously to keep their traffic." In an already crowded market, Independence would need to make its West Coast flights work for less than the current average one-way fare of $250.

>> Contacts: Kerry Skeen, Flyi, (703) 650-6000; George Novak, GWU, (703) 726-8351; Adam Pilarski, Avitas, (703) 476-2300; George Novak, GWU, (703) 726-8351; Kevin Schorr, Campbell-Hill, (703) 836-1283.<<

Independence Air's August Traffic Numbers
Traffic Indexes August 2004 July 2004 Percent Change
UP RPM (miles)
UP ASM (miles)
DN Load Factor
(1.5 points)
UP Passengers Enplaned
Source: Company reports

August Load Factor Falls Short Of Projection

In its second month of operation, Independence Air reported a load factor of 45.5 percent. The load factor was down slightly from July's 47 percent load factor; but it was nowhere near the mark that the company had predicted.

In late July when CEO Kerry Skeen met with industry analysts, he projected the August load factor would be a "very encouraging" 57 to 60 percent (CRAN, Aug. 2). Prior to releasing the August traffic report, Skeen declined to project fall passenger numbers. "We have put so much capacity out there that we know it will take months to fill the planes. We have said publicly that we don't expect to break even until the middle of next year. Every week our traffic continues to build."

August marked a turning point. On Aug. 3, the carrier ended service with United Express, which resulted in the retirement of the last of the Jetstream 41s. In addition, the final 28 Bombardier CRJ 200s were pulled to be refurbished in the new Independence Air livery. During August, Independence added 12 new cities so that by month's it served 34 cities.

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