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http://www.businessweek.com/stories/1995-05-14/growing-pains-at-valujet

Businessweek Archives

Growing Pains At Valujet


News: Analysis & Commentary: AIRLINES

GROWING PAINS AT VALUJET

In October, 1993, four airline industry veterans spent $1 million and did the nearly impossible: They launched an airline that turned a profit in its second month of operations. Record results for ValuJet Airlines have been rolling in ever since. And the company's stock, offered to the public at $6.25 last June, now trades at $27.50. The company's price-earnings ratio: an impressive 26.

Now come the growing pains. To avoid the fate of other Southwest Airlines imitators that flared then faded, ValuJet must keep a lid on operating costs, deal with a tightening market for used DC-9s, and contend with flight attendants and mechanics who vow to organize into labor unions.

ValuJet Chairman Robert L. Priddy and President Lewis H. Jordan swear they'll keep squeezing pennies. "In prioritizing growth over cost control, we'll choose costs every time," says Jordan. From its two-plane, three-city start, ValuJet now flies into 24 cities with 29 planes for fares as low as $39. The planes fly at an industry-leading 75% capacity, and at 43% full, they break even.

ValuJet's secret? Ticketless flying saves about $2 million a year. The airline's secondhand DC-9s cost only $5.2 million each. Add it up, and ValuJet flies for an industry-best 6.5 cents per seat-mile. In 1994, its first full year of operations, the airline earned $20.7 million on $133.9 million in revenues.

Still, growth must be served. Passenger-service expenses grew 19% in 1994's fourth quarter, and reservation costs jumped 23%--both well beyond an 8% jump in passengers. Growth slowed in the first quarter, but still topped bookings. Plane costs could be rising, too. ValuJet recently passed on a group of aircraft priced at $6 million each, but it needs to add planes to maintain growth.

TEMP TANTRUMS. Unionization could raise costs higher. Hoping to thwart the effort, ValuJet on May 4 announced that it will offer sick-day and vacation pay for all employees. That takes some teeth out of the union push, but flight attendants want to boost pay from $11.76 an hour--well below the $16 industry average.

Union organizers also are raising workers' ire over ValuJet's relationship to Jordan Temporary Services, owned by Jordan's 25-year-old daughter, Jennifer, and ex-wife, Angela Ellerbee. Jordan Temporary, which hires most non-pilot workers and employs 1,450 of the 2,700 people working at ValuJet, earned $5.14 million from the airline last year. Its billings are up 30% this year. "This company is filled with nepotism," gripes flight attendant Anna Wootten. ValuJet says it pays Jordan a competitive rate.

Priddy and Jordan swear they'll keep growth in line. "Every other startup wants to be another United or Delta or American," Priddy told analysts. "We just want to get rich." So far, ValuJet's shareholders are doing just that.By David Greising in Atlanta


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