Stock Takes A Dive, But Motley Fool Says Hold On
Shares of Dulles (VA) based
Atlantic Coast Airline Holdings went into a 24% tailspin Monday on
news that its pact to provide commuter service for United Airlines
will likely end when United emerges from bankruptcy, expected in
the first quarter next year. Atlantic Coast said it would then move
to a low-fare model to capitalize on its strong presence at
metropolitan Washington (DC) Dulles airport.
Atlantic's United Express
service currently provides 85% of total revenues, the rest flying
in on its Delta Connection operation with Delta Air Lines. Chairman
and CEO Kelly Skeen might simply be pressing United to sweeten its
offer -- one he reportedly called "unpalatable" -- but he is wise
to consider a future where 85% of revenues are not tied to the
fortunes of one partner.
Atlantic has produced consistent free cash flow outside of the
slow first quarter, but as Monday's market showed, shareholders
will bail if the business is threatened. The demise of the United
deal may serve as a catalyst for the new low-fare structure that
Atlantic reportedly has considered for two years, but The Motley
Fool suspects another force at work, too.
It's called JetBlue.
This low-fare carrier and Whitney
Tilson favorite currently flies from Atlantic's Dulles hub to
California and Florida and could certainly expand. Skeen doesn't
need that. By emphasizing that Atlantic has the most departures a
day from Dulles and plans 275, plus up to an additional 50 with
plans to buy 15 to 25 more planes by early 2004, he may be trying
to keep JetBlue from weighing in further.
All of this is good news for the Baltimore-Washington area,
where travelers must now drive to Baltimore-Washington
International Airport for low fares, courtesy of Southwest.
To be sure, Atlantic faces headwinds from JetBlue, Southwest,
ATA, and AirTran, and perhaps next year Virgin Airways, along with
smaller aspirants Frontier and Spirit. The company must control
costs to compete, but has at least three reasons to be
optimistic:
- it may cost little to convert its United Express
operations
- it will be able to fly planes two hours longer each day than it
currently does with United
- its balance sheet provides flexibility
With about $189 million in cash and equivalents and only $53
million in total debt as of March 31, 2003, Atlantic will get a
running start. Whether it takes off is pure speculation.