Independence Air iClub - Good analysis of FlyI's woes

This guy spells out very nicely what many of us have thought for some time:

http://www.marginalrevolution.com/marginalrevolution/2005/11/the_rise_and_fa.html#more

good article.

He's right as far as he goes, but it's not only the regional jets that are killing FlyI. Presidential Airways tried exactly the same trick in the late 1980s -- an independent, no-interlining LCC hubbing at IAD -- only with 737s and Bae146s. Presidential didn't last two years. Nobody has yet explained to me why Indy is any different. They sure haven't doen any better; even worse in fact. You know what they say about people who fail to study history...

I'm probably wrong but Independence Air looks to me like "Plan B" when FlyI and UAL couldn't agree on lower fee-per-departure rates. Of course the FlyI executives will paint the past two years as the culmination of a long-term plan to succeed where Presidential Air failed, but I'm just very cynical. IMO, it all looks like decisions made on the fly - very spur of the moment "save the company" type moves.

Lesson: don't start a whole new airline just to spite an old one. Spite doesn't belong in a business plan. :)

Excellent article. I learned a lot.

I'm probably wrong but Independence Air looks to me like "Plan B" when FlyI and UAL couldn't agree on lower fee-per-departure rates. Of course the FlyI executives will paint the past two years as the culmination of a long-term plan to succeed where Presidential Air failed, but I'm just very cynical. IMO, it all looks like decisions made on the fly - very spur of the moment "save the company" type moves.

I'm fairly certain that "stick it to United" was part of the plan. One of the things that is for certain though, is that sticking with UA under UA's terms would have been met with the same death wish they're currently facing. If you're going to get shot anyway, shouldn't you at least die running?

Excellent article. I learned a lot.

The funny thing is that there is nothing in that article that any person who really follows aviation doesn't already know.

Very true.

(I wrote it btw)

After the AA partnership unraveled, I thought Midway's last strategy was to operate for US Express.

"We will not cut benefits from OnePass, our industry-leading frequent flyer program, because we remain committed to rewarding our most loyal customers."
-- Gordon Bethune (two weeks before significantly cutting benefits of the OnePass program)

"You have got to tell everybody the truth, you get a lot more respect."
-- Gordon Bethune (after lying about OnePass)

You forgot "We're not going anywhere."
-- Marty Shugrue in TV ads for Eastern in the days before they collapsed

After the AA partnership unraveled, I thought Midway's last strategy was to operate for US Express.
It was, after an attempt to run a smaller airline on their own. The US partnership was a last gasp reincarnation after 9/11 ATSB money (or some other money related to that) came through that didn't last very long. I had a ticket on them (that I abandoned and conceded the money) for a flight about a week before the final Midway shutdown.

http://en.wikipedia.org/wiki/Midway_Airlines
http://www.usairways.com/midway/

I'm fairly certain that "stick it to United" was part of the plan. One of the things that is for certain though, is that sticking with UA under UA's terms would have been met with the same death wish they're currently facing. If you're going to get shot anyway, shouldn't you at least die running?

Even with the assumption that DH could not survive the 'new' deal with UA (which I have never have bought into - somehow Mesa seems to be able to work within these 'onerous' post-BK UA terms)...the brain trust in Sterling fought tooth and nail at the start of this adventure to make sure the folks at Mesa didn't acquire them to continue to use DH assets at IAD to perform exactly the same thing they had already been doing at IAD.

And, oh by the way, this would have actually given DH stockholders something for their investment instead of the worthless paper they are now left with.


11/17/05 - Mesa Air 4Q Profit Increases 40 Percent

PHOENIX (AP) - Regional carrier Mesa Air Group Inc. said Wednesday that its fiscal fourth-quarter profit grew 40 percent as passenger traffic rose moderately during the period.

Quarterly income jumped to $15 million, or 36 cents per share, from $10.7 million, or 25 cents, the year before. On an adjusted basis, earnings were 35 cents per share, above the average view of 31 cents per share from analysts polled by Thomson Financial.

Operating revenue totaled $309.1 million, a 19 percent increase from $260 million a year earlier.

The airline flew 1.69 billion revenue passenger miles -- a paying customer flown one mile -- up 8.3 percent from 1.56 billion last year. Capacity increased 10.8 percent, but load factor, or occupancy, slipped to 72 percent from 73.7 percent.

For the year, profit more than doubled to $56.9 million, or $1.35 per share, from $26.3 million, or 63 cents, in 2004. Adjusted earnings of $1.31 per share topped analysts' estimate for $1.25 per share. Revenue expanded 27 percent to $1.14 billion.


