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AirTran awaits ruling on future plans
Underdog airline looking to benefit from industry woes
By Matt Andrejczak, CBS.MarketWatch.com
Last Update: 3:17 PM ET Dec. 8, 2004
SAN FRANCISCO (CBS.MW) -- Five years ago, when most airlines were swimming in profits, AirTran Holdings was awash in losses. With little cash on hand, it had the industry's oldest fleet of planes, a poor reputation and low employee morale.
After a massive makeover, the revived company is now horning in on others' turf, seeking a bridgehead into the Midwestern market.
"Nothing was a quick fix," said Bob Fornaro, AirTran's chief operating officer, in an interview. "We've come a long way."
In the cutthroat airline business, AirTran (AAI: news, chart, profile) is now seen as a scrappy survivor by analysts who predict crushing costs will force some of its bigger competitors into liquidation in the next two to three years.
"We feel pretty good about things," added Fornaro. "We've been able to excel while others have faltered."
AirTran, the Orlando, Fla.-based discount airline, says it's on track to report profits for the third year in a row. Only one other airline can trumpet that success: fellow cut-rate carrier Southwest Airlines (LUV: news, chart, profile).
The coming months will be crucial to AirTran's ambitious plans. It must profitably deploy 19 new aircraft next year and secure rights to assets of bankrupt ATA Airlines that would add a Midwestern hub to its East Coast-based route network -- a move likely to occur early next year.
AirTran must also weather challenges from Delta Air Lines (DAL: news, chart, profile) in Atlanta and AMR's (AMR: news, chart, profile) American Airlines in Dallas.
Wall Street is cautious. The consensus of analyst recommendations on AirTran is a "hold," according to Thomson Financial, with revenue still a concern.
"Overcapacity in the East Coast is causing AirTran's unit revenues to fall faster than the industry," said Glenn Engel, the Goldman Sachs analyst who downgraded the stock on Wednesday to "underperform" from "in line."
Back from the brink
AirTran was headed for financial ruin before Chief Executive Joe Leonard and Fornaro came on board in 1999. The two industry veterans wasted no time in acting to turn the company's fortunes around.
By the end of 2000, they had steered the airline to its first profitable year, refinanced company debt and taken delivery of more cost-efficient aircraft.
With the rest of the industry reeling from the Sept. 11, 2001 attacks and the subsequent slump in air travel, AirTran only got stronger.
It started expanding its flight map, acquiring six gates at Baltimore-Washington International Airport and launching service to West Coast destinations to ease its reliance on seasonally sensitive north to south traffic. Its operating costs also fell to among the lowest in the industry.
Last year, AirTran chalked up a $101 million profit -- its most successful year ever. Investors took notice, sending the stock up 200 percent from $3.90 to $11.90 a share.
"They've done a terrific job of turning the airline around," Benchmark Co. analyst Helane Becker said.
Going nationwide
Riding its recent success, AirTran now wants to carve out more market share as others try to stave off bankruptcy.
The carrier seeks to buy the rights to 14 gates at Chicago's Midway Airport from bankrupt ATA Airlines, a move that will reduce AirTran's dependence on its Atlanta hub and flights to Florida.
The fate of that plan rests with city officials and the judge presiding over ATA's bankruptcy, who set a Dec. 10 deadline for other bidders. Southwest, America West Airlines (AWA: news, chart, profile) and JetBlue Airways (JBLU: news, chart, profile) have all expressed interest.
Losing the bid would be a blow for AirTran, which has sought a foothold in the Midwest ever since Leonard and Fornaro resuscitated the airline.
If the deal closes, "we think we will have a very strong and powerful route network that can compete with anybody," Fornaro said. "We believe this is the best opportunity for us."
He declined to comment on what AirTran would do if the deal falls through, but expressed confidence they would claim the assets.
Analysts agree the deal would diversify the airline's revenue base. Yet some are cautious, predicting the operations won't be profitable until sometime in 2006 or beyond.
UBS analyst Robert Ashcroft said he thinks the market "overestimates" the benefits of the deal. He contends AirTran should operate eight to 10 gates at Midway, not 14. Southwest, the airport's biggest carrier, wants seven of the gates. Ashcroft also claims AirTran "underestimates the pain" that Southwest will put it through.
However, Lehman Brothers analyst Gary Chase maintains the market overestimates the risks.
"We believe AirTran can make that situation work, and we believe growth in Midway is likely superior to growth elsewhere in the company's network," he said.
Competition will come not only from Southwest, which is adding flights from Midway. American Airlines and United Airlines (UALAQ: news, chart, profile), the world's largest airlines, are also huge players in the bustling Chicago market.
"It will be a battle royal," Benchmark's Becker said. She suggests that AirTran should expand into markets ripe for better low-fare opportunities, such as the Caribbean, Mexico and Canada.
Yet AirTran is not one to back down from a fight. Its leadership seems to thrive on challenges, eager to silence critics. AirTran is counting on its low operating-cost model to sustain its momentum.
For the nine months ended Sept. 30, AirTran's costs were lower than two of its bigger competitors, Delta and bankrupt US Airways (UAIRQ: news, chart, profile). AirTran's cost per available seat mile was 8.46 cents. That compares with Delta's 10.93 cents and US Airways' 11.47 cents.
The big-boy carriers can cut overhead all they want, Fornaro said, but boasts that they will never be as nimble as AirTran.
"Our people feel we have the winning formula," he added.
