Van Parys
Airtran Airways: The Present is Good, The Future is Great
Capstone Final Project For Submission to Professor Linowes
June 23, 2009
Ryan Van Parys MGMT-458-002H Forward Looking Proposals
1 Van Parys
I. Executive Summary
Throughout the past 10 years the Airline Industry has faced innumerable pressures from essentially every force of nature. In an environment where basic costs of operations are always in flux (fuel), demand for services is decreasing, and competition is fierce; it is no wonder why many consider buying an equity position in an Airline to be a “bad investment”. However, there are some bright spots in an industry entrenched with failures. Over the past decade, one of them has been AirTran Airways. An industry leader in being the lowest of the low-cost carriers (LCC’s), AirTran recorded a positive profit from 2002 to 2007 with high hopes for future expansion and dreams of continuous double digit growth.
However, these dreams soon came crashing down when one of those economic variables, Oil Prices, came up and hurt AirTran. Now after suffering through a year which saw net income end at under -$273,000,000, AirTran is trying to regroup by cutting capacity and diversifying its route network. However, what the company has not considered in full is to develop plans for when the recession is finally over. This paper will analyze AirTran’s advantages and challenges; explain new initiatives that the company is putting in place; and finally, explain how diverting service routes from competitive domestic routes to high growth Caribbean routes will be at least in part the answer to AirTran’s long term goals.
The paper will conclude in analyzing one of AirTran’s prime competitors in Southwest Airlines. The paper will discuss some of the historical advantages that Southwest has, but also some of the recent difficulties that the current recession has presented for the company. The paper will provide a comparative analysis between AirTran and Southwest and it will explain how the two companies’ similarities and differences make them an attractive duo for consolidation. Finally, this paper will consider the risks associated with both expanding service into the Caribbean and merging with Southwest and what it means for the potential for either of these options to become a reality in the future.
2 Van Parys
II. Background
The Airtran Airways we know today is a culmination of two originating companies:
Conquest Sun and ValuJet.
Conquest Sun Airways Corporation
The original AirTran Airways, a Boeing 737 operator with service to/from Orlando, was founded by AirTran Corporation, the holding Company of Mesaba Airlines of Minneapolis,
Minnesota. In 1994, AirTran Holdings purchased a start up 737 operator named Conquest Sun and renamed the airline AirTran Airways. 1 Conquest Sun was an airline started by former
Eastern Air Lines employees. The original AirTran Airways moved its headquarters to Orlando,
Florida, and grew to 11 Boeing 737 aircraft serving 24 cities in the East and Midwest providing low-fare travel to Orlando. In 1995, AirTran Airways was spun off by Mesaba and formed its own independent holding company named Airways Corporation. 2
ValuJet
ValuJet was started in 1992 by an executive group from the former Southern Airways and
pilots, mechanics and flight attendants from the defunct Eastern Air Lines. Some of the notable
Airline veterans who founded the company were Robert Priddy, Maurice Gallagher, and
Timothy Flynn. 3 The airline was mainly founded to fill the void at Hartsfield Airport left by the collapse of Eastern Air Lines in 1991. ValuJet started by purchasing and using two former Delta
DC-9 jets. Its first commercial flight occurred between Atlanta and Tampa on October 26, 1993.
By the end of 1993, the company operated six aircraft on 34 daily flights to Fort Lauderdale,
1 AirTran.com. "Company History: Airtran Airways History" AirTran Airways. http://www.airtranairways.com/about-us/history.aspx (accessed April 7, 2009). 2 Ibid., AirTran.com 3 Funding Universe. “Airtran Holdings, Inc.” http://www.fundinguniverse.com/company-histories/AirTran- Holdings-Inc-Company-History.html (accessed April 6, 2009)
3 Van Parys
Jacksonville, Orlando, and Tampa, Florida. 4 During the same year, it also became the first airline
to offer ticketless travel. In the spring of 1994, the airline went public by listing its stock on the
NASDAQ and trading under the ticker symbol VJET. By late 1994, it flew 22 jets between 16
cities, mainly in the Southeast. At the end of 1995, ValuJet was named as the top company in the
Georgia 100 as published by the Atlanta Journal-Constitution, and the airline posted high
margins with a $67 million net profit on revenues of $367 million. 5 By 1996 ValuJet expanded to
a variety of cities, linking Washington, DC to Chicago, New York, Washington DC, and
Montreal.
ValuJet Acquires Airways Corp., then renames the company AirTran Airways
In 1997, ValuJet acquired Airways Corporation in what would be known as the airlines first ever reverse merger. Shortly thereafter, ValuJet decided to change the name of the airline to
Airtran Airways. This was done most likely because the firm's public image never recovered from the crash of ValuJet Flight 592, which killed 110 people. On September 24, 1997 the parent company became AirTran Holdings Inc, and operations under new management began on
September 1, 1998. 6
Management Changes of Airtran
In January 1999, a new management team led by Joe Leonard, a veteran of Eastern Air
Lines, and Bob Fornaro, of US Airways, took the reins at the airline. Leonard improved operating efficiencies while Fornaro built a sustainable route network which increased the presence of the Atlanta hub while adding focus cities in Baltimore/Washington, Philadelphia and
4 Airtran.com, 1. 5 Ibid., 1 6 Matthew L. Wald. “Maintenance Firm's Lawyer Expects Indictments in Valujet Crash” New York Times. 07/02/99. http://www.nytimes.com/1999/07/02/us/maintenance-firm-s-lawyer-expects-indictments-in-valujet- crash.html?n=Top/Reference/Times%20Topics/Subjects/A/Accidents%20and%20Safety (Accessed April 01, 2009)
4 Van Parys
Chicago. 7 On August 15, 2001, Leonard and Fornaro rang the opening bell at the New York
Stock Exchange where the company's stock began trading under the ticker symbol AAI. 8
In November 2007, Bob Fornaro took over the reins of the airline as CEO, as well as
President. Joe Leonard remained Chairman of the Board of Directors until June, 2008. Upon his
retirement, Fornaro then became Chairman, CEO and President. 9
A History of Airtran’s Domestic Expansion Post Merger
On September 24, 1999 AirTran Airways became the first airline to use the new Boeing
717 for domestic flights; it entered these planes into service on October 12, 1999.
In June 2003, AirTran began new services to Los Angeles, Las Vegas, Denver, and San
Francisco by partnering with Ryan International Airlines, making AirTran a coast to coast airline. AirTran now operates the west coast routes with its own Boeing 737 aircraft. In July of
2003, AirTran ordered 100 Boeing 717’s, and shortly thereafter began servicing the markets of
San Francisco and Washington Reagan Airports.
On January 5, 2004 AirTran scrapped its last Douglas DC-9, leaving it with a fleet of over 70 Boeing 717s. Later in 2004, AirTran ended its contract with Ryan International and instated its first Boeing 737. Shortly thereafter, AirTran attempted to make a major expansion into Chicago-Midway but lost its bid for gates to Southwest Airlines.
In 2005 and 2006 AirTran added flights to Tampa, Charlotte and Phoenix which were imposed partially due to employee surveys. In 2007, AirTran announced service to Daytona
Beach, Newburgh, St. Louis, San Diego, Charleston, and Portland, Maine. In 2008, AirTran announced new service to San Antonio, Burlington, Columbus, and Harrisburg.
7 Airtran.com., 1 8 Ibid., 1 9 Ibid., 1
5 Van Parys
Also in 2008, AirTran reaffirmed that it is continuing to attempt to turn Milwaukee’s
General Mitchell International Airport into a hub. AirTran is competing for gates with LCC
Midwest Airlines, which ironically AirTran declined to acquire in 2006.
Today, AirTran is a strong competitor operating the youngest all Boeing fleet in the nation to more than 56 cities coast-to-coast with more than 700 flights per day and over 9,000
Crew Members serving nearly 20 million passengers per year. 10
AirTran’s International Expansion History
AirTran has never been very large in terms of international travel. This is mainly due to
fleet constraints since AirTran’s largest airplane is a Boeing 737-700, which has a maximum
range of 3,365 nautical miles. 11 This limits any opportunities for Trans-Atlantic, Pacific, African, and Middle Eastern Flights; but it does still have the range to service Northern South America,
Mexico, the Caribbean, and much of Canada. AirTran in the past chose not to expand internationally mainly due to its continued success domestically and fears over issues such as currency risk and low load factors. However, it is true that AirTran is beginning to consider expanding ever so slightly into the Caribbean.12
In 2005, AirTran launched its first service to Grand Bahama Island in the Caribbean, followed shortly by an announcement that it would expand into Cancun in December of 2005.