The fools built a business plan based on spite sprinkled with a heavy dose of betting on a UA liquidation (or at least a pull-back from IAD).

I do feel bad for the DH workforce that went along for this fools ride...

Even with the assumption that DH could not survive the 'new' deal with UA [deleted relevant points about Mesa 'cause I'm lazy]...
I do feel bad for the DH workforce that went along for this fools ride...

Hi,

I used to be an employee of ACA, and have had many friends over there. Unfortunately, with the demise of FlyI, most of my friends are now at "greener" pastures. I guess they say in the airlines, that once an employee, always an employee -- I just don't give a rip about the stockholders, because publicly traded airlines are an absolutely stupid place to "invest" money. Anybody who doesn't know that, shouldn't be putting money in the stock market. Ok, to be more polite about it, if one wants to invest in the airlines, they must do so only after performing due diligence. In other words, caveat emptor or know what you're getting into.

I haven't heard one positive thing about Mesa, ever. The company's pay sucks, their work rules, suck, etc. As somebody who at one point in time was considering becoming an airline pilot, Mesa is not a place I'd like to work. ACA, before FlyI, was. Walmart might be a great corporation, but it sucks to work there. Same thing like Mesa. To watch ACA turn into another Mesa, or get bought out by Mesa, no thanks, and the employees knew it. The new UA "contract" would have left ACA in a lurch, and you don't have to buy it. Fact is, the contract basically allowed UA to jerk ACA around, cut their flying at will, and heck, terminate the contract at will, or the equivalent of it. That contract was not in ACA's best long term interest, and I'm not the only one who feels that way. As an employee, I could care less what the company stock is worth if the company is laying people off. Safe to say I wasn't an employee that held a lot of company stock.

I have some OPINIONS about the airline industry, and they are as follows:

1. Generally speaking, unions are a necessary evil in the airline world. They are a necessary evil in any industry where no individual posesses a unique skill. No airline "labor" employee posesses a unique skill. They are all trained to a specific standard.

2. The nature of union contracts drives wages to levels that are unsubstainable. During the bad times, the cheaper, junior employees are laid off, and the more expnesive employees are forced to take paycuts to lower the now "higher" average salaries.

3. Employees are rarely going to sacrifice what management wants. Management will take an airline into BK in order to force wage reductions.

4. BK kills off the value of the common stocks.

5. Common stock now worth nothing.

Say what you want about the "fools," but the BOD approved it, and the shareholders haven't ousted the BOD. Ergo, the shareholders haven't helplessly stood by. Every time I write that last sentence, nobody comes up with arguments to the contrary. IIRC, ACA's stock was trading at about $30 at its highest. I don't remember how much it tumbled when UA filed BK. After all, when a vast majority of your revenue is tied to a carrier in BK, and your contract has the potential to be terminated, what value does your product and corresponding stock really have?

As far as the pilots are concerned (typically the most vocal and vested labor group) they took a gamble too. A lot of them would have gone from being an RJ captain to an A319 captain, with a nice pay raise over night, as well as the ability to negotiate workrules better than Mesa. Mesa's considered the leech that started this whole cost war. Therefore, the pilots didn't blindly go along for the ride. As for the majority of the rest of the employees, the competing UAX carriers at IAD had to hire people to staff up the new flights. Lots of them came from ACA. If I had still been working there at the time of the switch, AWAC would have offered me up to three years of my seniority to go work for them. I probably would have, too.

The new UA "contract" would have left ACA in a lurch, and you don't have to buy it. Fact is, the contract basically allowed UA to jerk ACA around, cut their flying at will, and heck, terminate the contract at will, or the equivalent of it. That contract was not in ACA's best long term interest, and I'm not the only one who feels that way. This may sound like hindsight, but I said it over a year and a half ago as well: Atlantic Coast shouldn't have thrown all its assets into becoming an independent airline. It should have negotiated contracts, with UA and/or others, to continue operating as a feeder carrier with part of its fleet... and slowly ramped up an independent airline. flyI could have been a separate company with ACA as holding company. It would have moved over to Airbus aircraft as they came online. And it would have had time to develop markets instead of operating hundreds of empty flights on day 1. It would have had lower costs and the holding company would have retained a fixed revenue stream from its RJ commuter operations. Might not have worked, but would have been better than the plan they went forward with.

