Atlantic Coast Airlines (Nasdaq: ACAI) declared itself emancipated today from UAL's United Airlines through the launch of a new low-fare carrier, Independence Air. The venture will likely command the attention of other regional airlines and, if successful, will contribute to the ongoing upheaval in the industry.
Atlantic Coast, which will soon change its name to FLYi Inc., has long provided regional service under the banner of major carriers, most notably for United, as well as for Delta Air Lines (NYSE: DAL). These relationships have been fruitful as the firm, and other regional outfits with similar relationships, have stayed in the black even as major players have posted steeper losses. In part, this profitability has depended on fees from the larger partners as well as cost-sharing arrangements that keep expenses down. But with United's emergence from bankruptcy still uncertain and Delta's CEO warning today that the company cannot continue to operate as it has, Atlantic Coast's decision to strike out on its own is understandable.
The experiment will be closely watched. Mesa Air Group (Nasdaq: MESA) is reportedly contemplating forming a low-cost service to break its dependence on struggling US Airways (Nasdaq: UAIR). If the major carriers' troubles continue, more defections may be in the cards.
Atlantic Coast starts off with some advantages, but the risks are significant. Its labor costs are relatively low, and right off the bat it will be flying in some popular markets, including Washington, Boston, Chicago, and Atlanta. But its fares may be hard for customers to find, since they will mostly be offered via the corporate website and a 1-800 number.
In addition, Atlantic Coast's near-term outlook is not rosy. The company expects to lose $8 million to $10 million in the current fiscal second quarter, and an additional $45 million in the second half of the year, as it boosts marketing expenditures and pulls planes out of its United service. At the same time, it will begin to make significant capital expenditures to expand its fleet with new Airbus 319 planes.
In many respects, Atlantic Coast is mimicking low-cost competitors JetBlue (Nasdaq: JBLU) and Southwest Airlines (NYSE: LUV). But while those companies have had the advantage of starting with a discount strategy, Atlantic Coast will probably endure a rocky transition as it transforms its business model. All the same, investors should watch closely to see if the firm can make its plan fly.
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Fool contributor Brian Gorman
is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.
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