ValuJet Stock Plunges 35% : Chief Says Airline Will Overcome Tough Odds

By ROBERT A. ROSENBLATT

June 19, 1996 12 AM PT

TIMES STAFF WRITER

WASHINGTON —

One day after ValuJet Airlines agreed to suspend operations, its stock plunged 35%, but the airline’s president expressed confidence Tuesday that the discount air carrier will be flying again within a month.

Winning approval from the Federal Aviation Administration to go airborne again will be just the first hurdle, however. More daunting will be the task of persuading the public to return to an airline that made its reputation for offering bargain-basement fares but is now best known for the crash in the Florida Everglades last month that killed 110 people.

Bill Fiala, an airlines analyst with Edward Jones, a major retail brokerage firm, said the odds are against ValuJet.

“I would say I’m pessimistic,” Fiala said, noting that ValuJet will face another major problem even if it gets FAA approval relatively quickly and can fill its planes with paying passengers. The third financial challenge will come from the lawsuits filed by survivors of the people who died in the May 11 crash of ValuJet’s Flight 592.

Many investors evidently shared Fiala’s view. ValuJet stock fell to $6.50 a share in heavy Nasdaq trading, down $3.50 from Monday’s close. The company had traded as high as $34.75 a share earlier this year and had closed at $17.875 on the day before the crash.

The airline’s junk bonds fell as much as 25%, dropping to 60 cents on the dollar Tuesday in the wake of the suspension of all flights.

Lewis Jordan, president of ValuJet, told a news conference in Atlanta that the carrier is awaiting an FAA directive that will “outline the policies, procedures, practices that we will need to follow in order to return ValuJet Airlines to service, we hope, in approximately 30 days.”

The detailed FAA order will “talk about the kinds of operating manuals we will have, the tight surveillance we will provide over the contract maintenance facilities, the type of management or organizational structure we will have in place, the type of engineering organization we will have in place, the manner in which we will do business in general,” he said.

Meanwhile, all but a handful of the airline’s employees will be laid off, and the company will make refunds to ticket buyers. A full refund “will be granted to any customer who was on the books at ValuJet,” Jordan said.

The airline had booked many reservations with people planning to attend the Summer Olympics in Atlanta starting July 19. “We had planned to be there for them, but right now we are at the mercy of circumstances,” Jordan said. Other carriers are expected to increase their flights to compensate for ValuJet’s grounding, industry experts said.

In ordering the carrier’s complete shutdown, the FAA said there were maintenance deficiencies throughout the Atlanta-based carrier’s system.

The FAA’s review of ValuJet began five months ago and intensified after the crash. However, the government investigation has not uncovered any links between maintenance problems and the Everglades crash.

“The tragic accident of 592 is something that has occupied our minds completely for over a month,” Jordan told the news conference, where dozens of ValuJet employees had gathered to show their support for him and the airline.

As the investigation continues, he said, “it becomes more and more clear that this is an accident that could have happened to any airline in the world, and that ValuJet Airlines is also a victim and ValuJet people are victims.”

ValuJet had about $200 million in cash in April, but it is not clear how much of the total includes payments from credit card customers who will get refunds for future flights.

The company outlined its pressing financial problems in a Securities and Exchange Commission filing Friday, seeking to sell $150 million worth of bonds. The carrier said it is facing intense competition from Delta Air Lines, which is planning a low-fare operation to compete directly with ValuJet.

ValuJet has $1 billion worth of jetliners on order from McDonnell Douglas, with the first $60 million in payments due by 1998.

Getting cash flow going for ValuJet will be very difficult in a competitive airline market, experts agree.

Another industry analyst, who declined to be identified, said ValuJet will be unable to use the low-fare approach it originally employed to win customers as a fledgling airline. “After the crash, they can’t offer $39 or $49 tickets,” the analyst said. “People will immediately worry: ‘Are they skimping on maintenance?’ ”

Times researcher Edith Stanley in Atlanta contributed to this report.

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A Dramatic Slide

Valujet’s stock has lost roughly two-thirds of its value since one of its planes crashed in the Everglades last month. Shares fell another $3.50 Tuesday.

May 11:

A ValuJet DC-9 crashes in Florida, killing 110 aboard.

June 2:

ValuJet cuts daily flight schedule in half, from 320 to about 160

Monday:

ValuJet agrees to temporary grounding

Tuesday:

ValuJet stock falls $3.50 to $6.50

How other airline stocks fared Tuesday:

Delta Air Lines

Up $3.38 to $83.63

AMR (American)