This may sound like hindsight, but I said it over a year and a half ago as well: Atlantic Coast shouldn't have thrown all its assets into becoming an independent airline. It should have negotiated contracts, with UA and/or others, to continue operating as a feeder carrier with part of its fleet... and slowly ramped up an independent airline. flyI could have been a separate company with ACA as holding company. It would have moved over to Airbus aircraft as they came online. And it would have had time to develop markets instead of operating hundreds of empty flights on day 1. It would have had lower costs and the holding company would have retained a fixed revenue stream from its RJ commuter operations. Might not have worked, but would have been better than the plan they went forward with.

That's all fine and good, but that's exactly what they tried to do with the Delta Connection side of things. ACA was operating the FRJ/328Jet for DLX out of various NE hubs, like BOS and CVG. DL told ACA to take a hike when the A319's came online. The way the UA contract went down, there was just no way UA was going to keep ACA as a partner while they operated their own Indy airline (ACA tried to stick it to UA by NOT offering the concessions UA wanted, figuring that they were bound by contract to pay the higher rates). IIRC, one of the reasons UA was witholding the last payments to ACA for the UAX flying was that they didn't want to fund their competitor's start up.

There ARE regional carriers that fly for more than one major carrier (SkyWest and Delta come to mind) but there are bunch of restrictions in place. One of the more trivial ones is that they can't fly into a competitor's hub with a different brand. I.e., ACA was not allowed to operate a UAX branded flight into ATL, a DL hub. Also note that none of the other-multi branded regionals operate flights as their OWN, they're all code shares for the majors. Also, I'm almost certain that all business agreements are in one way shape or another still based on some sort of cost-plus arrangement, where the regional shares no revenue liability or premium that depends on the success or fares offered on a particular route. I don't know of any routes that either Mesa or Skywest fly that that have co-brands overlap. I could be wrong, but I don't think that Skywest flies the same route for both UA and DL. OOooo... I lied! They do fly LAX-SLC for both colors. Nonetheless, since I'm fairly certain that SkyWest does not have any pricing control in any market, that there is nothing SkyWest can do for one carrier at the expense of another.

If ACA/FlyI would have maintained agreements with any major airline, it would have been at the detriment to their own operations... inevitably there would be no compete clauses in many major markets that ACA would have hoped to serve. ACA bread and butter markets would have been from cities like IAD-/BOS/CLT/LGA/ATL/DTW/etc that they could have inevitably served for their code share partners but would have been prohibited by no-compete clauses for them to serve with their own colors.

Finally, the 50 seater is dead. Dead in the water. With other airlines sending their own CRJ's to the boneyard or otherwise cutting them out of their flight schedule, exactly what flying would there be for ACA, the new entrant to the party? To say that wasn't actually happening at the time ACA branched out is true, but to say that it wasn't expected is demonstrating that one isn't taking an assessment of market dynamics as a whole.

Again, mangement is not the only party to blame here -- the stockholders took a risk as well, and failed to take appropriate action with the BOD when the BOD failed to take appropriate action with Skeen, et al.

As to the best option? Maybe ditching the 50 seaters altogether and gone with the E170's and E190's and offered themselves that way. Unfortunately, there are production and financing issues with both planes. Perhaps the real plan all along would have been to have UA go Ch 7. I used to wonder what would happen with OO, ZW, and DH if UA went Ch 7. I would have thought that they were three strong regional networks that thrown together with some narrowbodies at the large cities would have put together a formindable route network. Alas, UA isn't going away anytime soon, and that plan is not going to happen.

That's all fine and good, but that's exactly what they tried to do with the Delta Connection side of things. ACA was operating the FRJ/328Jet for DLX out of various NE hubs, like BOS and CVG. DL told ACA to take a hike when the A319's came online. The way the UA contract went down, there was just no way UA was going to keep ACA as a partner while they operated their own Indy airline (ACA tried to stick it to UA by NOT offering the concessions UA wanted, figuring that they were bound by contract to pay the higher rates). IIRC, one of the reasons UA was witholding the last payments to ACA for the UAX flying was that they didn't want to fund their competitor's start up.

There ARE regional carriers that fly for more than one major carrier (SkyWest and Delta come to mind) but there are bunch of restrictions in place. One of the more trivial ones is that they can't fly into a competitor's hub with a different brand. I.e., ACA was not allowed to operate a UAX branded flight into ATL, a DL hub. Also note that none of the other-multi branded regionals operate flights as their OWN, they're all code shares for the majors. Also, I'm almost certain that all business agreements are in one way shape or another still based on some sort of cost-plus arrangement, where the regional shares no revenue liability or premium that depends on the success or fares offered on a particular route. I don't know of any routes that either Mesa or Skywest fly that that have co-brands overlap. I could be wrong, but I don't think that Skywest flies the same route for both UA and DL. OOooo... I lied! They do fly LAX-SLC for both colors. Nonetheless, since I'm fairly certain that SkyWest does not have any pricing control in any market, that there is nothing SkyWest can do for one carrier at the expense of another.

