By Keith L. Alexander
Washington Post Staff Writer
Tuesday, January 3, 2006

Kerry B. Skeen set out to create a low-cost airline for Washington area travelers -- particularly those in Northern Virginia -- so they would not have to drive an hour or so to Baltimore-Washington International to get cheap flights on Southwest Airlines.

Industry analysts scoffed at his business plan from the start, and many predicted what happened yesterday, when Skeen's Independence Air announced it will stop flying on Thursday evening.

But Skeen, the airline's unyielding chief executive, blamed its demise on a combination of troubles, including record high fuel prices and cutthroat competition from other airlines.

"When we planned to launch, it was a whole different world in terms of the fuel situation," Skeen said in an interview yesterday. "The industry turned wrong on us. Nothing is perfect."

During the early planning stages for the Dulles-based airline, fuel prices were about $30 a barrel. By the time the airline launched on June 16, 2004, fuel had increased to about $40 a barrel. Over the next 12 months, fuel, traditionally an airline's second-biggest cost behind labor, climbed as high as $70 a barrel.

Even as fuel prices climbed and the airline tried to grow, competitors slashed their prices, awarded bonus frequent-flier miles and added flights on routes where they competed with the beleaguered airline.

"Every outside pressure kind of manifested itself," Skeen said.

The airline also was weakened because of costs that stemmed from its fleet type. Independence launched with 87 small, 50-seat regional jets that it had from its past providing commuter connections for major airlines. Because small jets cost more to fly per seat, the combination of low fares and fewer seats proved a critical flaw. By November, the airline tried to offset its losses by acquiring the first of 12 larger Airbus jets. Skeen had hoped to acquire more Airbus jets faster, but it was too late.

"If we had a clean sheet, the fleet mix would have been different," he said. "The Airbus deliveries came as fast we as could get them."

Skeen, who began his airline career cleaning planes for Delta Air Lines Inc. while a business student and eventually worked his way into middle management at Delta, never wavered in his conviction that Independence would be able to stay independent.

Analysts say Skeen passed by several opportunities to save the airline -- and thousands of jobs. Phoenix-based Mesa Air Group Inc. tried to buy the airline in 2003 for about $512 million. Skeen fought that hostile takeover in court. Months later, United Airlines began searching for additional regional partners, opening the door for Independence to return to its roots as part of its regional fleet. Skeen decided against that as well.

"It's just so sad, they had so many opportunities to sell the company, and they didn't do it," said analyst Helane Becker of Benchmark Capital.

But Skeen said there was no guarantee that the other options would have worked out better.

Critics questioned Skeen's approach from the beginning. "I applauded what the management tried to do; I just disagreed with their execution. They handled it very badly," Becker said.

The seed for Independence was planted five years ago, when the airline was operating as Atlantic Coast Airlines. For nearly 14 of its 15 years, Atlantic Coast operated as a regional carrier for United and Delta Air Lines under Skeen's leadership. But in the summer of 2000, according to people familiar with the decision, Skeen first pondered the possibility that his airline should venture out on its own. The idea came after United was forced to cancel thousands of flights that summer after United's pilots refused to work because of a labor contract dispute. Skeen became frustrated that his airline's fortunes were tied so closely to United's operations and began looking for ways to end the small carrier's reliance on other airlines.

When United filed for Chapter 11 bankruptcy protection in 2002, United announced plans to lower the fees it paid its regional partners. That's when Skeen decided it was time to go out on his own.

In a different environment, Skeen said, Independence would have been a long-term success.

"We all make mistakes," he said. "I made some mistakes along the way. But I have no regrets. It was a very difficult time in the industry."

Skeen, 53, said he plans to stay with the airline through the bankruptcy process. Skeen said he is most proud of his employees, many of whom continued to work through the holidays and accommodate passengers, despite their airline's impending demise.

The employees, he said, will "have to dust off their resumes," but he said he believes they shouldn't have any trouble finding jobs.

"They'll have something other employers in or outside of the airline industry will take notice of. It's a good thing to have Independence Air on their resumes."