AirTran Flying a Steady Course
Most major airlines are bleeding red ink as the economy slows, but AirTran Holdings Inc., parent of regional carrier AirTran Airways, is ready to post another profitable quarter. Not bad for an airline that wasn’t expected to survive into 2001.
AirTran is the successor to ValuJet Airlines, which folded shortly after its DC-9 flight 592 crashed into the Florida Everglades in May 1996, killing all 110 people aboard. But under new management led by Chief Executive Joseph Leonard, AirTran kept plugging away with its short-haul, low-fare strategy, overcame two years of heavy losses and now has defied experts’ forecasts that it was doomed.
The carrier--which is based in Orlando, Fla., but has its main hub at Atlanta’s huge airport--today is expected to post its ninth consecutive quarterly profit, with earnings of 8 cents a diluted share, according to a consensus of analysts surveyed by First Call/Thomson Financial.
By contrast, the nine largest U.S. airlines are expected this week to report combined losses of $570 million for the three months ended March 31--the industry’s first quarterly loss since the first quarter of 1995, according to Michael Linenberg, an analyst with Merrill Lynch & Co.
The big airlines got hammered in the quarter because the weakening economy prompted a decline in lucrative business travel, fuel costs remained high and labor unrest at some of the carriers hobbled operations.
(Continental Airlines reported Monday that first-quarter earnings fell 36% to $9 million, or 16 cents a share, from $14 million, or 21 cents, in the year-earlier quarter. Its revenue rose 7.6% to $2.45 billion. Southwest Airlines is the only other major airline expected to post a first-quarter profit.)
Yet AirTran, which also is one of the first airlines to order Boeing’s new 110-seat 717 jetliner, keeps thriving with its strategy of offering cheap fares to attract price-sensitive business and leisure travelers, while providing them with a few extras such as assigned seating.
Its first-quarter load factor--the percentage of available seats filled with paying customers--shot up to 70.5% from 64% a year earlier. And the carrier is winning more business travelers, which now account for 56% of AirTran’s revenue, up from 40% in 1999. Some of that increase comes at the expense of Delta Air Lines, which dominates Atlanta’s Hartsfield International Airport.
AirTran also is among the industry’s most profitable carriers, owing to its low-cost structure. Its profit margin is second only to the king of short-haul, low-fare carriers, Southwest Airlines, with AirTran expected to post pretax operating earnings of about 14 cents per dollar of revenue in 2001.
AirTran keeps costs from flaring by limiting its overhead, paying lower wages, outsourcing maintenance of its fleet and keeping flight amenities to a minimum--which is much the same strategy that was pursued by ValuJet.
“We have a very simple product,” Leonard said in an interview. “We don’t try to pretend that we are an in-flight dining room.”
AirTran also is saving big on its ticket distribution costs by urging passengers to buy their tickets on its Web site. The savings totaled $12.5 million last year, and now about 38% of AirTran’s tickets are purchased online. Leonard said that percentage, and the savings, will keep growing this year.
AirTran has 326 daily flights to cities throughout the eastern half of the nation, and it flies only as far west as Texas. But AirTran has an effect on Southern California, because the airline is the launch customer of Boeing’s new 110-seat jetliner, the 717, which is built by about 5,000 workers in Long Beach. So far, 19 of the 50 jets ordered by AirTran have been delivered, and the rest will join its fleet over the next 31 months.
The 717, in fact, is intended to trim AirTran’s costs even more, because the jets are more fuel-efficient than the existing fleet of aged DC-9s.
The weakening economy also could benefit AirTran as business travelers look for low prices to keep down their own costs. On average, AirTran’s walk-up fares--which are what business fliers often pay for traveling on short notice--are priced as much as 60% below those of the major carriers, analysts said.
“We really believe we’ll do better in a downturn,” Leonard said. “It just makes sense that if travel budgets get cut and you still have to fly, you look for a bargain. And our bookings are very, very strong.”
Linenberg agreed, saying AirTran’s profitability “and its low cost structure make it the perfect defensive [airline] play in this difficult economic environment.” He recently raised his rating on the stock to “buy.”
Indeed, Wall Street is taking notice of AirTran’s strides. After bumping along between $4 and $5 a share for much of 2000, the stock has been on a mostly steady climb since last fall. On Monday, its shares rose 39 cents to close at $9.39 a share on the American Stock Exchange.
After its highly publicized Florida crash, ValuJet was grounded for three months by federal regulators for safety reasons. The crash ultimately was traced to the ignition of oxygen generators that allegedly had been improperly prepared and delivered to ValuJet by an outside contractor and then loaded into the belly of the plane by the airline’s baggage handlers.
ValuJet resumed limited operations but in late 1997 merged with a small airline called AirWays Corp., changed its name to AirTran and moved its headquarters to Orlando from Atlanta. The company hired Leonard, a former aerospace and airline executive, as its CEO in January 1999.
AirTran still faces some turbulence, including workers’ efforts to share in more of the airline’s gains. In early March, for instance, its 540 pilots rejected a new contract proposal that AirTran and the workers’ union, the National Pilots Assn., had endorsed. The parties are back at the negotiating table.
And AirTran must keep fighting many travelers’ perception, in light of the ValuJet crash, that the airline is somehow unsafe. Each safety incident involving AirTran--such as a small fire that occurred during a flight in November in which no one was hurt--garners bigger publicity than most other airlines would receive.
Small wonder, then, that the “frequently asked questions” portion of AirTran’s Web site includes a lengthy response to the question: “How qualified are your flight and maintenance crews?”
AirTran, like all airlines, says safety is its paramount concern. But only time will tell whether the carrier, no matter how prosperous, can shake the legacy of ValuJet.
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Taking Flight
Defying many skeptics, AirTran Holdings Inc.--the successor to ill-fated ValuJet Airlines--not only is surviving but posting steady profit, even as most major airlines are again suffering losses. That’s lifted AirTran’s stock price since late summer.
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Earnings per share have remained steady ...
1st quarter 2001 (estimated): 8 cents per share
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... and the company’s stock is rising.
Weekly closes and latest
Monday: $9.39, up 39 cents
Sources: First Call/Thomson Financial, Bloomberg News
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AirTran has ordered 50 Boeing 747 jetliners.