Unfortunately, the devastation to Cancun by Hurricane Wilma caused AirTran to retract its fare offering. In September of 2007, AirTran stopped flying to Grand Bahama despite being profitable. AirTran cited a lost subsidy and an interest in more profitable routes as a reason for
10 Ibid., 1 11 Airtran Airplane Information. “Boeing 737 Aircraft Specifications” AirTran Airways. http://www.airtran.com/aircraft/boeing_737_aircraft_specifications.aspx (Accessed April 10, 2009) 12 Brendan Sobie. “US carriers look to expand Caribbean operations” Flight Global. http://www.flightglobal.com/articles/2008/09/24/316241/us-carriers-look-to-expand-caribbean-operations.html
6 Van Parys leaving. 13 In March of 2008, AirTran launched service to San Juan, Puerto Rico. While not
technically an international destination, the route serves the Caribbean and has been immensely
successful. In February of 2009, AirTran launched its first flight to Cancun, living up to a
previous promise 4 years earlier. 14
III. Advantages and Challenges
Advantages
Lowest cost in the industry
Since its inception, AirTran’s business model has been primarily focused on offering the lowest price for all of its routes. In order to be profitable under this model, AirTran has continued to live up to its goal of having the lowest non-fuel costs out of any airline. For example, in 2008 AirTran had a non-fuel cost per available seat mile of 6 cents. This presents a significant advantage to any airline, especially a low cost carrier like AirTran. (Appendix A)
Extremely high in quality
Despite the fact that AirTran relies heavily on slashing prices and costs, the Airline has remarkably remained the best airline in the US in terms of quality out of all the major airlines over the last two years. The Airline Quality Ratings are published every year and are measured by DOT reports for on time boardings, denied boardings, mishandled baggage, and other customer complaints. (Appendix B)
Youngest fleet with immense fuel efficiency
AirTran also has the youngest fleet in the nation, saving the company considerable
money in fuel expenses and providing customers with a more enjoyable flight experience. For
13 Barbara Walken. “GB loses services of AirTran” The Freeport News. May 31, 2007. Accessed via Lexis-Nexis. 14 Reuters. “AirTran Airways Launches New Service to Cancun, Mexico” May 7, 2009. < http://www.reuters.com/article/pressRelease/idUS48708+07-Mar-2009+PRN20090307>
7 Van Parys example, the Boeing 717 and Boeing 737 use 25% less fuel than comparable airplanes that many legacy carriers still use – the DC-9 and the MD-88.15
Great Revenue in the fourth quarter
Despite immense traffic challenges in 2008, AirTran posted its highest 4 th quarter
company Revenue per Available Seat Mile (RASM) and its highest 4 th quarter yield increase in
over 2 years. 16 If AirTran did not have severe problems with fuel hedges during the 4 th quarter, it
would have been profitable.
Challenges
Hedging Catastrophe
In 2006 and 2007 AirTran launched initiatives to attempt to seek double digit growth for the airline over the following 5 years. This initiative included rapidly expanding service and the purchasing of a number of new aircraft. Unfortunately for AirTran, their growth was immediately halted by the onslaught of the 2008 oil bubble and subsequent volatility in oil prices. Since AirTran’s fuel costs are the highest as a percentage of total costs in the industry, the
Airline decided to hedge 80% of its oil portfolio in 2008. 17 At the time, the contracts were seen
as necessary as fuel prices went from under $100 a barrel to well over $150 a barrel, making
operating costs outrageously high.18 To remain competitive, AirTran wanted to eliminate its price increase risk, so they locked in a series of oil futures contracts in the form of collars that set an upward bound for the amount of money they would have to pay. This strategy worked well for the first 3 quarters of 2008 as Airtran saved $60 million on fuel. Unfortunately, AirTran did
15 Gerlaga, Kurtzman, and Tatman. “Boeing 717-200” Boeing.com. < http://www.aoe.vt.edu/~mason/Mason_f/B717PresS07.pdf > 16 Airtran 10-K for 2008. Accessed via AirTran Investor Relations.
8 Van Parys not account for downside risk and when fuel prices dropped near $40 a barrel, AirTran lost a significant amount of money. 19
To mitigate risk, AirTran unwound many of the contracts in the fourth quarter, saving the company $14 million. However, the losses were still quite large. For the fourth quarter of 2008,
AirTran reported a non-operating loss of $147.7 million on fuel hedges. 20
Loss of Traffic
In a recessionary environment, all airlines are currently struggling to maintain airline traffic. The chart below gives a better picture of just how bad air volume has been since 2008 and 2006:
Domestic Traffic
∆ 08 - ∆ 06 -
Mar-06 Mar-07 Mar-08 Mar-09 09 09
All Airlines 50,999,432 51,803,605 51,969,727 47,292,452 -9.0% -7.3%
American 8,054,001 7,860,017 7,398,383 6,617,058 -10.6% -17.8%
Delta(exc. NW acq.) 7,524,851 7,286,579 7,133,764 6,341,916 -11.1% -15.7%
US Airways 4,411,731 4,492,224 4,333,238 3,861,468 -10.9% -12.5%
AirTran 1,207,500 1,475,860 1,709,125 1,586,579 -7.2% 31.4%
Source: Bureau of Transportation Statistics, Form 41 As can be seen in the graphic, AirTran and its east coast competitors have lost at least 7% in traffic since last year. However, this poses a unique problem for AirTran since it was the only airline out of the 4 to experience significant domestic growth since 2006. Such a rapid turnaround from high traffic to low traffic has presented AirTran with some serious capacity problems.
Load Factor
19 Ibid., 20 Ibid., see notes on oil hedging.
9 Van Parys
One comparative airline factor that AirTran is relatively weak in is load factor. Load factor is the proportion of an airplane's seats that are sold and actually filled at departure. It is a good measure of demand when comparing the number to both the company’s break-even point load factor and the rest of the industry. As of December 2008, AirTran’s load factor was only
78.9% which ranked 18 th amongst US Airlines. 21 This is an issue that can continually be improved upon by better forecasting and a more strategic analysis of new routes.
IV. A note on AirTran’s marketing
Perhaps one of AirTran’s biggest challenges is developing effective marketing initiatives.
AirTran will often run sales directed at internet users, but many users have to actually go to the
website to see the sales. Additionally, AirTran has limited television exposure which hurts the
airline in comparison with competitors like Southwest. Recently, AirTran has been looking into
expanding its A+ rewards service by allowing travelers to apply Frontier Airlines flights to A+
rewards credit. 22 This has proven successful in increasing AirTran’s business traveler exposure and should prove to be competitive with Southwest’s elite perks benefit package. Finally,
AirTran markets much of their services to young people and leisure travelers. “AirTran U” is a standby program that gives young people the chance to fly standby for bargain prices. It also offers many vacation packages to newly instated locations such as Branson, Missouri to try and increase traffic.
V. AirTran adjusting for life in a recession
Diversification
21 Bureau of Transportation Statistics. Form 41. Access via < http://www.transtats.bts.gov/databases.asp?Mode_ID=1&Mode_Desc=Aviation&Subject_ID2=0 > (Accessed 04/14/09) 22 Tim Winship. “AirTran challenges Southwest on Elite Perks” SmarterTravel.com. April 28, 2009. < http://www.smartertravel.com/blogs/up-front-with-tim-winship/airtran-challenges-southwest-on-elite- perks.html?id=2890356>
10 Van Parys
With AirTran’s fuel hedge debacle combined with decreasing traffic demand, AirTran has implemented a number of measures to survive and return to profitability. One strategy that
AirTran has implemented has been to diversify. This not only includes diversifying routes out of the Atlanta area, but also developing a series of new “mini-hubs”. This can be seen by looking at
AirTran’s reduction in Atlanta operational share. In 2001, AirTran flew 90% of flights out of
Atlanta, today they fly only 65% and have increased their presence in Baltimore(14% of the market) and Orlando(12% Market Share). (Appendix C) AirTran’s most recent initiative into
Milwaukee looks to take advantage of depleted capacity left by the consolidation of the
Delta/Northwest merger.
Capacity Cuts
As a response to a decrease in demand, AirTran has pulled back significantly on capacity.
AirTran has deferred or sold 47 aircraft that they initially scheduled to receive during 2008-2012 and proposed to cut capacity by 4% in 2009. 23 It looks, however, that AirTran may be going one
step further. In March, AirTran cut capacity by 8.4% which exceeded the loss in demand of
7.2%. As a result, AirTran improved on its load factor as it increased to an all time high of
80.7%. 24 AirTran claims that it will further cut capacity and invest in diversification in a weak demand environment such as this one.
