Independence Air, the scrappy Dulles-based carrier that broke off from United Airlines two years ago in the hopes of creating a budget alternative, yesterday filed for bankruptcy protection in a move that could well spell the airline's demise.
Flyi Inc., the airline's parent, vowed to continue normal flight operations while seeking court approval to auction itself off, but it warned that it will have to shut down if new investors or a buyer are not found in 60 days. Industry analysts, many of whom thought the airline was doomed from the start, expressed doubt yesterday that investors will be ready to gamble on a turnaround.
The announcement puts into question the jobs of more than 2,000 Flyi workers, most at the company's Dulles airport hub and nearby headquarters. The company had more than 5,000 employees when it operated as a feeder carrier for United Airlines for 15 years, before taking off on its own two years ago.
Flyi said the Chapter 11 bankruptcy filing will have no effect on passengers for now and vowed to continue through the holiday season its 220 daily departures to 36 destinations on a mix of 50-seat regional jets and 132-seat Airbuses.
No refunds will be offered to passengers wishing to cancel their reservations while the company is in bankruptcy protection, airline spokesman Rick DeLisi said. "Our fares have always been nonrefundable," he said.
When Independence Air's first flight left Dulles on June 16, 2004, Flyi chief executive Kerry B. Skeen seemed convinced passengers would embrace an airline that offered cheap, quick-turnaround flights and that billed itself in a spry marketing campaign as "the polar opposite of the lumbering, arrogant major carriers."
But the market for Skeen's dream never materialized, and even slick ads trumpeting $29 one-way fares couldn't overcome rising jet fuel prices and competition that forced Flyi to run money-losing flights with fares often as low as a Greyhound bus. Intent on keeping his image of an independent airline alive, Skeen, against the advice of analysts and others, rejected a buyout offer from budget contender Mesa Air Group Inc. and refused to renew his company's role as a regional feeder for United.
"There was risk if we stayed with United or if we didn't," said Skeen, who has accepted a 25 percent pay cut, to $277,500 annually, as part of a cost-saving effort that includes 5 percent pay cuts for non-union Flyi employees. The company said it is also negotiating with unions to change "wage rates and work rules."
The only hope now, Skeen said in an interview, is for a new investor to "either finance what we are doing today or, more likely, finance a transition" to a different model.
"We didn't have the advantage of a crystal ball when we launched Independence that fuel prices would be nearly triple. And the spike in fuel prices after [Hurricane] Katrina was just icing on the cake," Skeen said.
Employees at the airline's Dulles operation had been asked by the company not to speak to reporters, but several who spoke on the condition of anonymity said they were hardly surprised. The company has been scaling back routes and operations since the summer in an effort to pare expenses. That, coupled with the turmoil in the airline industry that has led Delta Air Lines Inc., Northwest Airlines Corp. and United Airlines parent UAL Corp. into bankruptcy as well, made yesterday's filing seem almost inevitable.
"This is my third airline in 20 years. I have seen this before. I expect this airline to be acquired by someone else," said one Dulles skycap. "I could see it coming."
In its filing, Flyi told shareholders to expect the worst: full cancellation of the company's stock "without consideration, in which case Flyi stock would have no value."
It was nearing that point yesterday. Flyi began trading at $6.01 when the company made its first flight but closed yesterday at 7 cents on the Nasdaq Stock Market.
Among analysts and competitors, there was an I-told-you-so attitude. Some had said from the beginning that the company was trying to do too much too soon -- offering service to 39 cities, for example, in its first few months. Skeen has said he had no choice. When what was then called Atlantic Coast Airlines Holdings Inc. broke off from United, it had leases on 87 regional jets that he did not wish to keep idle.
The breakup came after United, which filed for bankruptcy protection in December 2002, tried to reduce the fixed payments it made to Atlantic Coast.
"Flyi was guaranteed to fail, and it will eventually go out of business," said William H. Alderman, a Connecticut-based aerospace investment banker.
In late 2003, before launching Independence Air, Skeen went to court to fight off a hostile takeover bid by Mesa Air, which had offered about $512 million for the company.
Yesterday, Mesa chief executive Jonathan G. Ornstein called Flyi's bankruptcy "unfortunate and avoidable."
"The company had alternatives, and it chose not to pursue them," he said.
Some analysts and investors had warned Skeen that his only hope of survival was considering an opportunity last winter to return to its roots as a feeder carrier.
PAR Investment Partners LP, a Boston-based private investment fund, became Flyi's largest shareholder late last year on the hopes that would happen.
"They had opportunities to preserve value and they decided to completely shun them," said Edward L. Shapiro, a PAR partner. "Their argument to me was that, 'Oh, it would have been a lousy margin and we couldn't have made any money.' That may be true. But, versus what? Versus the negative operating margins they have operated with Independence Air?"
PAR sold all of its Flyi shares in the months before the bankruptcy filing.
Shapiro predicted no investors would step up to rescue Skeen's operation.
"I don't think they can raise the capital to continue to fund an operation that clearly is not viable," he said. "I can't come up with a scenario that this entity makes any sense at any size. What do they have? They have 12 relatively new [Airbus] planes. There's some value there. They have a name brand, if that's worth anything. But I can't imagine that it is."
Despite the company's financial troubles, it did develop a following among passengers, between its low fares and broad-based marketing efforts.
At a Dulles terminal yesterday, David Leggett was on his way back to Boston on an Independence flight, worried that the company's bankruptcy could disrupt a family schedule that includes a Christmas trip home for his son, an American University student, and his own trip back to watch an AU swim meet in two weeks.
"We'll see what happens," he said.
Washington Post staff writers Keith L. Alexander and Elissa Silverman and researcher Bobbye Pratt contributed to this report.
Flyi chief executive Kerry B. Skeen, left, said the airline's hope lies in finding a new investor to finance current operations or a transition.