Edit Metric
|
||||||||||||||||||||
Details
|
||||||||||||||
 AirTran Holdings (Nasdaq:AAI) is one of America’s largest low-fare passenger airlines. AirTran earns its revenue by targeting value-oriented business and leisure travelers with its affordable fares. The company has grown as a result of its expanding network of destinations and comparatively low ticket prices[1]. Interestingly, the airline has managed to achieve low operating costs despite relying on a hub-and-spoke system, in which most of its flights originate and terminate at its hub in Atlanta, Georgia. While the number of flights going to and from the hub has decreased to 65% of the network, from a high of 90% in 2001, this is still inconsistent with the business models of other low-fare airlines like Southwest, which have found competitive advantages from moving to a point-to-point traffic system[2]. The point to point system is less expensive due to the fact that it allows for utilization of minor airports that are in close proximity to major citiies. Conversely, the hub and spoke system forces legacy airlines to direct their traffic through major airports that are high not only in volume, but also in landing fees and rent costs. Given AirTran's continued reliance on the hub and spoke system, airline management has cited other operational factors as cause for the airline having a cost structure that is among the lowest in the industry, in terms of Cost per Available Seat Mile (CASM). The most significant contributor to the airline’s low CASM is its use of only two aircraft types manufactured by the same company[3]. Through reliance on two standard aircrafts, the Boeing 737 and the Boeing 717, AirTran cuts down on spending for training its pilots and its maintenance technicians who repair the aircraft. Additionally, it has a smaller inventory of spare parts because the parts are interchangeable. Another benefit of the fleet is that it has an average age of only 4.5 years, which means that it will be some time before the airline faces the massive fleet replacement costs, which are currently a serious concern for several legacy airlines[4]. Even more important is that these younger aircraft are relatively fuel efficient, a critical factor in an era of sky high fuel prices. This is evidenced by the fact that switching to the current Boeing fleet structure resulted in a reduction in low altitude emissions, with emissions falling 56% from 303 grams per seat to 134 grams per seat[5]. The low CASM number is also motivated by the airline's high labor productivity, low distribution costs (which include commissions, credit card fees, computer reservations system fees, and the costs of the airline's own reservations and sales personnel) and high asset utilization (measure of the number of sales dollars earned for each dollar invested in assets).
[edit] Business FinancialsAs of December 2007, AirTran offered 700 daily flights to 55 different destinations in the United States, primarily located on the east coast. Over the past five years, AirTran has diversified its network, increasing operations in business markets like Baltimore/Washington, Chicago-Midway, and Indianapolis. This market diversification allows AirTran to take advantage of key marketing and cost synergies and it serves as protection against risks that adversely affect an individual market[6]. Given this success, AirTran officials had planned to add new Boeing 737s to its fleet in an effort to expand its network to other domestic routes. However, after suffering a loss of $34.8 million in the first quarter of 2008 [7], the company announced in an earnings call that the continuing increase in fuel prices will force the airline to curtail growth until 2012[8]. Under the revised arrangement, the Atlanta based carrier will defer delivery of 18 Boeing 737-700s scheduled for 2009-2011, taking them instead in 2013 and 2014. [9]. As the graph below suggests, during early 2008, the airline achieved higher revenues per available seat mile (RASM) after reducing overall capacity. It was this relationship that served as motivation for slowing fleet growth.  AirTran reported operating income of $137.9 million and $40.9 million and net income of $52.7 million and $14.7 million in 2007 and 2006 respectively [11]. AirTran increased profitability in 2007 primarily by improving unit revenues by 1.5 percent ; decreasing unit operating costs by 1.7 percent; and through a 19.4 percent increase in the size of operations[12]. As the graph below suggests, AirTran maintains the lowest cost structure in the United States airline industry. 
This financial position has afforded AirTran some freedom to improve the customer experience. While legacy carriers have been forced to reduce their costs through a combination of service reductions including eliminating meals in coach class and charging for even a single piece of carryon luggage, AirTran has managed to offer several service improvements. [14]. AirTran has attempted to follow in the steps of JetBlue's personal televisions and improve the flying experience. On each flight, AirTran has incorporated 100 channels of XM radio service as in flight entertainment on both business class and coach. [15]. However, these service expansions have come at a cost, specifically a reduction in the cost-structure spread between legacy airlines and AirTran. Airline operating costs are measured in CASM (Cost / Available Seat Mile). AirTran's operating expenses for the year ended December 31, 2007 increased $320.8 million (17.3 percent) but decreased 1.7 percent on an operating cost per ASM basis (CASM).[16] AirTran's low operating costs are made possible through a companywide focus on cost controls with emphasis on high labor productivity, lower distribution costs and higher asset utilization. The graph below shows that non-fuel unit cost reduction has been a key component of the AirTran business strategy for many years.  AirTran earned a 1.5 percent increase in passenger unit revenues as measured by passenger revenue per available seat mile (RASM) to 9.69 cents in the year 2007 [18]. Operational terminology unique to the airline industry and discussed in the preceding section includes: available seat miles (ASM), revenue per available seat mile (RASM) and cost per available seat mile (CASM). The three metrics are determined as follows: 
