Questions of Air Safety Buffet ValuJet : Carrier’s Success Story Was Built on Big Savings

With two aging DC-9 jetliners and a dead aim on becoming the WalMart of the airline industry, ValuJet took the nation by storm in 1993 and soon gained recognition as the fastest-growing, most profitable airline in the history of deregulation.

ValuJet handed passengers peanuts rather than Salisbury steak and a plastic-coated number tag instead of a ticket--all part of a low-cost strategy in which even its chief executive worked at a $100 desk purchased at Home Depot.

Flight attendants would clean up the cabins, and pilots had to pay for their own flight training. The company would buy up retired aircraft parked in the desert--in one case paying just $900,000 for a jet--or import them from an airline in Turkey, betting successfully that passengers would flock to its low fares.

And for nearly two years, all the bets paid off handsomely, as the planes filled up. The public adored the corny Captain Value radio ads that blasted all over the East Coast. Moreover, Wall Street investors bid up the company’s stock eightfold, and it set profit records.

But along with one of its DC-9s that crashed on May 11, the ambitions of the brash new company have met the harsh scrutiny of the American public and federal government regulators.

The verdict is that ValuJet operated from the start too near or perhaps even below the minimum air safety standards that the American traveling public has come to expect.

Just this week, the Federal Aviation Administration took the extraordinary action of forcing the company to suspend operations because they were not safe, the most stringent action the agency has taken in years. The company has furloughed all but a few dozen of the 4,000 employees it had prior to the accident, conserving its cash.

Financial experts disagree sharply over whether ValuJet’s $200-million-plus cash hoard can tide it over until the current storm passes, but if the airline does resume operations, it is likely to be with clipped ambitions and a more conservative style.

Indeed, air safety experts say the final lesson of ValuJet is that after 18 years of deregulation, the margins of air safety have grown too thin, not only at ValuJet but also at many of the airlines that have come and gone.

“There is little doubt that they all shared some safety problems,” said Ira J. Furman, an aviation attorney and former member of the National Transportation Safety Board. “But the FAA’s approach is that no matter how thin the rubber is on a tire, it is safe until it blows out.”

ValuJet executives said Wednesday that they have been inundated by 200 to 300 news media calls a day since the FAA took action against the firm. The small Atlanta-based carrier was clearly not prepared for the potent storm that has hit it.

Until the crash, the company’s top management was basking in adulation.

ValuJet Chief Executive Lewis H. Jordan, former president of Continental Airlines, was named Georgian of the Year by a local business publication. Accolades also flowed to the firm’s other three founders: Robert Priddy, who co-founded another small East Coast start-up; and Maury Gallagher and Tim Fynn, both of whom founded WestAir of California.

ValuJet was part of a second-generation of start-up carriers--Reno Air, Kiwi International, Frontier--that took to the skies in the early 1990s. Most featured low fares and have grown in a methodical, slow fashion.

ValuJet, in contrast, took off rapidly, doubling its flights every six months. Such rampant growth can overwhelm an airline’s operations. According to airline consultant Michael Boyd, “ValuJet just went whole hog for growth, and fast growth kills airlines.”

But unlike virtually every other key start-up in the era of deregulation, ValuJet’s founders brought in their own capital and today are sitting on its cash reserve--which may prove to be the airline’s ultimate salvation.

ValuJet spokesman Gregg Kenyon said the company intends to resume operations in roughly 30 days and retains most of the $254-million cash cushion it had in mid-May.

“We are in a strong financial position,” Kenyon said.

The company is now working on satisfying a 12-page consent agreement with the FAA, aimed mainly at forcing the company to improve its safety system and consolidate maintenance at fewer than the current 31 outside shops that perform work on its fleet of 51 jets.

But the company believes that its fundamental strategy--that extremely low fares draw in passengers who would otherwise drive--remains unchanged, Kenyon said.

For example, while ValuJet was charging about $59 for flights from Washington to Atlanta, major airlines were typically charging $171. The low-price tickets were made possible by the firm’s holding down aircraft acquisition costs and salaries.

ValuJet was paying anywhere from $900,000 to $6 million per plane for its fleet of DC-9s, far less than the average $25 million to $30 million that low-cost Southwest or major carrier Delta were paying for new aircraft, according to Darryl Jenkins, an airline financial expert and a professor at George Washington University.

Flight attendants earn roughly $12,000 per year, several times less than the industry average--not to mention the requirement that they perform janitorial services in the cabin after each flight. And the few mechanics employed by the airline had little special training.

But the cost savings on personnel had a dramatic effect on safety, the FAA would discover in the aftermath of the accident in Florida. In one case uncovered by FAA investigators, for example, ValuJet personnel used a hammer and chisel to remove a bolt on an aircraft, lacking a service manual that would have disclosed the need for a special tool.

“ValuJet started out with a bunch of junk they bought out in the desert that other airlines had parked because they were too costly to operate,” said John Peterpaul, a United Airlines director and former International Assn. of Machinists official.

Ivan Michael Schaeffer, president of Woodside Travel Trust--a consortium of 130 travel agencies--predicted the company will quickly exhaust its cash cushion and won’t be able to rely on travel agents to restore its market share if it does restart. Among other things, the company does not pay agents a commission on its tickets.

But Jenkins believes the company is in such strong financial shape that it could easily absorb the estimated $2-million-per-plane cost of upgrading its fleet and an extended shutdown. And ultimately its customers are so addicted to low fares that they will come back once the FAA gives the airline a clean bill of health.

“When they do get their wings back, every microscope-toting bureaucrat in this town will have looked at them, and they will be a very safe airline,” Jenkins said. “People like low fares, and they want the low fares back.”

Vartabedian reported from Washington and Sanchez from Los Angeles.

* A NEW OLD PROBLEM: The crash sheds light on the issue of using outside contractors. A1

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Revenue Levels Off, Earnings Fall

ValuJet Airlines’ revenue has climbed steadily, but net income has been falling recently. Quarterly, in millions of dollars:

Revenue: $110.0 (1996)

Net Income: $10.7 (1996)

Sources: Standard & Poor’s, wire reports. Researched by JENNIFER OLDHAM / Los Angeles Times