Ancillary Revenue Growth
In a tough revenue environment, AirTran has turned to working towards increasing
Ancillary Revenue Growth. This includes charging for checked bags, more leg room, and
23 JP Morgan Aviation Conference Call. 03/10/09. < http://investor.airtran.com/phoenix.zhtml?c=64267&p=irol- presentations> 24 Rtt News. “AirTran Airways Traffic Down 7.2%, Load Factor Up – Update” 4/2/09. < http://www.rttnews.com/ArticleView.aspx?Id=903053&Category=Breaking%20News>
11 Van Parys making a reservation over the phone amongst others. In 2008, AirTran saw growth of 38% in these fees and is expected the rates to continue to be over 30% in 2009. (Appendix D)
Getting hedging in order
In response to its hedging problems, AirTran has developed a new hedging strategy in
2009. AirTran has reduced its hedging to 18% of total fuel deliveries, but will likely increase due to current favorable commodity prices. Like 2008, it is hedging with collar options, which will protect AirTran if oil prices rise above $60 a barrel. However, this time AirTran invested in options that provide them with a floor at $30, meaning mark to market would only hurt AirTran if oil fell below $30 a barrel, which is unlikely. (Appendix E)
Recent Developments
On April 22 nd , 2009, AirTran reported its earnings for fiscal year 2009. Unlike virtually every competitor who lost money during the 1 st quarter of 2009, AirTran posted numbers solidly
in the black. AirTran reported it swung to a first-quarter profit of $28.7 million, or 21 cents a
share, from a year-earlier loss of $35.4 million, or 38 cents a share. Operating revenue slipped
9.1% to $542 million and Revenue passenger miles slid 6%. However, AirTran cut back on
capacity by 7.2% and its load factor increased by 1 percentage point despite the tough economic
conditions. The downside to AirTran’s earnings report was Passenger revenue per available seat
mile, which is considered the best basic measure of revenue for airlines. This metric declined
7.6%, which is not surprising considering the very tough revenue environment. Most of
AirTran’s profits were realized through a heavy decrease in capacity and a decline in fuel prices
by 47% to $1.59. 25
VI. Airline Market Environment
Domestic
25 AirTran 2009 Q1. April 22, 2009. Accessed via AirTran Investor Relations.
12 Van Parys
Since 2006, the domestic airline market has been steadily contracting. As shown in graphical view previously in this paper, domestic passenger traffic has decreased 7.3% since
2006 and 9% since March 2009. In 2008, Profit and Loss results for all airlines domestically were even worse, with 3Q year-over-year net income losses being reported at 14.67 billion overall. Moreover, Passenger Revenue Yields have been flat or declining since the year 2000, when cents per passenger reached a high of 14.22. In 2007, the yield was 12.55 cents per passenger and that was during a good year for air travel. Much of the halt in profitability for airlines domestically has been due to a rapid increase in competition from low cost carriers combined with a significant decrease in air traffic. (Appendix F)
Latin America
Since the Domestic market is not very lucrative for most carriers, many have turned to growing international routes such as the Latin America region, which includes the Caribbean.
Since 2005, Latin American Passenger Miles to and from the US have increased by 19.7% whereas Domestic Passenger Miles decreased by .1%. In addition, while US load factor is still higher, Latin American Load Factor has increased at an 8% clip over the past 4 years in comparison with a 3.3% rate seen in the domestic sector. In terms of profitability, Latin
American operations have offered a significant advantage in terms of margins over domestic travel, with profit margins hovering around 10 percentage points higher in Latin America compared to the domestic sector since 2005. (Appendix G)
Recently, however, there have been signs that Latin American travel may not be so lucrative.
In March 2009, American and Delta reported seeing traffic decrease by 14 and 17% respectively year-over-year since March 2008. This could indicate that the market for Latin American travel is softening later than the domestic market, since people usually by tickets for international travel
13 Van Parys much further in advance. However, it could also indicate increased competition as US Airways numbers for Latin American traffic increased year-over-year in March 2009 by 7.2%. (Appendix
H)
VII. Recommendations
Continue to cut costs and expand into underutilized markets during the recession
As long as the recession continues, it is absolutely vital for AirTran to find ways to save as much cash as possible. One easy way of doing this is simply cutting more capacity and selling off more of their fleet. With the remaining fleet that they have, it is best that they push to utilize underserved markets in the upper Midwest. They are already doing this with expansion into airports like Akron and Dayton (two of their more profitable routes), and should continue to do so as long as Delta and Northwest continue to consolidate operations and lessen their influence in the region.
Initiative to move into the Caribbean by 2011
A move into the Caribbean is a risky measure. However, with dwindling profits on many cross country domestic routes, Caribbean options offer higher profit margins for roughly the same distance as Trans-Continental flights. Additionally, while domestic markets are contracting, travel to the Caribbean and Latin America has grown until recently. While now may not be the best time to conduct this strategy during 2009 due to the recession, capacity and therefore opportunity should arrive for a Caribbean expansion by the spring of 2010 or 2011.
Step 1: Divert old, unprofitable routes instead of increasing capacity
14 Van Parys
With $1 billion in debt outstanding as of February, 2009, AirTran is currently in no position financially to purchase new airplanes or expand capacity. Therefore, AirTran should look to eliminate certain routes in order to expand service into higher margin routes in the
Caribbean.
After conducting a detailed analysis using three variables, four routes have been identified for removal due to a combination of a relatively low load factor, insufficient profitability, and a lack of a profitable connection to AirTran’s hub in Atlanta. For a more detailed analysis of this route analysis, please check (Appendix I).
Hub Reduction 1: Moline/Quad City Airport
The first service airport that is being proposed to be reduced is Moline/Quad Cities in
Illinois. While this airport originally went along with AirTran’s strategy of moving towards smaller airports, flights in and out of Moline are simply not profitable. Of the three metrics used to rank each hub, Moline is consistently mediocre to bad in every category. Being the 8 th worst in terms of Airport Revenue, 13 th worst in terms of Profitable flights from the Atlanta hub, and 13 th
worst in Load Factor. It recorded a -29.97% profit margin in the 3 rd quarter of 2009, lost
approximately $8.85 per ticket sold to/from Atlanta and only filled 74.06% of its seats on its
routes. Also, the fact that it is only 2 hours from another AirTran route, Bloomington, makes this
route seem rather redundant.
Hub Reduction 2: Phoenix
The second service airport that should be reduced is Phoenix. The one positive about the
Phoenix airport is that its load factor for AirTran flights is at 78.5%. However, when looking at
the numbers closer it is noted that this load factor is very low compared to other AirTran west
coast locations. The real issues with Phoenix are observed when looking at its profitability. The
15 Van Parys airport lost over $17 per person per flight to Atlanta last year and ranks as the worst airport in terms of profit margin, turning in an astounding -58.09% margin. The 737’s flying into Phoenix would be much more profitable on international routes. However, the route should not be completely cancelled as it would be better to make sure AirTran customers take kindly to this proposal first.
Hub Reduction 3: Washington-Dulles
Washington-Dulles is a redundant hub for AirTran. It is located across town from DCA
and just southwest of BWI. Out of the three airports, Dulles is by far the least profitable. While
flights from Atlanta do well at Dulles, its operating margin was at -30.12% for the 3 rd quarter in
2009 and it is only filling a low 71.42% of its flights. Therefore, the redundancy of the hub
makes it worthwhile to divert some of the traffic to more profitable activity.
Hub Reduction 4: San Diego
Finally, San Diego is the 4 th hub that should be reduced. While AirTran is already reducing some of its fleet here, more may be necessary due to its redundancy with the much more successful LAX. San Diego’s operating margin was at -44.91% and it lost over $15.50 per passenger to its main hub in Atlanta.
Step 2: Invest in strategic Caribbean routes from hub in Atlanta
In choosing locations to invest in, attractive underserved markets that have the most potential for growth are attractive for airline expansion. The current locales of Cancun and San
Juan are attractive because of high load factors and more revenue per available seat mile. We can interpret based on the mileage data provided by Form 41 for Cancun and San Juan, what a reasonable CASM (Cost per Available Seat Mile) and RASM(Revenue Per Available Seat Mile) will be for each location. However, before we can look at specifics, it is best to identify areas
16 Van Parys that have strong Macroeconomic variables that fit the needs of an airline. After diligently doing research, it seems that the strongest opportunities for growth are Freeport, Belize City, and Santo
Domingo.
