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Profits At 35,000 Feet


Given the turbulence in the airline industry, it would seem an odd place to look for supercharged growth. But World Air Holdings Inc. (WLDA) is far from your typical airline. Founded in 1948 as a contract carrier for hire, the Peachtree City (Ga.) company has shuttled Muslims on pilgrimages to Mecca, soldiers to war zones, and African white rhinos to zoos. Then there are all the Jaguars and Bills: During the season, World Air transports several NFL teams to their games.

In recent years, World Air's reliance on contract flying has enabled the 26-plane carrier to prosper in the face of one of the most brutal shakeouts in aviation history. World Air provides the planes and crews that cargo handlers like United Parcel Service (UPS) 5/18/05 @ 7:36 PM --], China Airlines, and EVA Air use to help haul exports between the U.S., Europe, and Asia. And as one of the largest participants in the U.S. Air Force's supplemental carrier program, World Air has also enjoyed a booming business shuttling U.S. soldiers to and from Afghanistan, Iraq, and Bahrain. "We have clearly been a beneficiary of the military buildup [in support of] the war on terrorism," says World Air's chief executive, Randy J. Martinez. "You won't find many airlines that have the balance sheet we have today." The 50-year-old former Air Force combat pilot joined World Air in 1998, becoming CEO last year.

Thanks to that sharp rise in its cargo and military businesses, coupled with the well-timed acquisition of a rival contract carrier, World Air's revenues are on pace to top $600 million this year -- nearly double 2001 sales. That's tiny in this industry; by comparison the much younger passenger airline JetBlue Airways Corp. (JBLU) did $1.35 billion in revenues last year. But World Air swung from a $26 million loss in 2001 to a $25.6 million gain last year, and profits are expected to rise 32% this year. And that turnaround hasn't gone unnoticed on Wall Street, where investors have bid its stock up from the $1 range two years ago to above $11 recently. That has helped the company soar to the No. 12 spot on BusinessWeek's Hot Growth list of top-performing small companies.

STREET SCRUTINY

One key to World Air's success is that it has been largely insulated from the spike in fuel prices. As a contract player, it can simply pass its rising fuel costs along to customers. That's a major selling point on Wall Street. "I wouldn't buy any airline stock other than this one," says Michael J. Corbett, a portfolio manager at Chicago's Perritt Capital Management Inc., which holds 272,000 shares.

Not that things have always been so rosy for the company, originally known as World Airways. The airline got its start transporting immigrants between San Juan, Puerto Rico, and the U.S. using three Boeing (BA) 314 Clippers. Over the decades, World Airways flirted with insolvency several times, and in the 1990s its then-management team created a holding company, WorldCorp Inc., which went on to make disastrous investments in two tech ventures. The losses pushed WorldCorp into bankruptcy. In 1998, the company spun off the airline to shareholders. It began the latest chapter of its life with no cash, a mountain of debt -- and a big slug of bonds that came due a few years later.

The Iraq invasion proved to be a godsend for the teetering airline. Still, World Air trades at roughly nine times projected 2005 earnings -- considerably less than carriers with profits to speak of, such as Southwest Airlines Co. (LUV) or JetBlue. That's a clear sign that Wall Street fears the military business, which now accounts for roughly 67% of revenues, will decline after the U.S. decides to withdraw troops from Iraq. For his part, Martinez is betting that the acquisition last year of charter carrier North American Airlines Inc. -- whose clients include Club Med (CLMDY) and other tour operators -- will help the company lessen its dependence on the Pentagon.

Even beyond Iraq, some are convinced that World Air's military business will hold altitude. Helane Becker, an analyst at Benchmark Co., a New York brokerage, notes that World Air's past military work has given it the seniority to fly as much as 57% of the trips that the Air Force contracts out to private carriers -- a sharp increase from the 35% of flights that World Air handles today. "Even if the pie shrinks, it'll have a bigger share," Becker predicts. As World Air proves, even older companies can find new routes to growth.

By Dean Foust in Peachtree City, Ga.


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