If ACA/FlyI would have maintained agreements with any major airline, it would have been at the detriment to their own operations... inevitably there would be no compete clauses in many major markets that ACA would have hoped to serve. ACA bread and butter markets would have been from cities like IAD-/BOS/CLT/LGA/ATL/DTW/etc that they could have inevitably served for their code share partners but would have been prohibited by no-compete clauses for them to serve with their own colors.

Finally, the 50 seater is dead. Dead in the water. With other airlines sending their own CRJ's to the boneyard or otherwise cutting them out of their flight schedule, exactly what flying would there be for ACA, the new entrant to the party? To say that wasn't actually happening at the time ACA branched out is true, but to say that it wasn't expected is demonstrating that one isn't taking an assessment of market dynamics as a whole.

Again, mangement is not the only party to blame here -- the stockholders took a risk as well, and failed to take appropriate action with the BOD when the BOD failed to take appropriate action with Skeen, et al.

As to the best option? Maybe ditching the 50 seaters altogether and gone with the E170's and E190's and offered themselves that way. Unfortunately, there are production and financing issues with both planes. Perhaps the real plan all along would have been to have UA go Ch 7. I used to wonder what would happen with OO, ZW, and DH if UA went Ch 7. I would have thought that they were three strong regional networks that thrown together with some narrowbodies at the large cities would have put together a formindable route network. Alas, UA isn't going away anytime soon, and that plan is not going to happen.


Anyone who thought UA was going Ch. 7 is crazy, that clearly would never happen. Truth is when indy was selling $29 seats, they would barely cover the cost of fuel. I know this is a short reply to a detailed one, but the math is simply, you have to charge more than cost to make money, DH never did that. Also, most people going to DC are going for business, its not one of those cities you go 'just for fun.' So low fairs are nice, but being in a corporate reservation system is nicer. Offering 20% off for biz is not the way to go, offering free last minute changes is. A biz traveler is looking for wi-fi not some clown making the safety announcement. Plus, they simply offered too many flights to to many places. I was talking to a flight attendant on my way to ord once and he was telling me about how the corporate policy was to 'not' be like virgin. Don't get me wrong aca was in a bad position when UA went ch 11. But now they are in an even worse one.

I dont even know if it would work, but as for crj they might make nice biz jets maby they could start some special biz jet service or something. Maby offer shared biz jet service. Anyway this biz jet idea shouldn't take away from my rant about their operation.

Anyone who thought UA was going Ch. 7 is crazy, that clearly would never happen. Truth is when indy was selling $29 seats, they would barely cover the cost of fuel. I know this is a short reply to a detailed one, but the math is simply, you have to charge more than cost to make money, DH never did that. Also, most people going to DC are going for business, its not one of those cities you go 'just for fun.' So low fairs are nice, but being in a corporate reservation system is nicer. Offering 20% off for biz is not the way to go, offering free last minute changes is. A biz traveler is looking for wi-fi not some clown making the safety announcement. Plus, they simply offered too many flights to to many places. I was talking to a flight attendant on my way to ord once and he was telling me about how the corporate policy was to 'not' be like virgin. Don't get me wrong aca was in a bad position when UA went ch 11. But now they are in an even worse one.

I dont even know if it would work, but as for crj they might make nice biz jets maby they could start some special biz jet service or something. Maby offer shared biz jet service. Anyway this biz jet idea shouldn't take away from my rant about their operation.

Ok, a Ch 7 might have been crazy, but a pull down of the IAD hub may not have been quite so crazy. THAT had been speculated about for quite some time. Consider that at IAD, ACA had more operations as UAX than UA had as mainline, you would also see that UA's flight schedule for mainline service was quite thin. After 9/11 I don't think there were any overlapping mainline/express routes (i.e., it was either all-mainline or all-express). On second thought, MAYBE BOS was an overlapping route, but I could be wrong. Anyway, UA's mainline service from IAD pretty much consisted of regular service to the hubs, a few business markets such as BOS, a handful of domestic cities one per day at 1700, 4 flights to LHR, 2 flights to CDG, 2 flights to FRA, and once per day to the rest of the int'l cities. EVERYTHING else was UAX service. If the pullout by ACA could have delivered a big enough punch to the UAX operation, the pulldown of IAD might have been accelerated.