Freeport
AirTran has done business in Freeport before and for many it is still unclear why they left. Some say that it was due to Delta rerouting some of their flights to Grand Bahama in order to compete with AirTran. 26 Regardless, the only competition to the island today from Atlanta is a flight once every 2 weeks priced at around 400 dollars. 27 Even Orlando, which is one of
America’s largest tourist destinations, only has service to Grand Bahama via connection through
Spirit Airlines for nearly 300 dollars. While it is true that the GDP of the Bahamas is slowing during the recession, the country still boasts the highest per capita GDP in the greater Caribbean and provides a relatively inexpensive tourist destination for visitors. Every year, 5,000,000 tourists visit the Bahamas excluding Cruises, leaving a very large market for AirTran. 28 By being only 207 miles away from Orlando, AirTran could offer a seasonal flight from December through July to Grand Bahama four times a week at 60% capacity for $110 dollars round trip and still be profitable.
Belize City
Located just south of Mexico, Belize is an interesting country that grew over 2.8% in
2008 – representing one of the larger growth rates in the Caribbean. 29 With around 300,000
tourists per year excluding cruises, Belize City offers another interesting seasonal destination.
26 Freeport News., 2007. 27 Kayak.com. Assessed by factoring in airline prices for the months of May, June, and July 28 Washington Times Global. “Vancouver Airport Services provides hands-on management of Nassau’s Airport” < http://www.washingtontimesglobal.com/content/story/bahamas/415/vancouver-airport-services-provides-hands- management-nassau%E2%80%99s-airport> 29 Prime Minister of Belize. “Belize: Tourist Overnight Arrivals Down 3.6% end of November 2008, Compared to Previous Year” January 27, 2009. < http://www.caribbeanpressreleases.com/articles/4510/1/Belize-Tourist- Overnight-Arrivals-Down-36-end-of-November-2008-Compared-to-Previous-Year/Page1.html>
17 Van Parys
Belize City has become especially popular over the past few years due to its heavy focus on Eco-
Tourism and prime location to intriguing Mayan ruins. In terms of costs, the Atlanta to Belize
City option makes a lot of sense. Currently there are no direct options, only connections through
US Airways or Continental at other domestic airports. By offering a flight four times a week during tourist season, AirTran could price the flight at $260 round trip and make a profit even at only 65 percent capacity. Considering the most inexpensive option out of Atlanta now is over
$370 round trip, AirTran could connect customers from around the southeast to Belize and still make a profit.
Santo Domingo
With 3,447,730 tourists visiting the Dominican Republic annually, Santo Domingo is a prime location for visitors to travel every year. The Dominican Republic received $4.2 billion in tourist revenue last year and plans to undergo a major investment initiative to clean up the
Dominican Republic for the sake of tourism. 30 While not the first option for AirTran as the market flying out of Orlando is already very competitive, flights out of Atlanta could present an opportunity. At 1,389 miles in distance from Atlanta, the flight is basically the same from a cost perspective as AirTran’s current flight to San Juan. The flight would have to go for around $290 round trip to be profitable which is still substantially cheaper than Delta at $340 round trip(who currently holds a monopoly on the Atlanta market). If AirTran were to expand into the market, it would be advised that Santo Domingo be the last choice.
VIII. Risks
As with any strategy, a number of risks surface when a company decides to expand internationally. There include but are not limited to:
30 Scott Medina. “Dominican Republic Real Estate Economic Outlook for Investors” < http://www.nuwireinvestor.com/opportunities/dominican-republic-real-estate-economic-outlook-for-investors- 52635.aspx>
18 Van Parys
1) Currency Risk
2) Tax Risk
3) Safety Risk
4) Risk of Instability
There are also many risks associated with adapting any new business model. These risks are associated with the happiness of your employees, the happiness of customers cut out of diverted routes, and the ability to please new customers in new locations. In addition to route changes,
AirTran will have to invest significantly in a new marketing campaign for these new destinations, as well as service personnel who will be able to adapt to the demands of foreign customers.
Finally there is certainly a high degree of economic risk. Since the Caribbean markets
proposed in this memo are so heavily reliant on tourism, the economy must get better for this
initiative to work. That is why the proposal is pushed back to 2011 and that is why it will take a
great deal of diligence for analysts at AirTran to measure circumstances as they develop
throughout the Caribbean.
19 Van Parys
IX. ADDENDUM: A Forward Looking Proposal: AirTran Merges with Southwest
Airlines
Some Background on Southwest Airlines
Southwest Airlines is not only the nation’s largest low cost airline, but also the largest airline by number of passengers carried domestically per year. Southwest Airlines also ranks third in fleet size with 539 operating Boeing 737’s and more than 3,300 daily departures.
Southwest Airlines started in Texas operating 3 Boeing 737’s in 1971 and quickly grew in size.
In 2008, Southwest declared its 36 th straight year of profitability and it currently flies to 65 cities
in 33 states. Southwest’s main hubs are out of Las Vegas and Chicago-Midway Airport.31
Recent Southwest News
Despite Southwest Airlines historic success, the recession of 2008 and 2009 is threatening to end Southwest’s profitability. For the first quarter of 2009 ending on April 20,
2009, Southwest reported a net loss of $91 million. Southwest also saw a loss of 2.7% in passenger revenue yield per additional seat mile. The company also saw a decrease by 6.8% in year-over-year operating revenues which also highlights weakening demand. 32
Southwest Airlines current financial difficulties during the recession have not diminished
the company’s outlook on market share or long term growth. For instance, while virtually every
other airline (including AirTran) are looking to make money on ancillary revenues such as bag
fees to stay afloat, Southwest refuses to implement these fees and in consequence believes it is
beneficial. According to Southwest Airlines President Gary Kelly, "We believe that we're having
a meaningful impact and creating awareness among customers that we are virtually alone in not
31 Southwest Airlines. “Southwest Airlines Fact Sheet” < http://www.southwest.com/about_swa/press/factsheet.html> 32 Southwest Airlines 10Q For First Quarter 2009. Access via < www. southwest .com/ investor _relations>
20 Van Parys charging the bag fee, and that is translating to higher demand for Southwest Airlines.” 33 This
sense of loyalty to customer appreciation has made Southwest Airlines the model for discount
airfare and customer service for years.
Southwest Airlines’ expansion
Despite the recession, Southwest Airlines remains committed to expanding service.
However, like AirTran, it is doing so without necessarily adding capacity or purchasing new
planes. In Southwest Airlines latest 10-Q, the airline stated that it will operate the same fleet in
2009 as in 2008 and will expand to new locations by rerouting unproductive routes. In fact,
Southwest has plans to add 3 new markets in 2009, including Minneapolis-St. Paul (in March
2009), New York’s LaGuardia airport (in June 2009), and Boston’s Logan International airport
(in August 2009). 34 These flights give Southwest more of an east coast presence, but the results
are questionable given the considerable pressure from the expansion of service by both AirTran
and JetBlue.
In addition to organic expansion, Southwest also plans to join into more codeshares than
before. These include forming alliances with Canadian carrier WestJet and Mexican carrier
Volaris, both in hope of using a broader network in order to offer customers more attractive
options. 35 Southwest’s strategy continues to be one of pleasing the customer not only through
superb service, but through diversified routes to give customers even more options.
The Downside: Weaknesses of Southwest Airlines
Profitability
33 Terry Maxon. The Dallas Morning News. “Southwest Airlines sees no benefit in bag fees” April 27, 2009
21 Van Parys
As discussed in the “recent news” section for Southwest Airlines, profitability is considered a weakness for the first time in the Company’s recent history. In addition to the $91 million lost in the first quarter of 2009, Southwest has also seen its bond rating downgraded to
BBB+ by Standard & Poors. This downgrade reportedly is due to the fact that the company not only posted negative earnings for 2009, but projected negative earnings again in the second quarter of 2009. Furthermore, the company has added a significant amount of debt since late
2008 (over $700 million), which has added to its interest expense. As a result, the company's
2009 earnings and cash flow has come in well below analysts’ expectation and its debt level above previous expectations. The expected increase in the cost of debt for Southwest, combined for a need to take on more liabilities to cover costs during a recession will pose a serious profitability threat to Southwest Airlines. 36
Fuel Hedging
Similar to AirTran in 2008, Southwest has experienced significant problems with fuel hedging to date in 2009. The Company had a worse performance from its fuel hedging program in first quarter 2009 versus the same prior year period. As a result of these positions, and the significant decrease in physical prices for crude oil, jet fuel, and related products compared to first quarter 2008, Southwest had hedging losses reflected in Fuel and oil expense totaling $146 million, while first quarter 2008 hedging gains recorded in Fuel and oil expense were $291 million. 37 In addition, the company also retains over $600 million dollars in unwound fuel
contract hedge liabilities set to expire anywhere from 2009 to 2013. 38 While some of these
options have been restructured to be straight “call options”, in which Southwest is not forced to
36 Ted Reed, “Southwest Put on S&P CreditWatch Negative” TheStreet.com 04/16/09 < http://www.thestreet.com/story/10487301/1/southwest-put-on-sp-creditwatch-negative.html?cm_ven=GOOGLEN> 37 Southwest 10Q first quarter 2009. See Notes on Fuel Hedging. 38 Ibid., See Notes on Fuel Hedging
22 Van Parys purchase the underlying asset; many are still in the form of “collars”, which requires Southwest
Airlines to purchase the underlying asset regardless of the price.
