New airline sees low fares, regional jets as winning combo

Matthew Barakat

Wednesday, March 10, 2004 | 11:09 a.m.

CHANTILLY, Va. -- When regional carrier Atlantic Coast Airlines reinvents itself later this year as Independence Air, it 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.

Las Vegas is on the new carrier's radar screen, a spokesman for the company said Tuesday.

"When we start service this summer, it will begin with a fleet of 87 50-seat CRJs (a twin-engine commuter jet)," said Rick DeLisi, a corporate spokesman. "So we'll have about an 800-mile range in the beginning.

"But when we start taking delivery of our 25 Airbus 319 jets, we'll start looking west and Las Vegas is very high on our list of cities under consideration," he said.

DiLisi said Independence would take delivery of four of the Airbus jets, to be equipped with seatback satellite television systems, before the end of the year. But he said he doesn't expect service to McCarran International Airport to begin until 2005 at the earliest, when the airline is scheduled to receive 16 of the jets. Five more A319s will be delivered in 2006.

The airline industry will be watching closely to see if regional jets carrying just 50 passengers on relatively short flights can provide the economies of scale needed to thrive as a low-cost carrier.

"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 was faced with re-upping with United as a regional carrier under a contract that paid substantially less, or it could 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," 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, in part because many believed it was merely a negotiating ploy with United or that it was born of desperation at losing its lucrative partnership with the airline. Wall Street is among the doubters -- Atlantic Coast stock dropped nearly 25 percent when the company announced the break with United, and is now trading in the $8 range, about $6 below its 52-week high of $14.10.

Some observers question whether the airline can lower 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 jets like a Boeing 737.

But Nordling predicts Independence Air will be a success for several reasons. First, the low prices will generate significant demand at small and mid-sized airports that have never before 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 the markets where it will compete with Southwest, 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 Air will only be about $20 more.

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

In the Washington, D.C., market, Dulles is more convenient for many travelers, especially those in the northern Virginia suburbs. 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 JetBlue, 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 as well as Reagan National Airport. "We think it's an opportunity for the airport."

Ultimately, Atlantic Coast's biggest advantage may be that its business plan is so 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.

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

The Las Vegas Sun

contributed to this report.