- The Washington Times - Monday, November 7, 2005

Flyi Inc. filed for Chapter 11 protection from bankruptcy yesterday, merely 17 months after the airline reinvented itself as a low-cost carrier under the name Independence Air.

Now the airline, based at Washington Dulles International Airport, risks discontinuing operations if its plan for emerging from bankruptcy fails.

Flyi Chairman and Chief Executive Officer Kerry Skeen said the airline — the largest carrier at Dulles — will ask a bankruptcy judge to approve a court-supervised auction to help it find investors or a buyer.

But analysts say the plan could fail because there is little interest in the unprofitable business and the airline’s competitors would prefer to see Independence Air disappear.

A court-supervised auction “is a huge gamble,” said Helane Becker, airline analyst at brokerage firm the Benchmark Co.

Flyi hopes to have the auction concluded within two months.

Independence, the third airline since September to file for bankruptcy protection, plans to operate without interruption.

Flyi filed in U.S. Bankruptcy Court in Delaware, listing assets of $378.5 million and debts of $455.4 million. The company has just $24 million in unrestricted cash. The company has said since January it may file for bankruptcy protection.

“I’ve been predicting this for nine months. The only surprise is that they lasted as long as they did. The [business] model didn’t work,” said Ray Neidl, airline analyst for Calyon Securities.

Independence Air has reduced flights and shed workers throughout the year in a vain attempt to avoid bankruptcy by cutting costs.

In September, company officials said they planned to lay off 600 of its 3,400 workers by the end of October. Now it has 2,800 workers, about 85 percent of whom work at Dulles Airport.

The airline also intended to reduce its 350 daily departures to 230 by Oct. 31. Now it has 220 flights a day to 36 cities.

At its peak, Independence Air had 5,000 employees and 600 flights a day to 46 cities. In January, the airline eliminated 150 daily flights. This year, the airline has ended flights to San Diego; Los Angeles; San Jose, Calif.; Indianapolis; Cleveland and Louisville, Ky.

Independence Air began service in June 2004 after rebranding itself. The airline had been known as Atlantic Coast Airlines and began flying in December 1989 as a regional carrier for United Airlines.

The airline has relied on a fleet dominated by small regional jets. Currently, it operates a fleet of 58 regional jets that seat 50 passengers and 12 Airbus A-319 jets that seat 132 persons. Now, it needs just 30 regional jets and will shed leases for 28 of them in bankruptcy court, Flyi spokesman Rick DeLisi said.

Flying small regional jets is too costly, analysts said.

“This was badly thought out from the word go,” said Richard Aboulafia, vice president of Fairfax aviation industry consultant Teal Group.

Independence’s cost per seat mile — a standard measure in the airline industry of the cost of operations — was 17.2 cents in the second quarter. True low-cost carriers like Southwest Airlines and AirTran Airways spend about 6 cents, Ms. Becker said.

“I applauded their decision to start a low-cost carrier. I just disagreed with their execution,” she said.

Flyi severed ties with United in April 2004 and decided to use its regional jets to start a low-cost airline.

Flyi lost $202.2 million though June 30. It has not filed third-quarter earnings. About 72 percent of seats were filled on its flights in the second quarter, and passenger revenue fell to $113.1 million, down 26.4 percent from $153.6 million in the second quarter last year.

Fuel costs are partly responsible for the bleak financial picture. Before Independence began flying, airline executives assumed jet fuel would cost 90 cents a gallon. The airline recently has paid $3.10 a gallon, Mr. DeLisi said.

While the company hopes to emerge from bankruptcy, it could end up dissolving. If no bidders participate in the court-supervised auction, Independence Air may have to discontinue operations.

It is unlikely there will be bidders for Independence because of its unprofitable business model, Ms. Becker said.

“I think they will be liquidated, and that’s the best thing for the industry,” she said.

Company executives agreed to take wage cuts, and the company is negotiating with unions to cut costs further.

Mr. Skeen will take a 25 percent pay cut. President and Chief Operating Officer Tom Moore will take a 20 percent wage cut.

Management and other salaried workers are subject to an immediate 5 percent pay cut, and the company is negotiating with unions on concessions.

The company expects to have tentative agreements soon with unions representing its mechanics and flight attendants, but the negotiations with its pilots are continuing.

Its shares dropped 12 cents to close at 7 cents on the Nasdaq Stock Market yesterday.

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