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Last
updated: October
28, 2005
This Week in Travel
Independence Air Files for Bankruptcy
Jet Fuel Prices Ease
Delta Air Lines to Merge Song into Main Fleet
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Independence Air Files for Bankruptcy
Independence Air and parent company FLYi on Monday became the latest US airline to file for bankruptcy and the discount carrier said it would seek to sell itself off in a court auction.
The former regional feeder carrier, which plans to fly its normal schedule for now, had been struggling with high fuel prices. Energy costs hit the airline particularly hard because of its reliance on inefficient 50-seat regional jets.
"They didn't have the right strategy," said Jim Corridore, an analyst at Standard & Poor's. "They had the horrible luck of adopting that strategy at the worse possible time. It just wasn't in the cards for them."
Its bankruptcy could be good news for rivals whose fares have been depressed by competition from Independence out of Washington Dulles Airport and other airports on the East Coast of the United States.
FLYi said it would request court approval to engage in an auction to seek outside investors or purchasers for all or part of its assets.
The auction is expected to take place within 60 days, the airline said, adding that it expects to have enough financial resources to fund its obligations -- including paying its employees -- during that time.
"We think this auction process that we've asked the court to approve... will flush out the real interest in the company," FLYi Chairman and CEO Kerry Skeen said in an interview.
"We had extensive dialogue with various players, both investors and strategic players" before the bankruptcy filing, he said. "It's just a very difficult backdrop."
Independence, which had flown as Atlantic Coast Airlines, a feeder carrier for larger airlines like Delta Air Lines and United Airlines, began flying as an independent airline in June 2004.
While some of Independence Air's assets have value, they are unlikely to be appealing to potential investors if kept together, said William Alderman, president of aerospace investment bank Alderman & Co.
"The more likely scenario is a split-up and an orderly liquidation of these assets," he said. "I don't see a fire sale."
The airline, which recently said it planned to lay off 600 people and cancel flights to some key destinations, plans to cut costs further. Skeen will take a 25 percent salary cut on top of a previous 15 percent reduction and other executives will also take cuts.
Independence said it has also been negotiating with its flight attendants' and mechanics' unions on cuts in wages and changes to work rules and expects to announce a tentative agreement with both unions "probably in the next 24 hours," the CEO said.
Independence's bankruptcy follows Chapter 11 filings in September by Delta Air Lines and Northwest Airlines and in October by Northwest feeder carrier Mesaba Aviation.
Among other leading carriers, United Airlines is also in bankruptcy, while US Airways recently exited Chapter 11.
JetBlue Airways could be among the biggest beneficiaries of Independence's bankruptcy, analysts said, since the discount airline has a heavy presence in the US Northeast.
JetBlue separately on Monday raised $135 million to fund working capital and capital spending on new aircraft and other items through a sale of 7.5 million new shares.
US airlines have posted more than $30 billion in losses since the September 11, 2001 attacks on the United States, the first of a series of blows to the industry including soaring fuel prices and growing competition from low-cost carriers.
Jet Fuel Prices Ease
US airlines are breathing a little easier over the past week as jet fuel prices have eased significantly, returning to levels before Hurricanes Katrina and Rita knocked out refineries, sending prices soaring.
Jet fuel was trading at $1.83 a gallon on Thursday, or about $77 a barrel, up from the previous day's close of
$1.78, but still down 41 percent from a peak of $3.13, or $131 per barrel, in early October.
The widely publicized price spike helped push Delta Air Lines and Northwest Airlines into bankruptcy in mid-September and led American Airlines and rivals to cut back on some flights.
Now the pullback in fuel prices, along with improving passenger revenue and robust traffic, is boosting optimism about the battered airline sector, triggering a rally in shares of American's parent AMR and Continental Airlines.
Continental shares have soared 35 percent since the end of September, while American is up 27 percent.
While much of the refining capacity which was hit by the hurricanes has already returned, three Gulf Coast refineries are still shut down, said David Freyman, vice president at Dallas-based energy consultants Barnes and Click.
"As (refineries) come back we'll see the supply come back even more and I think we'll see a further easing of prices," he said.
He said that along with the recovery in refining, several airlines' decisions to cut back some of their routes had contributed to the drop in fuel prices.
"It impacts market psychology when the airlines say, 'All right, we've hit the point where we can't make money flying our planes around anymore,"' he said.
But a cold winter in the northeast United States could still roil jet fuel, both because of overall supply pressure and a need for kerosene, chemically similar to jet fuel, to mix with other fuels to prevent them from freezing, he said.
Current jet fuel prices are below the averages AMR and Continental have forecast for the quarter, which will mean narrower losses for both, even if they will still end the quarter in the red, said Calyon Securities analyst Ray Neidl.
If the trend persists, "next year may turn out to be stronger than we think," he said.
American Airlines spokesman Tim Wagner noted that jet fuel was still 35 percent higher than where it stood a year ago.
"It's gone down," he said. "You can't contest that that is good. But it's still up significantly."
American is still keeping some of the flight reductions it previously announced, he added.
Delta Air Lines to Merge Song into Main Fleet
Delta Air Lines will close down its low-cost carrier Song, the bankrupt airline said on Friday, as it focuses on turning around its core operations.
The decision, a victory for discount rival JetBlue Airways and a setback for Delta, whose previous management had hoped Song could compete against discount carriers like JetBlue.
"Delta was never willing to admit that they couldn't compete with JetBlue's costs with Song, even though they were not reducing their pilot pay," said Standard & Poor's analyst Jim Corridore. "Clearly they have finally admitted it."
Shares in JetBlue, whose low-cost service with amenities like leather seats and satellite television was widely viewed as a model for Song and which flew many of the same routes, soared as much as 11 percent.
Delta, the No. 3 US carrier, said Song would stop operating as a separate unit in May 2006, about three years after it started flying.
The decision on Song is the latest sign of Delta's willingness to break with its past as it seeks to reorganize under bankruptcy protection and stem billions of dollars in losses from high fuel costs and competition. Delta has never disclosed whether Song was profitable.
It also could pressure United Airlines to close down its own low-cost unit Ted. United is looking to emerge from bankruptcy protection early next year.
"Operating two products under the same name has never worked," said Calyon Securities analyst Ray Neidl.
Song struggled to compete with low-cost carriers like JetBlue partly because its Boeing 757 planes were too large, Neidl said. "It didn't give them the flexibility of JetBlue."
JetBlue flies A320s with 156 seats compared with 199 seats on 757s.
Delta said it would maintain a strong presence on New York to Florida routes, where it has been a main competitor for JetBlue. It also said it plans to add some of the features on Song planes, like video-on-demand service, to another 100 planes in its main fleet and have two classes of service compared with Song's economy class.
Song's president, Joanne Smith, was named vice president of consumer marketing for Delta as a whole.
After May 2006, Song's narrow-body jets will be redeployed to other Delta routes -- mostly transcontinental -- to replace wide-body planes the airline is shifting to international routes, Delta said.
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