ATA Shutdown Signals Discount-Carrier Woes  (WSJ)

ATA Airlines Inc. grounded its planes, the latest sign of pain for the discount carriers that helped push the U.S. airline industry toward lower fares but now are being squeezed by soaring fuel prices and a slowing economy. Their troubles could lead to big cutbacks in cheap seats and limit consumers' ability to fly for the low prices they have come to expect. But fewer seats could also help the rest of the industry, including bigger rivals, raise fares to cover swelling fuel bills.

Indianapolis-based ATA Airlines filed for Chapter 11 bankruptcy protection late Wednesday and shut down operations Thursday morning. The move will inconvenience tens of thousands of passengers and affect 2,230 jobs. It will likely hit the Hawaiian air market, where ATA was a major operator.

It also will affect Souuthwest which funneled passengers to Hawaii and other destinations through ATA. The Dallas airline said it had already anticipated a sharp reduction in its annual revenue from the partnership, to about $20 million from last year's $40 million, and said second-quarter results will be hurt by its cost to re-accommodate ATA passengers. It will further address its outlook in a coming quarterly conference call.

On Monday, Aloha Airgroup Inc., which is under bankruptcy-court protection, suspended passenger operations and laid off 1,900 employees after failing to raise new capital or find buyers. Also this week, closely held charter carrier Champion Air of Bloomington, Minn., said it will shut down at the end of May, laying off 550 workers. Closely held Sun Country Airlines of St. Paul., Minn., sent temporary layoff letters to 45 of its 156 pilots, saying high fuel prices have forced it to dramatically trim its summer schedule.

Fuel prices have eased somewhat in recent days but remain high, suggesting continued pressure ahead. The entire industry -- which returned to financial health in 2006 after a prolonged crisis sparked by the Sept. 11, 2001, terrorist attacks -- is being roiled by historically high fuel prices, the shaky economy and the credit crunch.

"This is uncharted territory," said Dave Barger, chief executive officer of JetBluep. "It's crazy." The big discounter is redoing its budget for the second half of the year and is estimating oil will cost $100 to $110 a barrel, up from about $65 a barrel at this time last year. "It's the new normal," he said. "We can't assume fuel is going to go lower."

The traditional big carriers face the same troubles. Northwest Thursday said it will raise fares, fuel surcharges and baggage fees and cut its domestic flight schedule by 5%, starting in September. (Please see related article on page B3.)

But many industry observers consider smaller airlines -- most of them operating on the low-cost, low-fare model -- more vulnerable. They often have less free cash and are confined to the domestic U.S. market, which is over-served and hotly price-competitive. They often operate older, fuel-guzzling aircraft or fly new jets that are costly to lease and increasingly difficult to finance. Smaller carriers are often closely held and don't have access to the capital markets, which are increasingly negative on airline investing in any case.

That could give larger rivals the room they need to raise fares. "There's no question that air-ticket pricing is going to rise. It needs to," said Stuart Klaskin of KKC Aviation Consulting Inc. of Coral Gables, Fla. "The U.S. public has been paying, on a whole, less than it costs to generate the service they receive domestically."

David Banmiller, CEO of Aloha, is pessimistic about the ability of the smaller carriers to weather the storm. "There are other carriers, I suspect, going through the same trauma" as Aloha was in recent months, he said.

Investors and analysts are keeping a close eye on several other discount carriers. One of them is Denver-based Frontier, whose net loss for the nine months ended Dec. 31 widened to $18.7 million from $9.9 million a year earlier, and whose cash cushion fell 16% over nine months to $170.4 million as of Dec. 31. Frontier in December said it would lay off 10% of its work force not directly related to flight operations and has restructured its route map to eliminate unprofitable routes. More recently, it agreed to sell four planes to bolster its liquidity.

"There is no plan to file for bankruptcy," a spokesman said, adding that Frontier still has "a challenge in front of us in terms of making sure we continue to strengthen our balance sheet."

Two startups also are being watched closely. One is Skybus Airlines, which started flying last May from Columbus, Ohio, with $160 million in financial backing. The carrier sells at least 10 seats on each flight for $10 each and serves some secondary markets such as Chicopee, Mass., and St. Augustine, Fla., with extremely low fares and few amenities. A spokesman said Skybus still intends to turn a profit sometime this year but is trimming its schedule, dropping some routes and reducing the number of daily flights on others due to fuel prices.

The other newcomer is Virgin America Inc., founded by British billionaire Sir Richard Branson. It took wing last August from San Francisco with $312 million in startup capital. Changing market conditions are forcing the discounter "to be a bit more careful and opportunistic about where we add our capacity," said David Cush, the CEO. But Virgin America still intends to double its fleet to 30 planes by the end of this year and add another 20 aircraft in 2009, he said.

Spirit Airlines, a closely held discounter based in Miramar, Fla., still is growing aggressively, said Ben Baldanza, the CEO. Spirit is reducing its losses, making money on its operations and diversifying into more Caribbean and Latin American routes, he said.

Larger and better known discounters Air Tran Holdings Inc., parent of AirTran Airways, and JetBlue both have reined in their previous frantic growth and are looking for ways to boost revenue. "We need to make more money," said AirTran CEO Bob Fornaro. Several weeks ago the airline raised its fee for advanced assigned seating to $6 from $5. In January it added a fuel surcharge on its nonsale fares and has made other fare increases. In February it increased its call-center ticket-booking fee to $10 from $7.50.

JetBlue, which has been under new management for the past year, strengthened its balance sheet recently when Luthansa   took a 19% stake for $300 million. It also has launched a marketing alliance with Aer Lingus of Ireland.

Jim Parker, an analyst for Raymond James & Associates, believes Southwest, JetBlue, AirTran and some others have staying power because they have newer, more fuel-efficient planes and significantly lower operating costs.

But Fruman Jacobson, a bankruptcy partner at Sonnenschein Nath & Rosenthal who has experience with airline insolvencies, foresees more bankruptcies and liquidations among smaller carriers. "I don't know how anybody in this fuel environment can be a low-cost airline," he said. "What's different is the rapidity with which these airlines go down," Mr. Jacobson said of Aloha and ATA. "Airlines used to atrophy. Now we're seeing a pattern of the rapid fall."

ATA started as a charter company 35 years ago but added low-fare scheduled flights in 1986. Now owned by private equity firm MatlinPatterson Global Opportunities Partners II, ATA blamed its shutdown on high fuel expenses and the loss of a key military charter contract come October. The company said its demise came after it was unable to obtain additional capital to sustain its operations or restructure its business.

Steven Turoff, a restructuring consultant who was hired by ATA's board last month to help stave off this ending, said in the carrier's bankruptcy-court filing on Tuesday that "low-cost carriers initially appeared to have a competitive advantage...because of lower operating and labor costs and certain efficiencies of scale." But recently "even the low-cost carriers have shown themselves to no longer be immune to market pressures such as skyrocketing fuel costs and rising labor costs," he said.