Discount carrier at Dulles files for Ch. 11

FLYi's Independence Air rivals BWI's Southwest


The parent of Independence Air, a formidable, if young, discount rival of Southwest Airlines, filed for bankruptcy protection yesterday, further clearing the way for Southwest's growth in the Baltimore and Washington areas.

FLYi Inc., which started Independence Air last year, filed for Chapter 11 in U.S. Bankruptcy Court and expects to seek new investors or purchasers in the next 60 days. The airline expects to continue its more than 220 flights a day - 140 from Dulles International Airport in Northern Virginia - but that's down considerably from the high-flying days of the carrier's short existence.

Headquartered at Dulles, the 18-month-old airline, along with JetBlue Airways and AirTran Airways, had been cutting into the low-fare dominance of Southwest and its regional hub at Baltimore-Washington International Thurgood Marshall Airport. BWI is about the same distance from downtown Washington as Dulles, but Independence lured passengers away with tickets that were cheaper than many bus tickets.

Other, mostly major legacy airlines such as United Airlines lowered their fares on some routes to compete. But analysts and other airlines long considered Independence's business plan unsustainable because, unlike Southwest, its fares didn't cover the airline's costs.

Cracks in the plan surfaced months ago as Independence began to scale back, prompting a recent comment from Southwest's Chief Executive Gary C. Kelly that "the bleeding has stopped," referring to the exodus of passengers to Independence and Dulles.

Yesterday, a spokeswoman for Southwest said nothing has changed for the airline with the bankruptcy filing by its competitor.

"We expect to continue growing at BWI, concentrating all our growth in the Baltimore-Washington region there," Whitney Eichinger said.

Jonathan Dean, spokesman for BWI, said the bankruptcy was "unfortunate." High fuel costs and competition have forced other airlines, including United, US Airways, ATA Airlines, Delta Air Lines and Northwest Airlines down the same path in the last few years, with only one, US Airways, emerging so far.

But he acknowledged the news was not bad for BWI. Southwest tends to avoid crowded metro airports and has said it has no plans to launch service from Dulles. It has 165 daily flights from 26 gates at a new terminal it built at BWI, and room for five more gates.

Dean didn't say what this year's numbers would look like, but last year, Dulles surpassed BWI in volume, handling 22.9 million passengers compared with BWI's 20.3 million, about half of them from Southwest. While BWI's year-over-year growth was less than 4 percent, Dulles set a one-year growth record of almost 35 percent last year, a jump owed largely to Independence.

Dean couldn't provide specific numbers but said he could see Southwest's passenger numbers drop and begin to grow again with Independence moves.

"Southwest never really responded to Independence. They didn't drop fares to that level because they saw that Independence's business plan wouldn't work," he said. "And we've already seen a rebound locally."

Robert Mann, president of R.W. Mann & Co. Inc., an airline industry analysis and consulting firm in Port Washington, N.Y., said the industry impacts aren't yet known because it's not clear whether the airline will sell itself or sell assets and emerge as a smaller airline.

Most immediately, there will be relief for competing carriers that had to drastically reduce fares to compete with Independence. Southwest would continue luring passengers back to BWI.

"Fares will go up at some airlines, but how much for how long, isn't clear," Mann said. "In winter, demand falls off, so they can't go up too much except around the holiday periods. It'll be more difficult to find low fares then."

For its part, Independence says it will be looking for savings. Managers and workers can expect pay cuts of 5 percent, though they will continue to be paid. The airline will maintain its schedule, honor all reservations and continue its frequent traveler program, the airline said.

"Since the launch of Independence Air almost 18 months ago, our employees have helped us achieve a remarkable degree of customer service success and brand recognition while operating in what has been described as the most challenging economic environment in airline industry history, including record-high fuel prices and extreme revenue weakness. These circumstances have prevented us, and virtually all U.S. airlines, from meeting financial goals," Kerry Skeen, chairman and chief executive of FLYi, Inc., said in a statement.

The company's bankruptcy petitions listed assets of $378.5 million and liabilities of $455.4 million as of Sept. 30. Unrestricted cash was $24 million.

Skeen said he would take a 25-percent salary cut on top of a 15-percent cut earlier this year. Talks with the airline's unions have begun.

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