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.

FMI: www.fool.com, www.atlanticcoast.com