It's the most dramatic makeover ever in the airline industry. One day it's Atlantic Coast Airlines, a highly profitable little feeder service for passengers booked through United and Delta. Then, voila, it's Independence Air, a new low-price airline with $350 million in the bank, a fleet of refurbished regional jets and 15,000 seats to fill each and every day.
This is great news for Washington. With 300 flights a day planned, Independence has turned Dulles into a major low-fare airport and jeopardized Washington's status as one of the most expensive (read profitable) airline markets in the country. Most Washington area residents looking for bargain fares can finally be spared the traffic hassles and anxieties of getting to BWI and the terminal gridlock once they get there. And in the never-ending campaign to attract businesses and visitors to Washington, the prospect of more flights and lower fares is far more important to the local economy than luring a Major League Baseball team or building an oversize new convention center hotel.
That said, this is anything but a slam dunk for chief executive Kerry Skeen and his Independence team.
Unlike other airline start-ups, Independence Air doesn't have to prove to customers that it can operate an airline safely and reliably. But unlike a start-up, it doesn't have the luxury of beginning slowly, picking off the low-hanging fruit and seeing how things develop. In this case, there are nearly 100 planes in the Independence fleet that it has to find a profitable use for right off the bat.
It is also true that Independence has the good fortune of competing most directly against US Airways and United, both of which have weak balance sheets and higher-than-average operating costs. But the odds are that plenty of new competition is on the way. Other airlines have already made arrangements to replace some of the regional feeder service that Atlantic Coast used to provide. And any early sign of Independence's success will invite other low-cost airlines, such as JetBlue or AirTran, to expand service at Dulles.
Nor is it simply other airlines that Independence has to contend with. In this era of the Internet, hotels and airlines are also locked in a battle with "third party distributors" -- Web sites such as Orbitz and Expedia -- over who will have the primary relationship with the customer and who will enjoy the upper hand in controlling inventory and pricing. Like some other low-cost carriers, Independence is determined not to list its flights on these sites or on travel agents' computers, both of which require it to pay commissions of up to $20 per ticket. Instead, it is investing a more limited amount of marketing money in clever advertising aimed at driving customers to its own Web site and phone banks.
But the convenience of one-stop price comparisons offered by middlemen is particularly alluring to the price-sensitive market that Independence has targeted. While Southwest may be big enough to go it alone, my guess is that Independence will be forced to make some sort of accommodation if it is to put enough fannies in those new leather seats to reach the 70 percent load factor built into its business plan.
Indeed, it is clear that Independence differs in a number of important ways from other low-fare carriers. Because it starts out flying smaller planes over shorter distances, its operating costs are higher. At the same time, its determination to offer frequent service to smaller markets means that it is counting not just on passengers traveling to and from Washington, but also on large numbers passing through its Dulles hub on the way to other cities it serves. Whether it is possible to maintain the economics of a low-fare, point-to-point carrier while meeting the operational demands of a hub-and-spoke structure is yet to be demonstrated.
One thing you can be sure of, however: The launch of Independence is the opening shot of a bloody battle for the Washington market that will dramatically lower fares, boost traffic and, in the end, lead to the demise of at least one carrier and the tactical retreat of several others. An industry that has suffered from endemic overcapacity is about to have even more.