Atlantic Coast Airlines, the largest United Express franchise in the eastern USA, stunned the regional airline industry with its plans to split from United Airlines and become an independent low-fare carrier.

The move, which follows months of fruitless talks over a new payment contract for the regional's service at Washington Dulles, has put a question mark over United's whole network of feeder carriers. The major, in bankruptcy reorganisation since last year, has been renegotiating contracts with most of its regional partners. The proposal has even raised speculation that United may have to draw down hub operations at Dulles.

Atlantic Coast is different from other, often captive regional carriers. As an independent airline with a planned schedule of 275 daily departures from Dulles, it would have the largest number of departures of any airline from any airport in the Washington area, although it would still lag in seat count. The regional would be larger than US Airways, with 183 daily departures from Reagan National Airport, or Southwest Airlines, with 156 from Baltimore/Washington International (BWI).

Plans outlined by Atlantic Coast to operate under its own name and link Dulles with small and medium cities along the East Coast would recreate a route network similar to the one it now operates under the United Express brand. It is dominant on north-south spokes into Dulles, while United uses the hub for east-west long-distance flights and for international routes.

But another measurement is key to Atlantic's future and that is the fleet. The 50-seat Bombardier CRJ regional jet is the largest aircraft it flies, and even though the carrier says that it will in future buy larger jets capable of flying long distance, Atlantic Coast's proposals are the first by a US carrier to operate such a type for low-fare services.

"It's not the fares we're worried about. It's the costs," says Jamie Baker, an airline analyst for JP Morgan. "Fifty-seat economics are particularly ill-suited for a low-fare operation. If you don't believe us, ask easyJet, Ryanair, Southwest or JetBlue. There is a reason that these airlines operate aircraft in excess of 125 seats."

Significantly, those low-cost carriers are heavily represented at Washington area airports, with Southwest dominating BWI, where AirTran Airways also has a significant presence. Both AirTran and JetBlue operate at Dulles and have said they plan to expand there. Jim Higgins of investment bank CS First Boston says: "The competition is unlikely to stand still, and we believe Atlantic Coast is particularly vulnerable to competitors' moves over the next nine months or so as it disengages from United."

Some asked if United would eliminate or scale back at Dulles in response to the Atlantic Coast announcement. But it is Atlantic Coast, not United, that holds the gate-leases for all the flights it operates as United Express at Dulles. So United would face a challenge to arrange for new gates and new carriers to provide United Express connections at the same level of service.

Merrill Lynch analyst Michael Linenberg, who is not as sceptical as others about Atlantic Coast's low-fare business model, thinks United might draw down Dulles. He says: "The possible disruption to United and resulting adverse economics would effectively negate the financial justification for a hub at Dulles; this is not what United needs right now given its financial condition."

Few see the Atlantic Coast announcement as a bargaining ploy or bluff, but United have not given up on the relationship. Atlantic Coast's Delta Connection operations at Boston Logan and at Cincinnati would not be changed. United has, however, managed to widen its armoury of connecting and feeder carriers, adding Trans States Airlines, a St Louis-based regional operator, for feed at both Dulles and Chicago O'Hare, and has also signed Mesa Airlines for a significant expansion. It has also worked out new arrangements with Air Wisconsin and with SkyWest.


Source: Airline Business