The End of Independence

Finally, an airline is dead. FLYi (Pink Sheets: FLYIQ.PK), the parent company of low-fare carrier Independence Air, announced over the holiday weekend that it would cease operations Thursday. Approximately 2,700 workers will lose their jobs.

I want to mourn. I really do. But I just can't, because ... it's about time. Airlines have been so dismal, for so long, that the cold cruelty of the market was bound to take the life of one of these miserable firms. Independence Air just happens to be the first victim.

Several factors contributed to the downfall. First, FLYi was formerly Atlantic Coast Airlines, a regional carrier that catered to passengers of United and Delta taking short-hop trips up and down the East Coast. Its business model depended on fees paid by each of the big boys. But at least one of those relationships went sour when Atlantic Coast demanded more favorable terms from bankrupt United. It didn't get them. Figuring that leaning on brittle partners wasn't such a good idea, the carrier struck out on its own shortly thereafter. Thus, FLYi was born. It all made perfect sense, of course -- except that the economics of a regional carrier running loud, 50-seat jets are a whole lot different than those of a national discounter.

Second, as our own David Meier pointed out here, Indy Air was in dire need of extra moolah to build up its customer base in the shadow of its larger competitors. The average load factor -- that is, the percentage of paid seats versus those available -- was below 50% shortly after the new airline took off. Changing that would mean more marketing expenses and lower fares, which, in turn, would mean more capital, which, naturally, would mean more debt. Lots and lots of additional debt.

FLYi, however, would never make enough to fund interest payments and ongoing operations, let alone growth, making its warnings from November -- that it could shut down as soon as Jan. 7 -- prophetic.

Sadly, that's good for the industry as a whole -- not that fares will suddenly rise overnight. But fewer carriers means more profit over a smaller base. The fight to claim an outsized piece of that pie has already begun. JetBlue (Nasdaq: JBLU  ) and AirTran (NYSE: AAI  ) , for example, are planning more flights between Boston and FLYi's Dulles Airport hub, the Boston Globe reports.

Is this a turning point for the airlines? Hardly. FLYi was a regional carrier trying the business equivalent of a loop-de-loop in a 747. The nationals -- from United and Delta to AMR's (NYSE: AMR  ) American and Continental (NYSE: CAL  ) -- have more support from the Feds, credit assurances from banks, and millions of customers with billions in frequent flier miles. All of which means that another shutdown, while probably needed, isn't likely for now.

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Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication, but he has family who are retired from United Airlines. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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