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AirTran future brighter after painful struggles
Mon Nov 24, 2008 2:17pm EST
By Kyle Peterson - Analysis
CHICAGO (Reuters) - AirTran Airways, once seen as a likely casualty of the stunning oil price spike that claimed several smaller rivals this year, seems to have found its way out of the woods and may be positioned for profits in 2009.
By some estimates, the low-cost airline, a unit of AirTran Holdings (AAI.N: Quote, Profile, Research, Stock Buzz), had a brush with oblivion in the first half of this year as oil and jet fuel raced to record highs and pummeled the airline industry.
But a series of liquidity-boosting steps and a few lucky breaks have brightened the future of the Orlando, Florida-based airline which has an Atlanta hub.
"The fuel price spike had put extreme pressure on AirTran's cash flow and liquidity by midsummer, and unrestricted cash balances had dropped to very uncomfortable levels," said Bill Warlick, senior director at Fitch Ratings.
"But the rapid decline in jet fuel costs and the big cuts in domestic capacity have improved the carrier's cash flow prospects considerably," he said.
AirTran, of course, was not alone is its predicament. The entire industry was clobbered in the first half of the year by fuel prices that rallied with oil to a record high in July.
Other airlines of comparable or smaller size had begun to feel the strain. A handful of small carriers went out of business, and Frontier Airlines (FRNTQ.PK: Quote, Profile, Research, Stock Buzz) filed for bankruptcy.
AirTran, meanwhile, was broadly viewed as having a dangerously low liquidity position -- $356 million as of December 30, while fuel prices continued to drain the cash.
Furthermore, it faced a growing threat from its Atlanta rival Delta Air Lines (DAL.N: Quote, Profile, Research, Stock Buzz), which announced a merger with Northwest Airlines in April. With that merger complete, AirTran now competes at its only hub with the world's largest airline.
Because of AirTran's enviable East Coast presence, its nimble point-to-point route structure and falling stock prices, some experts saw the company as a promising takeover target.
"I think the theory was it would have been a reasonably priced transaction for an extraordinary airline," said Stuart Klaskin at KKC Aviation Consulting.
"They were determined not to get themselves caught in a bit of a death spiral," Klaskin said.
SEEING SIGNS OF LIFE
Airline shares tumbled across the board as the industry piled up quarterly losses. Between January 1 and July 14, AirTran stock fell more than 80 percent before stabilizing at a little more than $1 as share.
That compares with a 60 percent decline in the Amex airline index .XAL during the same period. AirTran shares have since rebounded to near $2.85.
A rapid decline in fuel prices took the pressure off airlines in the third quarter, but losses mounted as carriers had purchased fuel when prices were still near the highs. AirTran posted a third-quarter loss, reversing a year-ago profit.
All the while, chaos in the U.S. economy threatened to erode travel demand. Against this dreary backdrop, AirTran hustled to regain its footing.
"We had a tough year, but we managed through it," said Steven Rossum, AirTran's executive vice president of corporate development.
"We've worked hard at managing our liquidity, and it requires a lot of our management time," he said.
The airline has taken giant steps toward improving its liquidity position, which was $402 million at the end of the third quarter, compared with $356 million at the end of the fourth quarter of 2007.
To achieve this feat, AirTran constructed a $215 million financing facility in two stages: a $90 million revolving credit line and $125 million in letters of credit.
AirTran also rescheduled airplane deliveries, sold some aircraft, sold other equipment and leased it back, reworked deals with certain business partners and slashed capacity.
The carrier still has a bond rating of CCC+, which is below junk threshold. But Rossum is optimistic the rating will rise.
"It takes a long time to dig out of the credit rating hole," he said.
(Reporting by Kyle Peterson, editing by Matthew Lewis)
Mon Nov 24, 2008 2:17pm EST
By Kyle Peterson - Analysis
CHICAGO (Reuters) - AirTran Airways, once seen as a likely casualty of the stunning oil price spike that claimed several smaller rivals this year, seems to have found its way out of the woods and may be positioned for profits in 2009.
By some estimates, the low-cost airline, a unit of AirTran Holdings (AAI.N: Quote, Profile, Research, Stock Buzz), had a brush with oblivion in the first half of this year as oil and jet fuel raced to record highs and pummeled the airline industry.
But a series of liquidity-boosting steps and a few lucky breaks have brightened the future of the Orlando, Florida-based airline which has an Atlanta hub.
"The fuel price spike had put extreme pressure on AirTran's cash flow and liquidity by midsummer, and unrestricted cash balances had dropped to very uncomfortable levels," said Bill Warlick, senior director at Fitch Ratings.
"But the rapid decline in jet fuel costs and the big cuts in domestic capacity have improved the carrier's cash flow prospects considerably," he said.
AirTran, of course, was not alone is its predicament. The entire industry was clobbered in the first half of the year by fuel prices that rallied with oil to a record high in July.
Other airlines of comparable or smaller size had begun to feel the strain. A handful of small carriers went out of business, and Frontier Airlines (FRNTQ.PK: Quote, Profile, Research, Stock Buzz) filed for bankruptcy.
AirTran, meanwhile, was broadly viewed as having a dangerously low liquidity position -- $356 million as of December 30, while fuel prices continued to drain the cash.
Furthermore, it faced a growing threat from its Atlanta rival Delta Air Lines (DAL.N: Quote, Profile, Research, Stock Buzz), which announced a merger with Northwest Airlines in April. With that merger complete, AirTran now competes at its only hub with the world's largest airline.
Because of AirTran's enviable East Coast presence, its nimble point-to-point route structure and falling stock prices, some experts saw the company as a promising takeover target.
"I think the theory was it would have been a reasonably priced transaction for an extraordinary airline," said Stuart Klaskin at KKC Aviation Consulting.
"They were determined not to get themselves caught in a bit of a death spiral," Klaskin said.
SEEING SIGNS OF LIFE
Airline shares tumbled across the board as the industry piled up quarterly losses. Between January 1 and July 14, AirTran stock fell more than 80 percent before stabilizing at a little more than $1 as share.
That compares with a 60 percent decline in the Amex airline index .XAL during the same period. AirTran shares have since rebounded to near $2.85.
A rapid decline in fuel prices took the pressure off airlines in the third quarter, but losses mounted as carriers had purchased fuel when prices were still near the highs. AirTran posted a third-quarter loss, reversing a year-ago profit.
All the while, chaos in the U.S. economy threatened to erode travel demand. Against this dreary backdrop, AirTran hustled to regain its footing.
"We had a tough year, but we managed through it," said Steven Rossum, AirTran's executive vice president of corporate development.
"We've worked hard at managing our liquidity, and it requires a lot of our management time," he said.
The airline has taken giant steps toward improving its liquidity position, which was $402 million at the end of the third quarter, compared with $356 million at the end of the fourth quarter of 2007.
To achieve this feat, AirTran constructed a $215 million financing facility in two stages: a $90 million revolving credit line and $125 million in letters of credit.
AirTran also rescheduled airplane deliveries, sold some aircraft, sold other equipment and leased it back, reworked deals with certain business partners and slashed capacity.
The carrier still has a bond rating of CCC+, which is below junk threshold. But Rossum is optimistic the rating will rise.
"It takes a long time to dig out of the credit rating hole," he said.
(Reporting by Kyle Peterson, editing by Matthew Lewis)