Despite lessons learned from risky fuel hedging, Southwest Airlines has already decided to dive back into the market, increasing its oil hedge portfolio for the year to 29% as of April
2009. 39 However, Southwest Airlines has promised to be more risk averse with its hedging
strategy and claims that it is necessary for survival in the Airline industry.
Questionable Strategic Decisions
After suffering losses for the last 3 quarters, while rivals such as AirTran have seen gains as recently as the first quarter, one has to wonder why Southwest is losing money from a strategic perspective. The answer could include many things, but there are a few important factors which will be discussed.
Not enough cuts in capacity
One interesting observation to note about Southwest Airlines’ recent struggles is there refusal to cut capacity aggressively. For example, Southwest has only cut capacity 4% year over year whereas competitors such as AirTran and US Airways have cut capacity at clips over 7%.
This has also been apparent in the load factor differentials between the airlines. While Southwest
Airlines’ load factor increased by .1% in the 1 st quarter of 2009, AirTran’s load factor increased by over a percentage point. 40
Additionally, there have been questions regarding Southwest Airlines fleet size and expansion policy. While Southwest decided to retire 15 aircraft in 2009, the company has taken deliveries of 13 aircraft, whereas AirTran postponed most of its deliveries. While for some this expansion may look beneficial in the long run; one has to question if it is worth the cost of a
39 Baskin and Ciu. “Airlines Return Gingerly to Oil Hedging” Wall-Street Journal < http://online.wsj.com/article/SB124109686617373069.html> 40 Dallas Morning News, 2009.
23 Van Parys lower bond rating (more expensive debt), potential layoffs (Southwest is already offering voluntary severance packages), and expansion of service during a time of saturated routes and decreased passenger volume. Additionally, Southwest Airlines current cash constraints as a result of this strategy may inhibit potential initiatives in the future, such as a merger or more aggressive expansion.
No focus on Ancillary revenues
It is true that Southwest Airlines values customer service first which is why the company is the last airline holding out on charging bag fees and other miscellaneous expenses. In a very tough environment, many of Southwest’s competitors are earning substantial revenues through a la carte fees. For instance in 2009, United Airlines predicts it will make over $1.1 billion in
Ancillary revenues with US Airways reporting that it will make over $500 million. What is even tougher to reconcile is that every other discount airline is also charging bag fees. CEO George
Kelly has stated that by not charging bag fees the airline has seen an increase in market share.
This seems a little far fetched as Southwest’s load factor was only up .1% in the 1 st quarter of
2009 despite cutting capacity. The number is very low compared to rival AirTran’s 1% increase
despite charging numerous fees.
While it is understandable that Southwest Airlines should stick to its marketing image of
being a customer friendly flier, the company could compromise by adopting JetBlue’s model of
only charging for the second bag of each customer. That way it would maintain its competitive
advantage over most discount/legacy carriers in terms of fee structure, but also alleviate some of
Southwest’s growing cash concerns.
24 Van Parys
The Airline Industry Consolidation
As the Airline industry becomes more competitive in virtually every market, Airlines have been interested in looking for various mechanisms to cut costs. The standard cost cutting is apparent with every airline, such as decreases in capacity, more efficient fuel hedging, ancillary revenue hikes, and elimination of routes. However, with more and more airlines expanding into already saturated markets, more drastic measures have been taken to ensure survivability.
One of the strategies airlines have been turning to as of late is consolidation.
Consolidation benefits companies by expanding route service, eliminating redundant routes between the two merged airlines, a lowering of needed complement to meet route demands, retiring of old aircraft, the ability to charge higher prices, and an increase in market share. For instance, Delta and Northwest recently merged and are projected to save $2 billion from a combined revenue stream of $35 billion in revenue reductions alone. 41 While the merger has not
exactly gone according to plans, the reason is not because Delta isn’t cutting costs. Delta has lost
money because of bad fuel hedging and a decline in revenues. In fact, per passenger, Delta is
actually saving money due to route consolidation created by the Delta-Northwest merger.
Operational efficiencies are one major result from mergers. According to the Government
Accountability Office, cost savings can be seen from the elimination of duplicative service,
labor, operational efficiencies from the integration of computer systems, and the reduction in
carrier expense similar airline fleets. Other cost savings may stem from facility consolidation,
procurement savings, and working capital and balance sheet restructuring, such as renegotiating
aircraft leases. For instance, the America West and US Airways merger produced $750 million in
41 Carey and Prada. “Delta Air Lines, Northwest Complete Merger”, October 20, 2008. The Wal-Street Journal. < http://online.wsj.com/article/SB122530765818781163.html>
25 Van Parys cost savings through the integration of information technology, combined overhead operations, and facilities closings. 42
Second, the savings accorded through increased market share is very apparent. While individual prices are unlikely to be raised for flights, numerous studies show that when airlines combine forces to dominate certain airports, it can lead to fare premiums due to numerous competitive barriers to entry at those airports. 43
Finally, the creation of an expanded route network is very beneficial to Airlines. Results from a recent Business Traveler Coalition (BTC) survey indicate that about 53 percent of the respondents were likely to choose a particular airline based upon the extent of its route network. 44 An airline may utilize a merger or acquisition to enhance its networks and gain complementary routes, giving the combined airline a stronger platform from which to compete in highly profitable markets.
Opportunity and proposal of merger
With these potential benefits in mind, it would serve Southwest Airlines and AirTran well to at least consider a merger once the economic outlook improves. AirTran and Southwest
Airlines are similar in enough ways to make the merger logistically feasible, but different in key areas that make the merger worthwhile.
Similarities
As stated earlier in this paper, AirTran and Southwest Airlines have by far the lowest non-fuel costs out of any major airline in the industry. AirTran and Southwest both have a non- fuel cost per available seat mile of around $.06. The two airlines also are known for their quality.
42 United States Government Accountability Office(GAO). “AIRLINE INDUSTRY Potential Mergers and Acquisitions Driven by Financial and Competitive Pressures” July 2008. < http://www.gao.gov/new.items/d08845.pdf > pg. 8 43 Ibid., 13 44 Ibid., 8
26 Van Parys
In 2007 and in 2008, AirTran and Southwest ranked in the top 3 in Wichita State’s annual airline quality rating. These two factors show that both airlines operate extremely efficiently, without losing bags or delayed flights. AirTran and Southwest Airlines also price their flights comparably. Southwest and AirTran both offer weekly sales to a number of destinations that allow customers to get bargain basement flight prices on non-peak hours. They also offer the options to upgrade to a higher class ticket. For AirTran, this allows passengers to purchase seats with more leg room or purchase a refundable ticket. For Southwest, it allows passengers to board first or purchase a refundable ticket if they wish. Both options are very inexpensive ways to charge customers more money.
In addition to operational efficiencies, Southwest and AirTran also fly almost identical fleets. Southwest features efficient Boeing 737’s, whereas AirTran’s fleet is divided between efficient Boeing 737’s and Boeing 717’s. The similarities in fleet type would make implementing and streamlining operations easy. Additionally, with Southwest’s recent interest in expanding eastern Seaboard routes, the 717’s could be a valuable asset as they are smaller and more fuel efficient than the 737. It also is suited for companies and airports with quick turnaround times, which is something that Southwest emphasizes regularly.
Finally, AirTran and Southwest also are very similar in terms of customer target market.
Since both companies are low cost carriers, they generally appeal more to people who travel for vacation, leisure, or visiting family. This is best emphasized with Southwest’s “want to get away?” commercials and AirTran’s promotion of services such as “AirTran U”. With similar customers in mind, the companies could easily integrate marketing initiatives.
27 Van Parys
Differences
While Southwest and AirTran are similar in many important ways, they are also different with regards to some key factors.
First, AirTran and Southwest are regionally different. Many of their routes do not overlap with one another. For instance, Southwest dominates the western portion of the US with its base in Las Vegas, while AirTran dominates the southeast for a low cost carrier with its base in
Atlanta. AirTran has a very limited and unprofitable presence in the southwest(due in large part to Southwest Airlines), and Southwest Airlines has not even entered the lucrative Atlanta market due to competitive pressures from AirTran. Meanwhile, both companies are looking to expand into areas where the other is strong. AirTran is looking to expand its Midwest presence by taking advantage of gate openings in Milwaukee. Southwest’s second largest hub is at Chicago-Midway which would save AirTran a lot of money and create the expansion that AirTran is looking for.