[edit] Key Trends and Forces[edit] Union ThreatAirTran has four separate agreements with employee groups represented by the International Brotherhood of Teamsters. The company has an agreement with the maintenance technicians, the technical training instructors, the stock clerks, and ground service mechanic employees. AirTran’s customer service, ramp agents, and reservation agents are not represented by unions. If any of these non-employee union groups elect to seek representation or a collective bargaining agreement, this will directly impact operating performance and expenses. Furthermore, these unions pose a large threat to any possible merger deals [edit] Fuel CostsFuel is the company’s largest expenditure accounting for 37% of the company’s expense in the year 2007. Like most airlines, AirTran’s balance sheet is largely affected by volatility in the price of oil. Increases in the price of fuel are hard to pass on to consumers due to the competitive nature of the airline industry; however, AirTran does benefit from its new fuel efficient Boeing jets which assist in mitigating the volatility. AirTran has also begun to install winglets on its Boeing 737’s to help improve the fuel efficiency of the planes. AirTran has relatively high liquidity for an airline company. This liquidity lets AirTran lock in the price of fuel when it is low (airlines with poor balance sheets have had less success hedging fuel because they cannot afford the hedges) and use these hedges to lessen the blow of fuel expenses to the balance sheet.  [edit] Consolidation ForcesThe airline industry is enduring a period of consolidation after the merger of Northwest Airlines and Delta Airlines. These mergers are a result of the industry attempting to cope with historically high fuel prices. [20] AirTran Holdings would actually benefit from the Delta-Northwest merger as it will trim excess domestic capacity, reduce competition in some of the nation’s busiest airports, and let airline companies to keep fares firm. [21] In Orlando, one of AirTran’s hubs, Northwest and Delta are the No. 1 and No. 3 airlines for route coverage between the markets that AirTran serves. As Delta and Northwest attempt to cut flights on overlapping routes, AirTran will be able to use its low-cost service to appeal to a new customer base. The benefits of a merger in the airline industry include the opportunity to cut costs and to pursue a larger route system to better serve customers. By getting rid of duplicate operations and taking advantage of stronger pricing power, AirTran would be able to increase its marketshare and reduce many of its costs. Since 2005, AirTran has been pursuing a merger with Midwest airlines : a mid-sized carrier headquartered in Milwaukee. This merger offered AirTran the opportunity to combine two strong regional networks. On August 12, 2007 AirTran offered over $16.25 per share. In the short term, the merged carriers have the ability to enhance revenue through a broader product offering. However, these mergers are also subject to various regulatory obstacles in addition to difficulties in seeking to successfully integrate the two distinct carrier cultures. [edit] Government RegulationAirTran can expect stricter regulation in the industry from government agencies after the FAA announced that it will play a larger role in safety inspections. This increase is a direct result of testimonies from FAA inspectors that airlines reported safety problems voluntarily, sometimes without follow-up government safety inspections. [22] AirTran has already had to perform intensive work on the hardware of its entire fleet of Boeing 737-700s after a fire destroyed a China Airlines Boeing 737-800 in Japan. [23] AirTran was given 10 days to complete the inspections and 24 days to complete the technical services. Both jobs were completed in seven days. The fact that AirTran was able to meet these standards and the fact that the company has won the FAA's highest award for the 12th consecutive year, [24] shows AirTran’s ability to meet government directives; nevertheless, this increase in regulation will only add to AirTran’s expenses as the company attempts to compete in its industry. [edit] Targeted MarketingAirTran has tried to stand out in the airline industry through attempting to target a generally ignored crowd. Although most airline companies attempt to reach business travelers and adult consumers, AirTran is going after the college age crowd in its attempt to foster consumer loyalty. [25]. [edit] International ProspectsDespite the fact that AirTran has 737’s that are capable of reaching South American destinations from its Atlanta hub, the company has thus far decided to focus only on domestic destinations. This does not follow the trend with most airlines in the industry considering the larger margins available from international flights. Delta Air Lines, which has said that more than 40 percent of its flying will be in international traffic by this summer, will start nine new international routes through June 12. [26] Other low-cost airlines such as Spirit and JetBlue have already expanded their offering in terms of flights available to the Carribean and Latin America. Considering the consolidation that is occurring in the airline industry, as well as its competitive nature in the United States, AirTran's decision to avoid expanding its offerings to the international market is prodigious. [edit] CompetitionAirTran faces heavy competition from JetBlue, especially considering the announcement that JetBlue will be making Orlando one of its focus cities. This move not only positions JetBlue as a direct challenge to AirTran in one of its focus cities, but also gives JetBlue a gateway for trips to its various international destinations. JetBlue provides the only service from Orlando, Florida to Cancun, Mexico. The airline has also received tentative approval to begin daily nonstop trips to Bogotá Colombia. These international destinations offer much higher margins and pose a threat to AirTran in one of its largest developing markets. [27]
AirTran has a less immediate need for cash, given that it raised $140 million through public offerings of stock and convertible notes. [30] This cushion of capital permits the company to deal with its rising fuel costs without having to significantly raise its prices and thus lose its standings with consumers as a cheap alternative to large carriers. In addition to this accumulation of capital, AirTran also has initiated plans to suspend capacity growth in order to move more assertively against rising fuel prices. This move is indicative of AirTran’s ability to adapt faster than its competitors to changes in the airline industry. It also stands as a testament to the abilities of AirTran's leadership to continue to contest for market share in its extremely competitive industry. AirTran's insightful moves of this type were recognized by Airline Business Magazine in July 2007, when they presented AirTran's chairman of the board with an award for innovative strategy that has produced consistent positive earnings in a tight market. [31] AirTran will undoubtedly continue to rely upon this innovative strategy in order to continue to earn a net profit in an increasingly competitive marketplace. 
[edit] References
|
The Shelf
|
Edit
History
Bookmark
