=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2004/03/02/f= inancial1406EST0166.DTL ---------------------------------------------------------------------- Tuesday, March 2, 2004 (AP) Airline sees low fares and regional jets as winning combination MATTHEW BARAKAT, AP Business Writer (03-02) 11:06 PST CHANTILLY, Va. (AP) -- When regional carrier Atlantic Coast Airlines reinvents itself later this year as Independence Air, it will embark on a new concept in the airline industry: a low-fare carrier using a fleet of small, regional jets. Having flown under the United Express banner as part of the United Airlines network, Atlantic Coast is relatively unknown to the traveling public although it is the nation's 17th-largest carrier in terms of passengers, rivaling JetBlue. But its transformation will instantly turn Washington Dulles International Airport -- Independence Air's hub -- into the nation's largest low-fare airport, with the new airline offering 350 flights a day. The airline industry will be watching closely to see if regional jets carrying just 50 passengers on relatively short flights can provide the economies of scale needed to thrive as a low-cost carrier. "This is kind of a new thing," said David Stempler, president of the Air Travelers Association, a passenger advocacy group. "It will be interesting to see how it plays out." When United filed for bankruptcy in December 2002, Atlantic Coast was faced with re-upping with United as a regional carrier under a contract that paid substantially less, or it could go its own way. Eric Nordling, Atlantic Coast's senior vice president for marketing, said the airline was considering the independent low-fare concept as far back as 2001. United's bankruptcy brought the issue to a head. "The most promising segment of the industry is the low-fare segment," Nordling said. "People are willing to try new brands. When we looked at the risks and rewards, the decision was clear." The company has faced skepticism about the plan, in part because many believed it was merely a negotiating ploy with United or that it was born of desperation at losing its lucrative partnership with the airline. Wall Street is among the doubters -- Atlantic Coast stock dropped nearly 25 percent when the company announced the break with United, and is now trading in the $8 range, about $6 below its 52-week high of $14.10. Some observers question whether the airline can lower its costs sufficiently to make a profit on cheap fares. Regional jets cost more to operate per passenger per mile because they carry fewer people and fly shorter routes than jets like a Boeing 737. But Nordling predicts Independence Air will be a success for several reasons. First, the low prices will generate significant demand at small and mid-sized airports that have never before had low-fare service. Nearly half the airports that will be served by Independence have no low-fare carriers. While under contract with United, the company does not set its fares; as an independent, it will have that power. In the markets where it will compete with Southwest, Nordling acknowledg= ed Independence Air won't match Southwest's fares. But they will be low enough that, for instance, on a flight from Dulles to Raleigh-Durham, Independence Air will only be about $20 more. In those cases, Independence believes many travelers will be willing to pay $20 for the convenience of a flight from Dulles instead of Baltimore-Washington International Airport, where Southwest operates a hub. In the Washington, D.C., market, Dulles is more convenient for many travelers, especially those in the northern Virginia suburbs. Many people now drive an additional 45 minutes to an hour to take advantage of lower fares at BWI. Generally, airports compete to attract low-fare carriers. Dulles has limited low-fare service from airlines including Jet Blue, AirTran and Delta's subsidiary, Song. The new United low-fare carrier Ted also plans 15 flights a day out of Dulles later this year. But Independence Air essentially fell into its lap. "We do not view what they're doing as a risk," said James Bennett, director of the Metropolitan Washington Airports Authority, which runs Dulles as well as Reagan National Airport. "We think it's an opportunity for the airport." A challenge for the airline, Stempler said, is its performance ratings on issues such as baggage handling and on-time flights. Atlantic Coast has tended to perform poorly on those issues, according to data from the U.S. Department of Transportation. The poor performance stands in contrast to the customer goodwill generat= ed by low-fare carriers such as Southwest and JetBlue. "At start-up carriers like JetBlue, they had new people, fresh people, an esprit de corps. At Atlantic Coast they'll be using the old staff," Stempler said. "The buzz in the business is that their service levels are not that high." Company spokesman Rick DeLisi said the company's poor ratings in the government's monthly consumer reports will improve when the airline becomes Independence Air. To begin with, because of the company's connection to United, it current= ly does most of its business at Chicago's O'Hare Airport, the nation's worst airport for on-time performance. And on issues like lost baggage, the airline will significantly improve operations because it will no longer have to coordinate with United. Ultimately, Atlantic Coast's biggest advantage may be that its business plan is so different from conventional methods, given the financial difficulties of the traditional airlines. "It'll be an interesting market experiment and I would not at all be surprised if it succeeds," said Clinton Oster, a professor at the University of Indiana who specializes in airline economics. Oster said the airline could stimulate the market in airports previously been unable to attract low-fare service. He pointed out that when Southwest comes to a particular airport, traffic sometimes jumps as much as 50 percent. The airline's exact plans for its debut remain unsettled, in part because it still has some unresolved contractual obligations with United. But the change is expected in the middle of this year, DeLisi said. It h= as not announced its 50 destinations, but expects to have several dozen Eastern destinations in 2004, coupled with a few West Coast destinations for which it will use larger Airbus jets. By 2006, it plans to expand to about a dozen destinations in the Western United States. On the Net: www.atlanticcoast.com ---------------------------------------------------------------------- Copyright 2004 AP