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Can Air Tran Keep Climbing?


The Corporation: Strategies

Can AirTran Keep Climbing?

ValuJet's successor is thriving--for now

When Joseph B. Leonard slipped into the cockpit of AirTran Holdings Inc. (AAI) in January, 1999, he could have been excused for feeling a sense of deja vu: Leonard, who worked at Eastern Airlines during its plunge into financial chaos and collapse, was faced with a money-losing carrier that was down to its last $25 million in cash. AirTran was the successor to ValuJet Airlines Inc., whose bookings plummeted in 1996 following the horrific crash of Flight 592 into the Florida Everglades. "There were very, very few people last January that thought we had any chance of survival," says Leonard, who to this day orders up daily cash reports.

But to the surprise of many in the airline industry, Leonard has pulled Orlando-based AirTran out of its spiral--and back into the jetstream. The 30-year aviation veteran wasted no time pursuing his agenda: installing a new management team, engineering sale-leasebacks of planes to build up cash, ditching money-losing routes, launching early discount sales to fill the planes, and pushing customers to buy tickets over AirTran's cost-saving Web site, where it now generates a third of its sales. Most impressive is that Leonard has overhauled AirTran's image as a no-frills carrier for college students and penny-pinching tourists. Today, higher-fare business travelers account for 60% of AirTran's revenues, up from 40% when Leonard arrived.

Leonard's initiatives, coupled with the strong economic tailwind that's helping all airlines these days, are lifting AirTran to unexpected heights: On Oct. 16, AirTran is expected to report its seventh straight profitable quarter. What's more, AirTran's operating margin under Leonard has climbed to 14.8%, up from only 2% in 1998, ranking it second only to Southwest Airlines Co. (LUV) AirTran's earnings for the full year should soar to $49.5 million, a 70% rise, on revenues of $600 million, up 19%, says PaineWebber airline analyst Samuel Buttrick. Adds Stuart Klaskin, an aviation consultant at Klaskin, Kushner & Co. in Miami: "They've defied all the odds. I've never seen an airline come back from the brink of failure as successfully as AirTran has."

So far, though, Leonard has little to show for it on Wall Street. AirTran's stock still languishes around 4, down from ValuJet's adjusted 1995 high of 33 1/2. Investors are skeptical of AirTran's ability to maintain its momentum if the economy cools. For one thing, AirTran has been more vulnerable than others to oil-price hikes. It now hedges only 35% of its fuel costs--low for a carrier of its size--and flies mostly older, gas-guzzling DC-9s. In the first half of 2000, AirTran's fuel costs rose 89%, and higher oil prices are expected to drain a further $16 million from third-quarter earnings as well, says CIBC World Markets analyst Sal Colak.

Even more of a threat, though, is the airline's crushing debt load of $230 million--more than double its current $100 million in cash holdings. That comes due with a thud next April. Leonard now spends about 80% of his time trying to line up a refinancing. Given the current jitters in the junk-bond market, many analysts expect that AirTran will have to pay even more than its current 10.25% and 10.5% rates to refinance.FATTER SLICE. Leonard's challenges don't stop there. AirTran's employees, who earn less than their peers at the major carriers, are demanding a larger share of the airline's newfound success. In mid-September, AirTran maintenance workers staged a 48-hour slowdown that caused myriad delays and cancellations. "The airline is up-and-coming, and we're getting our piece of it," vows John Mays, the International Brotherhood of Teamsters' representative for AirTran's 350 mechanics and inspectors. Leonard responded by giving them yearly raises starting at 7% over the next four years. But he has to placate AirTran's 500 pilots, too, whose contract becomes amendable in March.

The risk is that any disruption may turn off customers who are just coming back to the airline. They include fliers like John Petrush, who admits he's reconsidering after the mechanics' slowdown delayed his Atlanta-to-Biloxi (Miss.) flight by nearly five hours. "AirTran doesn't have its act together right now," Petrush said, as he sat stranded last month at Hartsfield Atlanta International Airport. "If they can't perform, I just won't ever use them again."

Leonard knew the odds were long when he took the job. Many airline experts figured ValuJet was finished after the Everglades disaster. The airline--which right before the crash had issued $150 million in bonds--was forced by the Federal Aviation Administration to suspend operations and, under intense regulatory scrutiny, only gradually resumed flights after three months. But even with short-haul fares as low as $39 each way, ValuJet's planes were flying half-empty, recalls Leonard's predecessor, D. Joseph Corr. In November, 1997, Corr finally buried the ValuJet name when he acquired AirTran, a small Florida carrier, assumed its name, and moved the headquarters from Atlanta to Orlando.OVERACHIEVERS. Under Leonard, who joined AirTran after running AlliedSignal Inc.'s aerospace division's marketing and sales, the carrier has made safety a top priority. An FAA representative now sits in on AirTran's morning operations meetings. "We're seeing an operation that's going beyond the major requirements of the FAA," says L. Nicholas Lacey, the agency's director of flight standards.

Corr was already pushing to upgrade AirTran's service to business fliers. But Leonard has ratcheted up the effort. The carrier offers assigned seating, curbside check-ins, a frequent-flier program, and a business-class cabin. Agents solicit coach passengers at airport gates for $25 upgrades to business class. And AirTran aggressively woos small and midsize businesses that are more cost-conscious than their larger brethren. "Our target is not the Coca-Cola account executive," Leonard says. RaceTrac Petroleum Inc., a Smyrna, Ga., chain of gas stations that is AirTran's biggest client, says it can book last-minute flights at half the cost of the major carriers--as long as employees keep in mind that AirTran's on-time performance is spotty. The initiatives are helping Leonard steal business travelers away from rival carriers: While AirTran remains a distant second to Delta Air Lines Inc. (DAL) in its only hub, Atlanta, the low-cost carrier has has doubled its share of passenger volume at Hartsfield, to 8.8%, since 1997.

Leonard will boost his passenger capacity by 8% this year and wants to increase it a further 20% in 2001. He's adding a new, fuel-efficient Boeing 717 each month--financed separately--and is expanding to three to five new cities every year. And Leonard would like to set up a second hub at Ronald Reagan Washington National Airport. However, AirTran faces intense competition from other airlines that want to snap up some of the slots that might be freed at the airport by US Airways Group Inc. as part of its proposed merger with UAL Corp. (UAL) Continental Airlines Inc. (CAL) has bid $215 million for some of the slots.

Indeed, for all its success, AirTran's comeback has yet to be truly tested. "Until we see a weak economy, we won't know if [AirTran] is for real," says Randy Petersen, CEO of Frequent Flyer Services, a Colorado Springs (Colo.) publisher that tracks traveler-award programs. Having already witnessed the demise of one airline, Leonard will have to scramble to keep this one aloft.By Aixa M. Pascual in OrlandoReturn to top


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