Likewise, Southwest is looking to expand their east coast service by offering routes to Boston and New York City. AirTran already has a presence in these markets and would provide
Southwest with a valuable resource. Finally, both companies have a significant presence in
Baltimore. If AirTran and Southwest merged, they would have access to close to 70% of BWI’s domestic capacity, which would provide a strategic stranglehold on a large east coast airport with quick turnover time. For more information concerning route info, please see Appendix J.
Another key difference between the two companies are their strengths when it comes to
cost cutting. AirTran is better equipped strategically in terms of route expansion, revenue
building, and capacity cuts, while Southwest is better equipped with managing day to day
operations(such as turnaround times and customer service). Combining the strengths and ideas of
28 Van Parys the two companies would potentially allow for the companies to lower costs even more and provide a better merged product for consumers.
X. Benefits
Benefits to Southwest
If a merger between AirTran and Southwest were priced correctly, Southwest would gain numerous benefits. The first would be essentially a dominating position throughout the entire
US. In the status quo, Southwest dominates the western market for discount airfare and competes mainly against AirTran and JetBlue on the east coast. By adding Atlanta as a hub and increasing its presence in Baltimore, competition from low cost carriers nationwide would be minimized.
This would allow Southwest to take more market share from legacy carriers such as American
Airlines and United, but adding Atlanta would provide more pressure on Delta and could force more capacity reductions by Delta.
In addition, Southwest Airlines would gain a valuable alternative to Boeing 737’s in
AirTran’s Boeing 717’s. Currently some of Southwest’s shorter routes are unprofitable due to a lower demand for travel (i.e. Baltimore to Providence). By using 717’s as alternatives to 737’s,
Southwest could save money on fuel and on turnaround time at airports. 45
Benefits to AirTran
AirTran would also gain considerably from a merger with Southwest. Due to competitive
constraints, AirTran will face immense barriers to entry in many new markets in the future if it
tries to grow organically. If AirTran merges with Southwest, it would create significant growth
without having to implement the costs associated with expanding organically. AirTran would
also become much more profitable as an entity without having to compete against Southwest at
its two major hubs (Orlando and Baltimore).
45 AirTran Aircraft Specifications.
29 Van Parys
Moreover, AirTran would also benefit immensely from a marketing perspective. In the status quo AirTran is growing but faces significant name recognition issues. Southwest Airlines is a name that is nationally known in virtually every major market. By utilizing Southwest’s impressive branding and reputation for customer service, AirTran would create more demand for its products and services.
While a merger would more than likely lead to layoffs of some variety, the employees continuing with the company would benefit from Southwest’s employee relations. Whereas labor disputes are rampant amongst AirTran and its employees, Southwest is known for having one of the happiest work forces with a very high retention rate. 46 It would benefit employees of AirTran to have management who is more conscientious of their needs.
XI. Risks
While there are certainly many benefits, there may also be several risks associated with a
Southwest-AirTran merger.
Cash Flow Risk
In a tough revenue environment such as the Airline Industry, cash and availability of inexpensive financing will be vital to complete any merger. With an enterprise value of $1.61 billion, AirTran would command at least this much in an acquisition. 47 More than likely, this would have to be an equity transaction supplemented by debt. During the recession, it is unlikely that any airline would be in the financial position to acquire another under such terms. However,
46 Marketing Innovators. “The Effects of Employee Satisfaction on Company Financial Performance” < http://74.125.95.132/search?q=cache:yfZX_eHN2T4J:www.marketinginnovators.com/Downloads/TheEffects.pdf+s outhwest+employee+satisfaction&cd=1&hl=en&ct=clnk&gl=us&client=firefox-a> 47 Key Statistics for AAI. Yahoo Finance. Accessed via < http://finance.yahoo.com/q/ks?s=AAI>
30 Van Parys this is certainly a possibility later on, once the recession is over and Southwest becomes more profitable.
Incompatible Messages
One inherent difference between AirTran and Southwest that is negative is their differing
opinions on business operations. Southwest runs its whole marketing campaign on not charging
fees to its customers, whereas AirTran is looking to increase ancillary revenues. Different
philosophies towards customer service will have to be reconciled for this acquisition to be
successful.
They are also very different in terms of operations. Southwest uses an open seating
arrangement and encourages employees to joke around with passengers, whereas AirTran runs a
more traditional model of assigned seating and a professional flight crew.
Legal Risk
In 2008, when Delta and Northwest merged, the Department of Justice looked long and hard to make sure there were no antitrust issues surrounding the merger. By merging two of the largest low cost airlines in the country, the Department of Justice could potentially be a roadblock for an acquisition of this magnitude, especially when noting the considerable pricing power the firm would have once merged in certain markets. 48
XII. Conclusion
While 2008 was indeed a rough year for AirTran, several newly proposed initiatives are giving investors hope that the airline will once again be profitable in 2009. With a strong 1 st quarter in 2009 and a commitment to excellence, AirTran looks to be weathering the economic recession. However, the long term future is less clear for AirTran. While they are currently focused on expanding into domestic markets, it may be more beneficial to consider other North
48 GAO Report on Airlines., 10.
31 Van Parys
American routes. As part of a forward looking strategy post recession, AirTran should strongly consider the advantages of expanding into Caribbean and Latin American markets. These markets not only provide considerable competitive advantages but also several economic advantages that cannot be matched by US markets with limited growth potential. Likewise,
AirTran should reduce exposure to less profitable domestic routes. In this paper Moline, Illinois;
San Diego, California; Phoenix, Arizona; and Washington-Dulles were noted as routes that
AirTran could potentially scale back on to expand into other destinations.
If AirTran chooses, it could also look to merge with a larger airline to reduce its cost of expanding organically within the U.S. There is no other airline that is similar and that would benefit more from a merger with AirTran than Southwest Airlines. The two airlines are extremely similar in terms of operations and cost structure, but different enough in geography to make such a merger lucrative. However, while the benefits of such a merger could have the potential to be immense, attention will need to be paid to the risks associated with a merger.
Would Southwest be willing to part with a heavy amount of cash to purchase AirTran? Would the cultures of AirTran and Southwest be able to coexist effectively? These are questions that must be considered before deciding on an undertaking as large as an airline merger.
32 Van Parys
Bibliography
Airtran Airplane Information. “Boeing 737 Aircraft Specifications” AirTran Airways. http://www.airtran.com/aircraft/boeing_737_aircraft_specifications.aspx (Accessed April 10, 2009)
AirTran 2009 Q1. April 22, 2009. Accessed via AirTran Investor Relations.
AirTran.com. "Company History: Airtran Airways History" AirTran Airways. http://www.airtranairways.com/about-us/history.aspx (accessed April 7, 2009).
Airtran 10-K for 2008. Accessed via AirTran Investor Relations.
