- The Washington Times - Tuesday, March 9, 2004

Regional carrier Atlantic Coast Airlines, when it reinvents itself later this year as Independence Air, will embark on a new concept in the airline industry: a low-fare carrier using a fleet of small, regional jets.

Having flown under the United Express banner as part of the United Airlines network, Atlantic Coast is relatively unknown to the traveling public although it is the nation’s 17th-largest carrier in terms of passengers, rivaling JetBlue. But its transformation will instantly turn Washington Dulles International Airport — Independence Air’s hub — into the nation’s largest low-fare airport, with the new airline offering 350 flights a day.

The airline industry will be watching closely to see whether regional jets carrying just 50 passengers on relatively short flights can provide the economies of scale needed to thrive as a low-cost carrier. The planes are smaller than than commonly used jets such as the Boeing 737.

“This is kind of a new thing,” said David Stempler, president of the Air Travelers Association, a passenger advocacy group. “It will be interesting to see how it plays out.”

When United filed for bankruptcy in December 2002, Atlantic Coast had the option to continue with United as a regional carrier under a new contract that paid substantially less, or go its own way.

Eric Nordling, Atlantic Coast’s senior vice president for marketing, said the airline was considering the independent, low-fare concept as far back as 2001. United’s bankruptcy brought the issue to a head.

“The most promising segment of the industry is the low-fare segment,” Mr. Nordling said. “People are willing to try new brands. When we looked at the risks and rewards, the decision was clear.”

The company has faced skepticism about the plan, partly because many believed it was merely a negotiating ploy with United or that it was born of desperation after losing the lucrative partnership with the airline.

Wall Street is among the doubters. Atlantic Coast’s stock dropped nearly 25 percent when the company announced the break with United and is trading in the $8 range on Nasdaq, about $6 below its 52-week high of $14.10. It closed yesterday at $7.08.

Some observers question whether the airline can reduce its costs sufficiently to make a profit on cheap fares. Regional jets cost more to operate per passenger per mile because they carry fewer people and fly shorter routes than the larger 737s.

But Mr. Nordling predicts Independence Air will be a success for several reasons. First, the low prices will generate significant demand at small and midsize airports that have had low-fare service. Nearly half the airports that will be served by Independence have no low-fare carriers.

While under contract with United, the company does not set its fares; as an independent, it will have that power.

In markets where it will compete with Southwest, Mr. Nordling acknowledged Independence Air won’t match Southwest’s fares. But they will be low enough that, for instance, on a flight from Dulles to Raleigh-Durham, Independence will be about $20 more.

In those cases, Independence officials say travelers will be willing to pay $20 for the convenience of a flight from Dulles instead of Baltimore-Washington International Airport, where Southwest operates a hub.

Dulles is more convenient for many travelers, especially those in Northern Virginia. Many people now drive an additional 45 minutes to an hour to take advantage of lower fares at BWI.

Generally, airports compete to attract low-fare carriers. Dulles has limited low-fare service from airlines including Jet Blue, AirTran and Delta’s subsidiary, Song. The new United low-fare carrier Ted also plans 15 flights a day out of Dulles later this year. But Independence Air essentially fell into its lap.

“We do not view what they’re doing as a risk,” said James Bennett, director of the Metropolitan Washington Airports Authority, which runs Dulles and Ronald Reagan Washington National Airport. “We think it’s an opportunity for the airport.”

Ultimately, Atlantic Coast’s biggest advantage may be that its business plan is different from conventional methods, given the financial difficulties of the traditional airlines.

“It’ll be an interesting market experiment, and I would not at all be surprised if it succeeds,” said Clinton Oster, a professor at the University of Indiana who specializes in airline economics.

Mr. Oster said the airline could stimulate the market in airports that have previously been unable to attract low-fare service. He pointed out that when Southwest comes to an airport, traffic sometimes jumps as much as 50 percent.

The airline’s plans for its debut remain unsettled, partly because it still has some unresolved contractual obligations with United.

But the change is expected in the middle of this year, Mr. DeLisi said. It has not announced its 50 destinations but expects to have several dozen eastern destinations in 2004, coupled with a few West Coast destinations for which it will use larger Airbus jets. By 2006, it plans to expand to about a dozen destinations in the western United States.

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