I took a trip to the Washington, D.C., area this week. I was hoping to try Independence Air. But I took my old standby, US Airways (OTC BB: UAIRQ). This morning, I read a Barron's article about FLYi (NASDAQ:FLYI), the parent of Independence Air. When two things come together like that, it's a sign I'm supposed to write something about it.
FLYi is a result of the transformation within the air transportation industry. FLYi, under its previous name of Atlantic Coast Airways, was a spoke-to-hub carrier for United (OTC BB: UALAQ) and Delta (NYSE:DAL). And they had a serious set of sugar mamas looking out for them.
But FLYi has decided to try and earn an honest living operating as a point-to-point carrier like Southwest (NYSE:LUV) and Motley Fool Stock Advisor recommendation JetBlue (NASDAQ:JBLU). Barron's did a nice job of explaining the strategy and some of the challenges (the article is summarized here if you're not a Barron's subscriber). Barron's also suggested it was "a decent bet" that FLYi could double or triple by 2005. But investors need to know about a few key obstacles before anteing up.
The biggest problem FLYi faces now is getting passengers on the planes. From its August passenger numbers, 66% of fliers flew Indy Air. So FLYi is about 2/3 of the way through its transition. But revenues are down. And the load factor, the amount of actual passenger miles divided by available seat miles, was a very low 46%. So like Curtis told Jake and Elwood, you've got "to put word in the street." Marketing expenses are up, but they need to be more effective in order to behinds in the seats.
But even if FLYi does a better job of marketing its new brand, it still has to overcome the switching costs of getting new passengers to give it a shot. Low fares are nice, but those cursed frequent flier miles make customers very sticky, even in the face of bankruptcy. FLYi is going to have to get creative with their marketing, which is likely to mean more costs.
But the worst thing I saw was its increase in debt. Although I am sure it was necessary, long-term debt is no good for any airline, let alone one in transition. It's another fixed cost on top of all the fixed costs that FLYi already has. Long-term debt is up almost two times from the same quarter a year ago and now makes up 42% of its capital structure. Take heed, investors: Beware the leverage on the down side!
I am not rooting against FLYi. In fact, I would love to see it be successful. It would be a slap in the face to the arrogance in the rest of the industry. But I felt you should have the whole story to help you make up your mind. So I will leave you with one last thing. CEO Kerry Skeen is focusing on the right thing to be successful: productivity. It will be his new sugar mama, but she will definitely play hard to get.
Fool contributor David Meier does not own shares of any of the companies mentioned.
