For some carriers media scrutiny at times of misfortune adds fuel to the fire. But not for ValuJet Airlines. The darling of Wall Street and consumers alike seems to have sidestepped a recent spate of bad luck.
Lewis Jordan, president of the Atlanta-based carrier, waves off suggestions that the carrier is experiencing growing pains: 'We've had five consecutive quarters of profits, around a 15 per cent net [margin], and people have figured out that these are the best financial results ever in this industry.'
But for one week in June fortune appeared to abandon ValuJet. On Monday, the company's flight attendants voted to unionise. On Wednesday, its overloaded computer system shut down. Then on Thursday, its inaugural flight from Boston to Atlanta was six hours late. And that evening, a ValuJet DC-9 blew an engine at Atlanta/Hartsfield, causing seven injuries and attracting intense media attention.
While ValuJet management says its growth is under control, the carrier has built a network of 27 cities in less than two years, and has added on average one DC-9 each month. There are now signs of upward pressure on costs.
The cost of DC-9s is soaring, as other start-ups follow ValuJet's lead. In June, the airline paid $18 million for four of them. This unit price is twice the price ValuJet paid for each of its first 10 DC-9s. The day will come, acknowledges ValuJet, when MD-80s will be required. In the meantime, DC-9s guzzle fuel and require expensive maintenance.
Employee expenses are certain to rise as well. ValuJet's 3,000 workers have the US airline industry's lowest wages, providing the backbone for unit costs of 6.5 cents per available seat mile. Though mechanics turned down union representation on 20 June, flight attendants now belong to the Association of Flight Attendants. But Jordan points to Southwest Airlines as having both unions and low costs.
Passengers were not put off by the fire: less than two dozen changed their reservations the day after the accident. And ValuJet achieved a 93 per cent load factor on the Friday of the 4 July weekend.
Perhaps the most rapt observers of ValuJet's progress are investors. The stock has quintupled from its initial offering price in June 1994. This March the stock traded at 20 times earnings. The week after the accident, ValuJet's price-earnings ratio exceeded 30 for the first time and has remained there.
To be trading at 30 times earnings is not necessarily advantageous for an airline. The euphoria can cloud management's judgement, as can the inevitable selloff when earnings growth slows, even slightly, as costs rise.
Source: Airline Business