Baskin and Ciu. “Airlines Return Gingerly to Oil Hedging” Wall-Street Journal < http://online.wsj.com/article/SB124109686617373069.html>
Bureau of Transportation Statistics. Form 41. Access via < http://www.transtats.bts.gov/databases.asp?Mode_ID=1&Mode_Desc=Aviation&Subject_ID2=0 > (Accessed 04/14/09)
Carey and Prada. “Delta Air Lines, Northwest Complete Merger”, October 20, 2008. The Wal-Street Journal. < http://online.wsj.com/article/SB122530765818781163.html>
Funding Universe. “Airtran Holdings, Inc.” http://www.fundinguniverse.com/company-histories/AirTran-Holdings- Inc-Company-History.html (accessed April 6, 2009)
Gerlaga, Kurtzman, and Tatman. “Boeing 717-200” Boeing.com. < http://www.aoe.vt.edu/~mason/Mason_f/B717PresS07.pdf >
JP Morgan Aviation Conference Call. 03/10/09. < http://investor.airtran.com/phoenix.zhtml?c=64267&p=irol- presentations>
Kayak.com. Assessed by factoring in airline prices for the months of May, June, and July
Key Statistics for AAI. Yahoo Finance. Accessed via < http://finance.yahoo.com/q/ks?s=AAI>
Marketing Innovators. “The Effects of Employee Satisfaction on Company Financial Performance” < http://74.125.95.132/search?q=cache:yfZX_eHN2T4J:www.marketinginnovators.com/Downloads/TheEffects.pdf+s outhwest+employee+satisfaction&cd=1&hl=en&ct=clnk&gl=us&client=firefox-a>
Maxon, Terry. The Dallas Morning News. “Southwest Airlines sees no benefit in bag fees” April 27, 2009
Medina, Scott. “Dominican Republic Real Estate Economic Outlook for Investors” < http://www.nuwireinvestor.com/opportunities/dominican-republic-real-estate-economic-outlook-for-investors- 52635.aspx>
Prime Minister of Belize. “Belize: Tourist Overnight Arrivals Down 3.6% end of November 2008, Compared to Previous Year” January 27, 2009. < http://www.caribbeanpressreleases.com/articles/4510/1/Belize-Tourist- Overnight-Arrivals-Down-36-end-of-November-2008-Compared-to-Previous-Year/Page1.html>
Reed, Ted. “Southwest Put on S&P CreditWatch Negative” TheStreet.com 04/16/09 < http://www.thestreet.com/story/10487301/1/southwest-put-on-sp-creditwatch-negative.html?cm_ven=GOOGLEN>
Rtt News. “AirTran Airways Traffic Down 7.2%, Load Factor Up – Update” 4/2/09. < http://www.rttnews.com/ArticleView.aspx?Id=903053&Category=Breaking%20News >
33 Van Parys
Sobie, Brendan. “US carriers look to expand Caribbean operations” Flight Global. http://www.flightglobal.com/articles/2008/09/24/316241/us-carriers-look-to-expand-caribbean-operations.html
Southwest Airlines. “Southwest Airlines Fact Sheet” < http://www.southwest.com/about_swa/press/factsheet.html>
Southwest Airlines 10Q For First Quarter 2009. Access via < www. southwest .com/ investor _relations>
United States Government Accountability Office(GAO). “AIRLINE INDUSTRY Potential Mergers and Acquisitions Driven by Financial and Competitive Pressures” July 2008. < http://www.gao.gov/new.items/d08845.pdf > pg. 8
Wald, Matthew L. “Maintenance Firm's Lawyer Expects Indictments in Valujet Crash” New York Times. 07/02/99. http://www.nytimes.com/1999/07/02/us/maintenance-firm-s-lawyer-expects-indictments-in-valujet- crash.html?n=Top/Reference/Times%20Topics/Subjects/A/Accidents%20and%20Safety (Accessed April 01, 2009)
Washington Times Global. “Vancouver Airport Services provides hands-on management of Nassau’s Airport” < http://www.washingtontimesglobal.com/content/story/bahamas/415/vancouver-airport-services-provides-hands- management-nassau%E2%80%99s-airport>
Winship, Tim. “AirTran challenges Southwest on Elite Perks” SmarterTravel.com. April 28, 2009. < http://www.smartertravel.com/blogs/up-front-with-tim-winship/airtran-challenges-southwest-on-elite- perks.html?id=2890356>
Note: The Appendices are compiled in part from the JP Morgan Airtran Aviation Conference, AirTran/Southwest websites, and the calculations were completed using various Form 41 data from the bureau of labor and statistics.
34 Van Parys
Appendix A: Non-Fuel Cost Per Available Seat Mile
35 Van Parys
Appendix B: Wichita State Airline Quality Ratings Through 2007
36 Van Parys
Appendix C: AirTran Continues to Diversify its Routes
37 Van Parys
Appendix D: Ancillary Revenue Devotion
38 Van Parys
Appendix E: Hedging Adjustments
39 Van Parys
Appendix F: Profit & Loss Results For Airlines
Profitability All Flights
2005 2006 2007 2008 ∆ 07-08 ∆ 05-08 Latin America Op. Rev. 8,619,055 10,302,602 11,437,747 10,030,901 -12.3% 16.4%
Domestic Op. Rev. 111,858,063 120,879,999 124,797,123 99,875,059 -20.0% -10.7%
L.A Net Income -720,181 1,465,110 1,131,446 -451,450 -139.9% 37.3% Domestic Net Income -19,747,536 9,042,504 2,996,275 -14,673,777 -589.7% 25.7%
LA Margin -8.36% 14.22% 9.89% -4.50% -14.4% 3.9%
Domestic Margin -17.65% 7.48% 2.40% -14.69% -17.1% 3.0%
Difference 9.30% 6.74% 7.49% 10.19% 2.70% 0.89%
40 Van Parys
Appendix G: Selected Operating Data
Passenger Miles + Capacity All Flights ∆ 07- ∆ 05- 2005 2006 2007 2008 08 08 Latin America Capacity 68,865,137,574 73,349,921,756 76,725,363,762 76,358,902,956 -0.5% 10.9% Domestic Capacity 758,465,632,032 745,900,852,106 762,531,604,914 733,996,270,284 -3.7% -3.2% Latin America PAX 49,673,166,011 55,057,095,721 58,920,753,211 59,476,830,208 0.9% 19.7% Domestic PAX 583,625,591,909 588,411,656,977 607,006,295,615 583,198,564,010 -3.9% -0.1% Load Factor LA 0.721310779 0.750608786 0.767943615 0.778911534 1.4% 8.0% Load Factor Domestic 0.769481921 0.788860417 0.796040835 0.79455249 -0.2% 3.3%
41 Van Parys
Appendix H: Latin American Traffic
Latin America Traffic Mar-06 Mar-07 Mar-08 Mar-09 ∆ 07-08 ∆ 08-09 ∆ 06-09 Caribbean(outbound) 525097 498349 547115 NA 9.8% N/A N/A American 1,987,986 2,045,369 2,212,269 1,902,852 8.2% -14.0% -4.3% Delta(exc. NW acq.) 763,150 955,199 1,072,505 890,179 12.3% -17.0% 16.6% US Airways 443,402 428,412 480,936 515,376 12.3% 7.2% 16.2%
42 Van Parys
Appendix I: Index used for evaluation
Loss per pass Load Origin Revenue Expense Profit/Loss Margin ATL Factor - PHX $6,172,120.97 $9,757,755.61 ($3,585,634.64) 58.09% ($17.43) 78.5 - MLI $4,524,184.64 $5,880,050.78 ($1,355,866.14) 29.97% ($8.85) 74.06 - SAN $9,885,382.45 $14,324,493.69 ($4,439,111.24) 44.91% ($15.77) 80.66 - IAD $7,797,179.15 $10,145,371.40 ($2,348,192.25) 30.12% ($4.85) 71.42
From sale cost per Cost per Load 1 2 Hub Destination fare miles rev/mile ASM flight Factor Rev p/f Diff Margin Orlando Freeport $60 207 $0.29 $0.16 $33.12 $60.00 $36.00 $2.88 8.0% Atlanta Belize City $130 1134 $0.11 $0.07 $79.38 $65.00 $84.50 $5.12 6.1% Santo Atlanta Domingo $129 1389 $0.09 $0.07 $97.23 $80.00 $103.20 $5.97 5.8%
43 Van Parys
Appendix I: Index used
Margin From Load Factor Airport**** Total Revenue Stream Hub Rank(demand) Sum*** Wichita* 2 1 1 4.00 Burlington 27 2 2 31.00 Richmond 21 4 7 32.00 Raleigh Durham 10 16 6 32.00 Quad City Airport 8 13 13 34.00 Phoenix 1 10 27 38.00 Bloomington 9 20 12 41.00 Wash-Dulles 7 26 8 41.00 St. Louis 26 12 5 43.00 Charleston 23 3 17 43.00 Memphis 35 18 3 56.00 San Diego** 3 14 39 56.00 Newport News 52 7 4 63.00 White Plains 13 24 26 63.00 Boston 43 6 16 65.00 Kansas City 16 17 33 66.00 San Fran. 4 11 52 67.00 Buffalo 19 9 40 68.00 Flint 29 21 21 71.00 Detroit 18 19 34 71.00 Palm Beach 12 31 29 72.00 Miami 24 34 18 76.00 Charlotte 48 8 22 78.00 San Antonio 5 25 48 78.00 Portland 57 5 19 81.00 Seattle** 11 22 53 86.00 Rochester 44 15 28 87.00 Newark 39 38 10 87.00 Los Angeles 14 23 50 87.00 LaGuardia 55 28 9 92.00 New Orleans 36 33 23 92.00 Las Vegas 6 36 51 93.00 San Juan 20 27 49 96.00 Jacksonville 33 50 15 98.00 Pensacola 42 43 14 99.00 Wash-Reagan 51 41 11 103.00 Pittsburgh 28 32 44 104.00 Denver 41 48 20 109.00 Fort Lauderdale 22 47 41 110.00 Midway 49 37 25 111.00 Phildadelphia 47 40 24 111.00 Minn. St-Paul 50 30 32 112.00 Houston 46 29 38 113.00 Sarasota 30 42 42 114.00 Ft. Myers 17 51 46 114.00 Milwaukee 37 49 30 116.00
