The parent of low-cost carrier Independence Air said yesterday it lost $82.7 million in the third quarter of this year, a development that will mean higher fares and reduced service to some cities, the Dulles-based airline said yesterday.
The loss reported by Flyi Inc. compared with a $21.3 million gain in the third quarter of 2003, when the company -- then known as Atlantic Coast Airlines Holdings Inc. -- operated feeder flights for larger carriers, a markedly less risky venture. The company expects to post a "significant" loss in the fourth quarter as well, Flyi chief executive Kerry B. Skeen told analysts.
Third-quarter revenue fell to $119.6 million from $221 million, a 46 percent decline.
Independence Air plans to raise fares from an average of $60 to the mid-$70s by this winter and to reduce flights. For example, in December it will offer eight flights between Dulles and Atlanta instead of 16. Service to Boston, Newark, Raleigh, N.C., and John F. Kennedy International Airport in New York also will be reduced, according to Skeen.
Flyi has a $98 million payment due in January on the lease of its regional jets. Skeen said that the airline is trying to negotiate with creditors to delay or reduce the payments it owes and that it plans to raise cash by selling a few jets. Independence Air, which has been flying with half-empty planes, hopes to gain greater visibility among travel agents by contracting with online reservation systems that charge airlines a fee for every ticket they sell. Skeen said the company already has made a deal with Galileo International Inc. Currently, Independence sells tickets through its own Web site and toll-free telephone number.
Flyi officials also announced they will have to delay plans to operate the airline's first 132-passenger Airbus A319 jets. The airline had planned to fly them starting Wednesday to Tampa and Orlando. But the Federal Aviation Administration has not yet certified Flyi to operate them, Skeen said. Those markets will be served temporarily by regional jets.
Flyi finished the third quarter with $198 million in cash and short-term investments, down from $345.4 million at the end of the second quarter. Some analysts worry that the company is running through cash too quickly. "With the difficult winter months coming up, you'd certainly like to have more cash," said Anthony F. Cristello, an analyst for BB&T Capital Markets. "I'm suspect. I don't know if they are going to be able to do enough to stave off" a filing for Chapter 11 bankruptcy protection.
Another analyst, Robert N. Ashcroft of UBS Investment Research, last week said there is a 65 percent chance Flyi will file for Chapter 11 reorganization, probably in January. UBS last week downgraded Flyi's stock, and bond-rating agency Standard & Poor's put the company on its watch list. On Monday, Moody's Investors Service downgraded Flyi and declared that the company has a "negative" outlook.
Skeen said in an interview that the company has a plan to improve its liquidity by the end of the year. "We are working very hard to see that we have the resources to weather this storm," he said. "We're still bullish on the business plan. We think long-term that the Independence strategy here at Dulles is going to work."
The company's shares closed yesterday on the Nasdaq Stock Market at $1.40, down 15 percent from the previous day and down 77 percent from June 16, when Independence debuted. A year ago, the stock was trading at more than $12.
"We're not happy. You know, I'm a shareholder too," said Skeen, who said he owns about 100,000 shares of Flyi stock. "Obviously, I'm definitely motivated to see the share price go up."
Until this summer, Flyi was known as Atlantic Coast Airlines, which operated regional feeder jets for United Airlines and Delta Air Lines. Under this arrangement, Atlantic Coast flew the airplanes and handled most airport operations, including the hiring of pilots, mechanics and flight attendants. United and Delta handled reservations, marketing and customer service. This arrangement gave Atlantic Coast relatively predictable revenue and earnings.
After United filed for bankruptcy protection in December 2002, it tried to reduce the fixed payments it made to Atlantic Coast, which responded last fall by announcing plans to become a full-service, stand-alone operation.
Independence Air was launched at a Dulles terminal decorated with balloons and streamers. A jazz-swing band played as Independence employees and customers ate cake and watched the airline's 50-seat regional jets -- all newly outfitted with leather seats -- lift off.
Since then, Independence has flown 1.2 million passengers and served 38 markets out of Dulles, but less than half of the airline's seats have been sold. Skeen said that some of the markets have not performed as well as the airline expected.
The average U.S. airline sells about 70 percent of its seats. But Independence reported load factors of 47 percent in July -- its first full month of operation -- 45.5 percent in August and 44.4 percent in September.
Analysts said Independence picked a tough time to launch because of rising crude oil prices. Some airlines have combated the price hikes with a strategy known as hedging: locking in prices from their fuel suppliers months, or even years, in advance. Low-cost carrier Southwest Airlines, for example, will pay about $25 a barrel through 2005 for about 80 percent of its fuel needs. Yesterday, crude sold for $52.46 a barrel.
But Independence, like many airlines, doesn't have any fuel hedges. When the airline was launched in June, oil was already so expensive that the airline decided not to lock in a price. "Hindsight says, yeah, we should have hedged," Skeen said. "We would have been better off to hedge fuel at the $40 level."
Skeen said the company will turn things around by the middle of next year. "We are still not there," he said. "We are still not where we need to be."