As far as biz jets goes, Canadair already makes a mid-cabin transconinental plane called the Challenger. It actually has more rangethan the CRJ does. I have seen a few CRJ's in private service, but they are VERY few and far between.

Oh yeah, DC does have a significant tourist draw as well... enough that could be price stimulate to visit the city just because you can get there cheap enough. Between all of the museums and monuments, there's enough to do there for a family. More so than RDU, home of the failed Midway, anyway.

I shouldn't say 'no one' goes there for fun, but the truth is a lot of it is biz travel. They should of put more effort into winning the guy in the suit not the one in the jeans. A good example of this was how the weren't in the IBM booking system thus losing stewart.

I shouldn't say 'no one' goes there for fun, but the truth is a lot of it is biz travel. They should of put more effort into winning the guy in the suit not the one in the jeans. A good example of this was how the weren't in the IBM booking system thus losing stewart.

I would have gone for a slightly higher base fare, but then unlimited changes or something to that affect. Unfortunately, the way corporate travel policies read these days, an employee has to book the cheapest fare on its face, not the one that gives the most value. Cheapest fares and free changes wouldn't have been enough, I don't think.

I would have gone for a slightly higher base fare, but then unlimited changes or something to that affect. Unfortunately, the way corporate travel policies read these days, an employee has to book the cheapest fare on its face, not the one that gives the most value. Cheapest fares and free changes wouldn't have been enough, I don't think.

Well if they could get the airline in the company reservation system and offer biz friendly amenities like wi-fi @ iad. As for changes go i have found that if you ask and are persistent they will change any reservation. Show up at white plains for Stewart, they don't care.

I don't agree with Climbguy that Washington is 'mainly business', nor that Indy Air was an incompetent option for business travellers. I travelled on them for business weekly from BNA to IAD - Flights always on time, one gate in BNA with great friendly staff, a comical safety announcement but otherwise extremely professional demeanor, new planes, and a decent rewards scheme. United flew the same route 15 minutes later, were often late and (even as a UA 1P), I still chose DH. I enjoyed it.

The $29 fare sale - sure, it doesn't cover costs. Ever heard of easyJet? RyanAir? These LCC's in Europe have lost money on each seat, but generated brand interest, penetrated the market and, as we've seen here, brought other carriers' prices down significantly. Now they are huge players - and still offering 1p seats. There was most likely a long-term vision at DH that justified the initial losses they were making, it just wasn't executed correctly in quite a tough market (with tough conditions these days too eg. fuel).

It *is* easy to simplify the analysis - i'm doing it right now, but it's not all about WI-FI, nor route options, nor targeting exclusively the business customer. It's complex - these people weren't morons, they were in it to make money, they made their business case and, for several reasons in the OP's analysis, it just didn't work. A shame for them, their staff and DH's customer base.

The $29 fare sale - sure, it doesn't cover costs. Ever heard of easyJet? RyanAir? These LCC's in Europe have lost money on each seat, but generated brand interest, penetrated the market and, as we've seen here, brought other carriers' prices down significantly. Now they are huge players - and still offering 1p seats. There was most likely a long-term vision at DH that justified the initial losses they were making, it just wasn't executed correctly in quite a tough market (with tough conditions these days too eg. fuel).

Whoa there... comparing $29 DH fares to the free seats that FR and U2 give away are not exactly fair comparisons.

FR earns ancillary revenue from those free seats. In their latest financial statement they got 16% of their total revenue from ancillary revenues.

FR also hedged fuel; DH never did.

FR and U2 also run larger planes with much lower CASMs comapred to DH. DH started out running extrememly high CASM RJs. FR crams 189 seats into a 737! They probably lose less on free fares than DH lost on $29 fares on RJs.

I can't fault DH for cheap initial fares to get attention and get passengers to try them. I CAN fault them for offering those fares on just about a weekly basis and refusing to change when they saw the market reality (among other things they can be faulted for, all of which we pointed out long ago). They had a sale practically every week. Fuel is not an excuse. DH would have lost money even if they paid a grand total of 0.00 for fuel. It is just hastening their demise.

I can't fault DH for cheap initial fares to get attention and get passengers to try them. I CAN fault them for offering those fares on just about a weekly basis and refusing to change when they saw the market reality (among other things they can be faulted for, all of which we pointed out long ago). They had a sale practically every week. Fuel is not an excuse. DH would have lost money even if they paid a grand total of 0.00 for fuel. It is just hastening their demise.

Yes, agreed. Comparison was made to illustrate the market attention point. I *did* state that I was oversimplifying to give a perspective on where they thought they were going (if they knew) :)