44 Van Parys
Akron 54 35 31 120.00 Orlando 34 54 36 124.00 Baltimore 45 45 37 127.00 Indianapolis 32 55 47 134.00 Dallas 56 44 35 135.00 Tampa 38 53 45 136.00 Dayton 53 52 43 148.00 * This denotes route is currently operating under a subsidy ** This denotes AirTran has plans to cut a portion of this route *** This sums the rankings of three variables, lower score is worse ****Some Airports with low scores were not cut due to other factors, these include a lucrative subsidy, a new route, or an important competitive market
45 Van Parys
Appendix J: Southwest Route Map From Hub(1/2)
46 Van Parys
Appendix J: Airtran Route Maps(2/2)
47 Van Parys
AirTran Holdings, Inc. Consolidated Statements of Operations (In thousands, except per share data)
Year ended December 31, 2008 2007 2006 Operating Revenues: Passenger $ 2,413,609 $ 2,198,910 $ 1,814,907 Other 138,869 111,073 77,176 Total operating revenues 2,552,478 2,309,983 1,892,083 Operating Expenses: Aircraft fuel 1,194,938 803,640 675,336 Salaries, wages and benefits 474,889 451,818 390,348 Aircraft rent 242,464 242,764 230,699 Maintenance, materials and repairs 163,350 151,265 126,062 Distribution 100,400 88,461 69,888 Landing fees and other rents 137,738 122,800 100,761 Aircraft insurance and security services 21,556 23,761 25,678 Marketing and advertising 40,475 40,415 44,792 Depreciation and amortization 58,618 48,485 30,078 Gain on sale of assets (23,185 ) (6,234 ) — Impairment of goodwill 8,350 — — Other operating 204,895 198,648 157,580 Total operating expenses 2,624,488 2,165,823 1,851,222 Operating Income (Loss) (72,010 ) 144,160 40,861 Other (Income) Expense: Interest income (3,679 ) (20,401 ) (21,714 ) Interest expense 78,080 75,530 50,861 Capitalized interest (5,355 ) (9,226 ) (12,943 ) Net (gains) losses on derivative financial instruments 150,836 255 — Midwest exchange offer expenses — 10,650 — Other (income) expense, net 219,882 56,808 16,204 Income (Loss) Before Income Taxes (291,892 ) 87,352 24,657 Income tax expense (benefit) (18,063 ) 34,669 9,943 Net Income (Loss) $ (273,829 ) $ 52,683 $ 14,714 Earnings (Loss) Per Common Share: Basic $ (2.51 ) $ 0.58 $ 0.16 Diluted $ (2.51 ) $ 0.56 $ 0.16 Weighted-Average Shares Outstanding: Basic 109,153 91,574 90,504 Diluted 109,153 104,319 92,436
48 Van Parys
AirTran Holdings, Inc. Consolidated Balance Sheets (In thousands)
December 31, 2008 2007 ASSETS Current Assets: Cash and cash equivalents $ 31 5,078 $ 206,873 Short-term investments 19,937 111,119 Restricted cash 86,126 29,618 Deposits held by counterparties to derivative financial instruments 48,820 — Accounts receivable, less allowance of $1,250 and $1,128 at December 31, 2008 and 2007, respectively 38,301 42,772 Spare parts, materials and supplies, less allowance for obsolescence of $2,844 and $2,281 at December 31, 2008 and 2007, respectively 15,428 14,488 Prepaid and stored fuel 16,004 32,660 Derivative financial instruments 3,420 13,035 Prepaid expenses and other current assets 33,843 19,596 Deferred income taxes 7,450 9,776 Total current assets 584,407 479,937 Property and Equipment: Flight equipment 1,291,155 1,284,273 Less: Accumulated depreciation and amortization (124,759 ) (97,946 ) 1,166,396 1,186,327 Purchase deposits for flight equipment 64,03 2 119,817 Other property and equipment 108,186 100,763 Less: Accumulated depreciation and amortization (55,642 ) (40,995 ) 52,544 59,768 Total property and equipment 1,282,972 1,365,912 Other Assets: Long-term investments 5,497 8,230 Goodwill — 8,350 Trademarks and trade names 21,567 21,567 Debt issuance costs 14,201 16,016 Prepaid aircraft rent 84,168 81,109 Other assets 70,048 67,345 Total Assets $ 2,062,860 $ 2,048,466
See accompanying notes to Consolidated Financial Statements.
49 Van Parys
AirTran Holdings, Inc. Consolidated Balance Sheets (Continued) (In thousands)
December 31, 2008 2007 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 81,557 $ 50,644 Accrued and other liabilities 147,889 137,896 Air traffic liability 252,055 219,923 Derivative financial instruments 69,646 — Current maturities of capital lease obligations 835 1,036 Borrowing under revolving line of credit 90,000 — Current maturities of long-term debt 69,865 98,635 Total current liabilities 711,847 508,134 Long-term capital lease obligations 16,031 11,915 Long-term debt 940,569 946,303 Other liabilities 120,342 99,575 Deferred income taxes 7,450 31,434 Derivative financial instruments 20,616 4,755 Commitments and Contingencies Stockholders' Equity: Preferred stock, $.01 par value per share, 5,000 shares authorized, no shares issued or outstanding — — Common stock, $.001 par value per share, 1,000,000 shares authorized, and 119,550 and 91,886 shares issued and outstanding at December 31, 2008 and 2007, respectively 120 92 Additional paid-in capital 497,390 396,824 Accumulated earnings (deficit) (225,745 ) 48,084 Accumulated other comprehensive income (loss) (25,760 ) 1,350 Total stockholder's equity 246,005 446,350 Total Liabilities and Stockholders' Equity $ 2,062,860 $ 2,048,466
See accompanying notes to Consolidated Financial Statements.
50 Van Parys
AirTran Holdings, Inc. Consolidated Statements of Cash Flows (In thousands) Year ended December 31, 2008 2007 2006 Operating activities: Net income (loss) $ (273,829 ) $ 52,683 $ 14,714 Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: Depreciation and amortization 64,981 50,842 31,700 Amortization of deferred gains from sales/leaseback of aircraft (4,668 ) (4,887 ) (4,407 ) Impairment of goodwill 8,350 — — Midwest exchange offer expenses — 10,650 — Provisions for uncollectible accounts 1,264 1,407 1,619 (Gain) loss on asset disposals (22,356 ) (4,811 ) 4,387 Deferred income taxes (18,063 ) 34,464 9,943 Other 13,013 6,551 4,576 Changes in certain operating assets and liabilities: Restricted cash (44,326 ) (4,803 ) (5,372 ) Derivative financial instruments 66,027 (6,492 ) — Accounts receivable 5,157 (5,566 ) (10,437 ) Spare parts, materials and supplies (1,625 ) (3,284 ) (1,248 ) Prepaid and stored fuel 16,656 (27,161 ) (1,835 ) Deposits held by counterparties to derivative financial instruments (48,820 ) — — Prepaid aircraft rent (6,618 ) (11,892 ) (12,986 ) Other assets (4,507 ) (16,429 ) (20,934 ) Accounts payable, accrued and other liabilities 37,331 46,477 26,809 Air traffic liability 32,132 64,330 38,597 Net cash provided by (used for) operating activities (179,901 ) 182,079 75,126 Investing activities: Purchase of available-for-sale securities (30,303 ) (2,040,593 ) (2,540,215 ) Sale of available-for-sale-securities 118,986 2,071,195 2,389,190 Purchases of property and equipment (136,427 ) (176,020 ) (119,113 ) Return (payment) of aircraft purchase deposits, net 55,785 78 13,635 Midwest exchange offer expenses — (10,348 ) — Proceeds from sale of aircraft 305,965 72,879 5,000 Other 14,650 — — Net cash provided by (used for) investing activities 328,656 (82,809 ) (251,503 ) Financing activities: Issuance of long-term debt 107,577 62,029 66,034
51 Van Parys
Payments on long-term debt and capital lease obligations (317,153 ) (115,904 ) (113,132 ) Borrowings under revolving line of credit 377,000 — —
Repayment of borrowings under revolving line of credit (287,000 ) — — Net proceeds from issuance of common stock 74,669 — — Proceeds from exercise of stock options, employee stock purchase plans and warrants 3,902 2,378 12,003 Other 455 — — Net cash used for financing activities (40,550 ) (51,497 ) (35,095 ) Net change in cash and cash equivalents 108,205 47,773 (211,472 ) Cash and cash equivalents at beginning of year 206,873 159,100 370,572 Cash and cash equivalents at end of year $ 315,078 $ 206,873 $ 159,100
52 Van Parys
53