Independence Air is the latest airline to take on the majors with discount fares. But will its low-cost strategy fly in the midst of an industry downturn?

by Kelly Barron
Winter 2004

KERRY SKEEN, CHIEF EXECUTIVE OFFICER OF INDEPENDENCE AIR, ENJOYS LEISURELY morning walks with his three dogs. He plays golf. And one of his greatest passions is restoring old homes.

“I’m not a helter-skelter, risky kind of guy,” he says.

Yet Skeen, 51, is heading one of the riskiest ventures to hit the tarmac in years. Amid one of the worst downturns in airline industry history, Independence Air severed its long-standing relationship as a regional carrier for United Airlines in June, forfeiting guaranteed revenues to go it alone as a low-cost airline.

As if that weren’t bold enough, Skeen is breaking out in a big way. Operating out of Washington-Dulles International Airport, Independence flies 600 nonstop flights daily to 40 cities, taking on United and others with fares that are as much as 70 percent lower. And since it took off, Independence has doubled its fleet to 144 planes, adding larger 132-seat Airbuses to its existing 56 smaller regional jets.

In piloting a new path for Independence, Skeen is flying in the wake of other no-frills, low-operating-cost mavericks such as Southwest Airlines and JetBlue Airways, both of which have usurped market share from traditional carriers and spurred an industry revolution.

But despite the much heralded success of low-cost airlines, you’ve got to wonder: “What’s Skeen thinking?”

The airline industry continues to swoon, adding soaring fuel costs and fare wars to a long list of maladies that have included terrorist attacks and the SARS epidemic. Many traditional airlines are either teetering on the edge of bankruptcy or already belly-up. And the outlook isn’t good. As many as 70 percent of the airlines that enter bankruptcy stumble into another financial mess and wind up in bankruptcy again, says Skeen.

In a perverse way, this helps explain his thinking. United guaranteed Independence’s revenue when the smaller airline served as its regional carrier, giving Independence a tremendous advantage in turbulent times. But Skeen sensed the business was changing. The larger United airports that Independence, then known as Atlantic Coast Airlines (ACA), flew passengers into were getting clogged with regional players. Growth in the future would slow, Skeen fretted. So, he and his management team started toying with the idea of adding some independent flights.

Then came September 11, 2001. Then came United’s bankruptcy. And then came an end to ACA’s sweet deal. With United seeking to halve the profits it previously guaranteed, Skeen was staring at two choices. Go with ailing United, and take his chances; or strike out on his own, and take his chances. “It was a choice between the devil and the deep blue sea,” says Dan Kasper, an aviation consultant with LECG in Cambridge, Mass.

Skeen and Independence are striking out in other ways. Just as Southwest has its schtick, with Minnesota-nice flight attendants, and JetBlue has TVs and leather seats, Independence is developing its own quirky identity.

Instead of flight attendants rattling off pat preflight safety announcements, Independence hired celebrities such as Dennis Miller and political strategist James Carville to narrate. The airline provides hot towels for weary passengers. Jet fins poke out of the beds of its pickup trucks. The airline also encourages its employees to press the flesh, telling pilots to enter the galley and talk to passengers directly.

Independence’s personality is still a work in progress, though. The airline ditched some of its scripted humor when flight attendants said they felt uncomfortable joking with passengers that, like the president, they could wave from the plane steps as they departed.

“We’re not campy,” concedes Independence’s president, Thomas Moore. The Independence culture, though, is coming together. Employees rallied to fend off an early takeover attempt from Mesa Air. And the company has pulled in outsiders, ranging from consultants to marketing hotshots, to hone its management philosophy and give its brand an edge.

Independence needs to stand out. Aside from the miserable state of the business, the airline faces other challenges. Unlike Southwest or JetBlue, the airline’s low-cost model relies more heavily on smaller planes, which are, on the whole, more expensive to operate. An Independence regional jet, for example, has a seat-mile cost, the industry’s biggest gauge of costs, of 16 cents, versus a seven-cent seat-mile cost for a larger Southwest 737 aircraft.

Skeen counters that the majority of the routes Independence flies don’t compete against Southwest. What’s more, he thinks the cost comparisons with other airlines are faulty. Larger carriers pay for some of the overhead of their regional affiliates. Once you add in those costs, says Skeen, the seat-mile costs of many of Independence’s competitors rise to 22 cents, giving him an advantage.

Maybe. But Skeen will still need to fill seats. To stoke demand, he plans to fly his planes longer, as many as 11.5 hours a day, versus the 10 hours a day of many major carriers. He’ll add more flights, too. With United, Independence flew just four flights to Syracuse, N.Y., for example. Now it will fly seven.

Another cost savings: Booking tickets online. Eschewing traditional distribution, which costs as much as $15 to sell a ticket, Independence, like JetBlue, will hawk tickets on its Web site. Skeen believes that this move will lower the costs to get a customer on board to less than 50 cents. It may also help lure business travelers, more and more of whom are being forced to go online. McDonald’s, for example, now requires its employees to book air travel online, according to Plunkett Research, Ltd., a Houston, Texas-based
research firm.

It doesn’t hurt that the airline will draw its passengers from the Washington, D.C., area, a region starved for a low-cost carrier. What’s more, Independence’s strategy to rely on smaller planes for shorter flights may be a harbinger of the changing airline industry. Southwest and JetBlue are adding smaller planes to their fleets, too.

Still, Independence has yet to take off. In the company’s first six months, ending June 30, 2004, revenue fell 7 percent to $403 million (the latest figures available at press time). The company lost $24 million, compared with a profit of $48 million, and isn’t expected to make money this year or next.

Skeen is used to starting from the bottom, though.

He began his career as a janitor at Hartsfield-Jackson Atlanta International airport before moving up the ladder at Delta, and then jumping to form ACA. And he’s not averse
to hard work. When Independence misjudged how many passengers would show up at the airport to change their tickets, Skeen dove in to help stave off delays, and boarded planes to personally explain the situation to irritated passengers.

Says Skeen about the challenges ahead: “I’ve got my eyes wide open.”

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Kelly Barron is a freelance writer in Los Angeles. Email Kelly at editor@executivetravelmag.com.