After years in the wilderness, AirTran has put its ValuJet days firmly behind it. With pride restored and ten straight profitable quarters, the airline is once more making its voice heard in the corridors of power as a champion of new competition
For years, AirTran seemed to spend its time avoiding the public gaze - its only public relations objective being to remind people that it was no longer ValuJet. Now the carrier is once more profitable, proud and eager for the limelight. The airline's renewed confidence shows in the way that chief executive Joe Leonard can take enough time off to become a familiar figure in Washington's corridors of power.
At the US Department of Transportation (DoT) and at the Department of Justice, Leonard has become a major advocate for small airlines and new entrants in their policy battles to gain a more level playing field with the giants.
"Joe has gone from tactical management to strategic issue-and-agenda management," says Stuart Klaskin of Klaskin, Kushner & Company, a Miami consultancy focusing on small airlines. He explains that Leonard's agenda in this campaign is to present AirTran as a symbol for the "plucky little guy" who can make it but who really deserves a little help from the government. "He's out ahead of others who might do so in part because he has a skilled and well-versed team to run the airline on an everyday basis, and because of AirTran's unique advantages," he says.
One core advantage is the financial strength inherited from the public flotation of ValuJet, the low-cost phenomenon from which AirTran sprang. After ValuJet's infamous 1996 crash, losing a McDonnell Douglas DC-9 in the Florida Everglades, those funds kept the carrier alive long enough to get through its purchase of failing AirTran Airways, whose name it adopted.
After that, it used its surplus financing to purchase a new fleet of Boeing 717s, and to weather three years of losses amounting to $278 million, before it posted an operating profit in 1999. A new round of financing last year from Boeing helped AirTran pay down some $230 million in debt, enhancing the company's balance sheet. The record since then has been one of consistent improvement, with the carrier starting this year recording its ninth consecutive quarter of profits.
Solid financial footing
AirTran is now on a solid financial footing - 2000 saw a record net profit of $47 million. And it has won a reputation for safety - it is a regular recipient of Federal Aviation Administration plaudits for maintenance. So Leonard can now seek rather than shun public attention and has done just that.
Leonard spends up to half his time publicly representing AirTran. Much of it is in Washington, lobbying, testifying and otherwise pressuring policymakers and legislators. His main goal in this exercise is airport access; in particular to slot-controlled hubs like Washington's Reagan National Airport.
To prove the validity of his argument, Leonard points to the real-world benefits accruing from AirTran being allowed to serve limited-access markets such as New York LaGuardia, where it gained slots in 1997. By 1999, air travellers from La-Guardia were saving about $175 million annually because of the lower fares AirTran brought to the market. Leonard estimates that gaining Reagan National slots and meshing those routes into its East Coast low-fare network could save consumers $600 million a year.
Legislation to change the slot system has focused on New York's LaGuardia and JFK airports and Chicago O'Hare. At Washington National, the new AIR-21 law created only two dozen new slots, and those have been awarded to specific carriers for specific routes. AirTran did not received any of these slots and would, in any case, need more than the handful doled out by the law. In fact, AirTran wants about 220.
The US Airways/United Airlines merger would have necessitated that those carriers divest themselves of some of their slots at National. Leonard aggressively staked a claim to these while the merger was the airline industry's central issue. Even though the deal is now off, Leonard will remain vigilant in continuing to seek slots at National, whether or not it is through legislation. "I think there is a great deal the Secretary of Transportation can do just through jawboning," he says.
Jawboning is an old tradition of pressuring a business with subtle or not so subtle threats. President John Kennedy did so 40 years ago when he dragged in the chief executives of the steel industry and cajoled and intimidated them into withdrawing a price increase that would have rippled through the auto industry just as the nation was facing an economic slowdown. Similarly, former Transportation Secretary Federico Pena jawboned in the early 1990s when he called in Northwest Airlines and pressured it to relent on undercutting low-fare rival Spirit at Detroit's Metro Airport.
Leonard's point is about the nature of policy. He argues that policy is not just the passage or introduction of a given bill, or even a tiny amendment on a larger piece of legislation which may benefit a given company. Policy is a larger quilt of attitudes and reactions that is shaped by constant presence, pressure and reminders. When critical mass is reached, then developments such as persuading the DoT to use a routine pending proceeding to launch an investigation become a real possibility.
That is why Leonard will go to such forums as town meetings or any congressional hearing where he can make his views known and keep AirTran's name active in the policy debates that form the context to any major DoT decision. For instance, he was the first airline chief to address Washington DC's National Press Club in more than a year.
Kevin Mitchell of the Business Travel Coalition (BTC), an advocate for low-fare airlines, says of Leonard's appearances on and off Capitol Hill: "He has brought a lot of value to the debate and to issues of importance to low-fare carriers."
Leonard's persistence has also got the attention of legislators. At a Senate Commerce Committee hearing earlier this year on American Airline's take-over of TWA, Leonard was the only small-airline representative. He had gained the support of Sen Chuck Schumer, an outspoken and highly respected New York Democrat, in Schumer's long-running fight to change the slot rules. Schumer's support for the carrier, begun when he served in the lower chamber House of Representatives, was key to AirTran winning its LaGuardia slots in 1997.
Some of Leonard's desires would be fulfilled by a bill sponsored by the commerce committee's chairman, South Carolina Democrat Ernest Hollings. This would have the Transportation Department redistribute underused slots at key airports. Hollings calls this bill a "can opener to pry open the lids of the hubs", a sentiment Leonard enjoys.
