Independence To End Flights On Thursday
Financially Troubled Flyi Can't Find Buyer, Decides to Cease Operations

By Bill Brubaker and Sholnn Freeman
Washington Post Staff Writers
Tuesday, January 3, 2006

Flyi Inc., parent of Dulles-based low-fare airline Independence Air, said yesterday it will discontinue flights after Thursday evening because it cannot find a buyer for its financially troubled operation.

The demise of Independence Air, whose blue and white jets have become a familiar sight in the skies around Washington Dulles International Airport, will leave 2,700 employees, including 2,300 in the Dulles area, out of work, and thousands of passengers scrambling to find alternate flights and secure refunds. The shutdown also will cut competition in the 37 markets Independence serves, probably leading to higher fares at Dulles Airport.

In the latest piece of bad news for the U.S. airline industry, Flyi will vanish two months after it filed for Chapter 11 bankruptcy protection, complaining of high fuel costs and intense competition, and almost 19 months after it launched service at Dulles Airport, promising low fares and coast-to-coast service.

Flyi is the largest airline to go out of business since 1991, when both Eastern Air Lines Inc. and Midway Air Lines Inc. folded, industry consultant Darryl Jenkins said. Seven other airlines are operating under Chapter 11 bankruptcy protection to reorganize their operations, including major carriers United Airlines parent UAL Corp., Delta Air Lines Inc. and Northwest Airlines Corp.

"The financial pressures in the industry have prevailed. We have run out of time," Flyi's Web site said in a letter to passengers.

As news of the shutdown spread, the lines at the Independence Air ticket counter at Dulles Airport started to build yesterday afternoon. Worried customers, including Bill and Ruth Tanker of Rockville, started streaming in. The Tankers had electronic tickets they bought online for a trip to Florida on Jan. 21 and were trying to determine if they would get their money back.

Flyi said customers who used credit cards to pay for tickets on flights scheduled to depart after Thursday night should call the credit card companies and request refunds. Flyi said it will seek approval Thursday from the U.S. Bankruptcy Court in Delaware to issue automatic refunds to all customers ticketed to depart after 7 p.m. that day. The airline's frequent-flier miles will become worthless at that time.

Under federal law, after Independence shuts down, travelers booked on its flights must be accommodated on a standby basis by other airlines serving the same route at a cost of $50 per passenger. The provision was part of a statute created by Congress to protect consumers after the Sept. 11, 2001, terrorist attacks. Flyi said passengers must book these alternative flights within 60 days after the carrier goes out of business.

Independence said its last flight Thursday will leave White Plains, N.Y., bound for Dulles Airport. Flyi said it will continue selling tickets on its remaining flights, some at its characteristically low prices. Cost of a one-way ticket for this afternoon from Dulles to Savannah, Ga., was $59. Independence's low fares were seen as a key reason why ticket prices at Dulles Airport have been falling while those nationwide have been rising.

"I'm sad to see [Independence] go," Adam Thrasher, 26, an admissions officer at Boston College, said as he waited in the Independence check-in line at Dulles Airport yesterday. "When Independence came on the scene, fares became lower."

Kevin and Kristen Decker of St. Augustine, Fla., who were in the check-in line preparing to fly home, said they had spent $500 for two round-trip tickets on Independence, about $200 less than the cost of flying on a competitor. They said they expect the prices for flights out of Dulles to rise, something analysts also predicted, although competitors yesterday said they had no immediate plans to increase fares.

"We still have to be competitive with everybody else out of Dulles," United Air Lines spokesman Jeff Green said.

United is Flyi's former partner and biggest competitor. United's parent is preparing to emerge from Chapter 11 bankruptcy protection in February.

Flyi's predecessor, Atlantic Coast Airlines Holding Corp., operated as a regional feeder carrier for United from 1989 to 2004. Many Wall Street analysts fault Flyi for rejecting an offer in 2003 to remain with UAL, the second-largest U.S. airline company. The offer would have cut the fixed payments United paid to Atlantic Coast to operate some of its regional flights.

Flyi instead decided in 2004 to form an independent carrier that flooded the market with short-hop, low-fare flights, most on 50-seat regional jets that are expensive to operate.

Flyi chief executive Kerry B. Skeen said in an interview yesterday there was no guarantee the company, employees or shareholders would have fared better if Atlantic Coast had stayed with United. "It's much easier in hindsight to say what didn't work," he said. "But the jury may still be out on those paths as to how well they may have worked."

Flyi suffered from rising jet fuel costs and the aggressive response of competitors, led by United and US Airways. They matched Independence's fares, added flights and sweetened frequent-flier perks. Flyi sold more than 8 million tickets, but many were at money-losing fares, including $29 one way from Dulles Airport to cities such as Newark.

The airline leases 37 airplane parking positions in Dulles's Concourse A, used for regional jets, and it shares eight slots in Concourse B, used for larger jets, from the Metropolitan Washington Airports Authority, which runs the Dulles and Reagan National airports. The fate of those slots will be sorted out in bankruptcy court, Flyi spokesman Rick DeLisi said.

A spokeswoman for the airports authority, Courtney Prebich, declined comment on the financial impact of Independence's shutdown on Dulles.

Betsy Snyder, an analyst for Standard & Poor's Corp., the New York credit ratings agency, said she expected JetBlue, which already flies out of Dulles Airport and recently bought new aircraft, to be among the bidders for Independence's slots. She said United also has been ramping up service from Dulles.

Flyi warned as early as last winter that it might have to file for Chapter 11 bankruptcy protection if it could not successfully restructure its operations. All last year, though, the airline publicly held out hope that a solution to its financial problems could be found.

Flyi declared in its bankruptcy filing Nov. 7 that it would shut down if it could not find a buyer by Jan. 7. Flyi said in the filing that it had $378.5 million in assets, $455.4 million in liabilities and $24 million in unrestricted cash on Sept. 30.

On Dec. 23, Flyi sent a letter to employees warning that the airline would cease operations Saturday if it was unable to find a major investor. At least two airline companies, UAL and Mesa Air Group Inc., have expressed interest in bidding for Flyi's assets. Mesa, a Phoenix-based regional carrier, tried to acquire Flyi two years ago.

"While we've been clear in reminding everyone that this was a possibility, we remained optimistic that there would be a way to avoid reaching this juncture," Skeen said in a statement yesterday. "To date there has not been a firm offer put forward that meets the financial criteria necessary to continue operations as is."

Staff writers Keith L. Alexander and Dean Starkman contributed to this report.

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