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.