As important as new legislation may be, constantly focusing public attention on the legal powers government already has is equally vital, Leonard says. AIR-21, for instance, has also ordered airports to come up with plans to encourage competition, saying that they must do so before they can raise departure fees or qualify for certain federal grants.
"The DoT needs to recognise its existing authority under federal law to review predatory and uncompetitive practices," he says. AirTran has urged it to invoke these powers in filing complaints against Delta Air Lines and others.
Leonard has also got plenty of attention from the big airlines - lions he has tackled both through advertisements suggesting they are unfair and through pointed remarks in Congress. Delta is already noticing. It responded in late June by matching AirTran's last-minute/ walk-on fares from Atlanta, which had always been pegged at up to 60% below Delta's prices. And Delta eliminated the hated Saturday-night stay requirement from many of these fares. It also made them available as one-way fares, again a fare type favoured by business travellers.
Provoking a response
This move by the Atlanta-based giant has led UBS Warburg airline analyst Jamie Baker to warn that Delta's move may cramp AirTran. AirTran's "healthy profitability has been in part aided by Delta's reluctance to compete at industry norms", he says. As much as 40% of AirTran's revenue base will be exposed to these Delta discounts, Baker estimates.
AirTran also got a response from US Airways with its most recent new route, its four daily nonstop flights between US Airways hubs Pittsburgh and Philadelphia which began on 5 July. AirTran was emboldened to serve the market after it began flights from Pittsburgh to LaGuardia, Chicago Midway and Atlanta and US Airways did not respond to the challenge aggressively. However, Leon-ard says "we got their attention" when AirTran began its Pittsburgh-Philadelphia service. Specifically, US Airways offered a 14-day advance purchase one-way fare of $49, an exact match of AirTran's offering on the inter-hub route and down from a regular full-fare round-trip price of $468.
Indeed, BTC's Mitchell warns that AirTran faces a time constraint. "Right now they have wriggle room, but if this economic downturn goes on and corporate travel-spending cuts are very deep, then the majors can go directly after AirTran with low fares. In the current economic environment they can send a message to e-business travellers now booking onto AirTran [and away from Delta]," Mitchell says.
But AirTran is a different airline than in years past, with innovations which will provide help on both costs and revenues. On the cost side is the workhorse of its fleet: the Boeing 717. By agreeing, along with the late TWA, to be a launch customer for the model, AirTran won preferential pricing from Boeing to showcase the aircraft. Additionally, the 717's engines are 24% more fuel-efficient than those of the predecessor DC-9 and the aircraft is young enough that it does not yet need major overhaul or heavy repairs. For AirTran's route system, with an average length of 860km on its 338 daily departures to 34 cities, the 717 is ideal for making eight to 10 takeoffs and landings a day.
On the revenue side, the 717 not only enables the carrier to dodge a reputation of having an old fleet, but also brings several new features which will please passengers, including larger overhead bins. Signally, AirTran is also using the 717 to unveil another company first: a business-class product. With 12 business-class seats and 105 coach seats, the 717 can accommodate coach passengers who wish to upgrade for a $25 fee per flight segment. This has helped push AirTran's business-to-leisure mix to 56:44, a reversal of the mix when Leonard took office, notes Raymond James & Associates analyst Jim Parker.
AirTran has 22 717s in service and will have 30 by year end. It has 20 more on firm order through 2003, with options and purchase rights that can be exercised on 48 more through 2005.
Leonard calls the 717 ideal for AirTran's strategy of controlled growth through the development of its Atlanta hub. Although AirTran is managed from a small office building at Orlando International Airport, where it moved in 1998 as part of its image rebuilding, its main operation is at Hartsfield. Of the company's nearly 340 daily flights, more than 300 serve Atlanta. It has no plans to institute a new hub, but might instead add a "focus city" - a mini-hub - possibly choosing Pittsburgh or Philadelphia if it does not gain Washington National access. But that growth depends on the political winds and on Delta's challenge to its growth at Atlanta.
Growth plans continue
The plan though remains the same: "To develop our company from within, add about an airplane a month, retire one every other month or so," Leonard says. As part of this plan, the airline has accelerated the retirement of its four remaining Boeing 737-200s to the third quarter of this year.
In a year in which every US airline has had to think about consolidation, AirTran has focused on internal growth. "We have not had conversations with other folks either about acquiring us or our acquiring someone else," Leonard says. Although TWA unions approached him last year about making a bid for the doomed carrier, it never developed. He occasionally muses about a combination of AirTran and other similarly sized carriers, perhaps in the form of code-sharing or joint marketing, and says, "in the past they were all trying to kill us, so nobody really wanted to associate with us. I think it is now pretty clear that we are going to be around."
Along with staying power, AirTran has had a few growing pains, having to deal with organised labour's clout more than ever before. Its National Pilots Association rejected a tentative agreement in March because it offered too little in the way of pay increases. The union pressed for a contract that would give AirTran's 650 pilots wages comparable to those on a major. In mid-July airline and union reached a deal that union leaders endorsed and which Leonard called "expensive", but which he said will retain AirTran's cost advantage.
The finalisation of this deal is an important step for AirTran in a year when the carrier will have achieved annual capacity growth of 17-19%. Leonard says that by the end of 2002, "we anticipate being a major airline" with annual revenues of $1 billion or more. Between now and then, Leonard will not miss a chance to draw as much attention as possible to his no-longer-shy airline.