Underdog airline looking to benefit from industry woes
By Matt Andrejczak, CBS.MarketWatch.com
Last Update: 3:17 PM ET Dec. 8, 2004
SAN FRANCISCO (CBS.MW) -- Five years ago, when most airlines were swimming in profits, AirTran Holdings was awash in losses. With little cash on hand, it had the industry's oldest fleet of planes, a poor reputation and low employee morale.
After a massive makeover, the revived company is now horning in on others' turf, seeking a bridgehead into the Midwestern market.
"Nothing was a quick fix," said Bob Fornaro, AirTran's chief operating officer, in an interview. "We've come a long way."
In the cutthroat airline business, AirTran (AAI: news, chart, profile) is now seen as a scrappy survivor by analysts who predict crushing costs will force some of its bigger competitors into liquidation in the next two to three years.
"We feel pretty good about things," added Fornaro. "We've been able to excel while others have faltered."
AirTran, the Orlando, Fla.-based discount airline, says it's on track to report profits for the third year in a row. Only one other airline can trumpet that success: fellow cut-rate carrier Southwest Airlines (LUV: news, chart, profile).
The coming months will be crucial to AirTran's ambitious plans. It must profitably deploy 19 new aircraft next year and secure rights to assets of bankrupt ATA Airlines that would add a Midwestern hub to its East Coast-based route network -- a move likely to occur early next year.
AirTran must also weather challenges from Delta Air Lines (DAL: news, chart, profile) in Atlanta and AMR's (AMR: news, chart, profile) American Airlines in Dallas.
Wall Street is cautious. The consensus of analyst recommendations on AirTran is a "hold," according to Thomson Financial, with revenue still a concern.
"Overcapacity in the East Coast is causing AirTran's unit revenues to fall faster than the industry," said Glenn Engel, the Goldman Sachs analyst who downgraded the stock on Wednesday to "underperform" from "in line."
Back from the brink
AirTran was headed for financial ruin before Chief Executive Joe Leonard and Fornaro came on board in 1999. The two industry veterans wasted no time in acting to turn the company's fortunes around.
By the end of 2000, they had steered the airline to its first profitable year, refinanced company debt and taken delivery of more cost-efficient aircraft.
With the rest of the industry reeling from the Sept. 11, 2001 attacks and the subsequent slump in air travel, AirTran only got stronger.
It started expanding its flight map, acquiring six gates at Baltimore-Washington International Airport and launching service to West Coast destinations to ease its reliance on seasonally sensitive north to south traffic. Its operating costs also fell to among the lowest in the industry.
Last year, AirTran chalked up a $101 million profit -- its most successful year ever. Investors took notice, sending the stock up 200 percent from $3.90 to $11.90 a share.
"They've done a terrific job of turning the airline around," Benchmark Co. analyst Helane Becker said.
Going nationwide
Riding its recent success, AirTran now wants to carve out more market share as others try to stave off bankruptcy.
The carrier seeks to buy the rights to 14 gates at Chicago's Midway Airport from bankrupt ATA Airlines, a move that will reduce AirTran's dependence on its Atlanta hub and flights to Florida.
The fate of that plan rests with city officials and the judge presiding over ATA's bankruptcy, who set a Dec. 10 deadline for other bidders. Southwest, America West Airlines (AWA: news, chart, profile) and JetBlue Airways (JBLU: news, chart, profile) have all expressed interest.
Losing the bid would be a blow for AirTran, which has sought a foothold in the Midwest ever since Leonard and Fornaro resuscitated the airline.
If the deal closes, "we think we will have a very strong and powerful route network that can compete with anybody," Fornaro said. "We believe this is the best opportunity for us."
He declined to comment on what AirTran would do if the deal falls through, but expressed confidence they would claim the assets.
Analysts agree the deal would diversify the airline's revenue base. Yet some are cautious, predicting the operations won't be profitable until sometime in 2006 or beyond.
UBS analyst Robert Ashcroft said he thinks the market "overestimates" the benefits of the deal. He contends AirTran should operate eight to 10 gates at Midway, not 14. Southwest, the airport's biggest carrier, wants seven of the gates. Ashcroft also claims AirTran "underestimates the pain" that Southwest will put it through.
However, Lehman Brothers analyst Gary Chase maintains the market overestimates the risks.
"We believe AirTran can make that situation work, and we believe growth in Midway is likely superior to growth elsewhere in the company's network," he said.
Competition will come not only from Southwest, which is adding flights from Midway. American Airlines and United Airlines (UALAQ: news, chart, profile), the world's largest airlines, are also huge players in the bustling Chicago market.
"It will be a battle royal," Benchmark's Becker said. She suggests that AirTran should expand into markets ripe for better low-fare opportunities, such as the Caribbean, Mexico and Canada.
Yet AirTran is not one to back down from a fight. Its leadership seems to thrive on challenges, eager to silence critics. AirTran is counting on its low operating-cost model to sustain its momentum.
For the nine months ended Sept. 30, AirTran's costs were lower than two of its bigger competitors, Delta and bankrupt US Airways (UAIRQ: news, chart, profile). AirTran's cost per available seat mile was 8.46 cents. That compares with Delta's 10.93 cents and US Airways' 11.47 cents.
The big-boy carriers can cut overhead all they want, Fornaro said, but boasts that they will never be as nimble as AirTran.
"Our people feel we have the winning formula," he added.
