With new business markets joining its network this year, AirTran Airways is poised to maintain significant revenue growth and attract more corporate clients. Business Travel News airline editor David Jonas recently spoke with chairman and CEO Joe Leonard about the carrier's prospects and the airline industry's prognosis.Business Travel News: In what locations will AirTran focus growth throughout 2005?
Joe Leonard: The overall strategy is to grow about 20 percent a year in available seat miles. We do that in three ways: increase flying in Atlanta to cities we already serve, add other point-to-point flights and open new cities. We have been very conservative about the number of new cities we add. Last year, we did not open any. This year, we already announced three: Sarasota, Indianapolis and Charlotte. We will announce another city in a week or two—one which will be corporate travel-oriented [note: AirTran subsequently revealed that city to be Richmond, effective June 23]—and then another city or two toward the end of the year. We will do more of a westerly type of flying. There are a lot of opportunities there, but also in the Northeast. In some higher-demand markets like New York LaGuardia, which is capacity-controlled, we can put on larger aircraft. With our new Boeing 737s, we have two advantages: Its range and its size.
BTN: What is your early assessment of business travel demand in Charlotte and Indianapolis?
Leonard: Bookings look very good. Certainly Charlotte is a huge business market that has never seen low fares and our model tends to grow the market generally by 150 percent. We expect to see that there and in Indianapolis.
BTN: Considering overall growth targets, do you perceive dangers in expanding too quickly?
Leonard: We watch carefully and if we outgrow our ability to maintain unit revenues, we will slow it down. We have been critical of other carriers who are growing, and then we are asked, 'Well, you are growing, why can't they?' The answer is that we are growing and making money and they are growing and losing their shirts.
BTN: Speaking of which, will 2005 be the year that the anticipated industry shakeout finally starts?
Leonard: I hope so. These enablers that keep propping up these old-line carriers are doing damage to the entire industry. We don't count on a shakeout, but if it happens, we will be a big beneficiary. Some of the weaker carriers are direct competitors of ours.
BTN: How is overall business travel demand looking?
Leonard: Demand looks quite good, actually, but the prices have to go up.
BTN: Speaking of pricing, how has airfare reform impacted AirTran?
Leonard: SimpliFares implemented by Delta Air Lines and matched by everybody gives us a huge opportunity to go into corporations and get a bigger portion of that business than we ever had before because those airlines are cutting back on corporate deals as a part of the new fare structure. We get a fair hearing now.
BTN: Can you provide an update on revenue guarantees set up by local businesses in certain markets
(BTN, March 24, 2003)?
Leonard: If we are going into a highly competitive environment that has some risk—which probably means it is a small or medium-size market—we are looking for some type of assurance that people will use us, whether it's a revenue guarantee or a travel bank. Before we got smarter about it, people would ask us to come to town and we would. Then we would be matched on fares and they keep flying the other guy. Then that major carrier gets the benefit of us being there without giving us our fair share of the business.
BTN: How has AirTran's business class been performing? Are most passengers there by way of upgrades?
Leonard: The business class does extraordinarily well for us. It is the best deal out there. We run about a 65 percent load factor up there, and near 100 percent in the big business markets. There are three ways to get up there. One is by upgrade, but that is not the majority. The second way is to buy it and the third way is if you are from one of our corporate accounts. Those companies can buy a full-coach ticket and get into business class at no additional price.
BTN: Switching to costs, but excluding fuel, AirTran has lowered unit costs to very low levels. At what point do expense reduction efforts reach a point of diminishing returns?
Leonard: At some point, you definitely see diminishing returns but we are not there yet. We are bringing in more 737s, which have more seats and structurally lower unit costs. We see a significant unit cost reduction in 2005 and additional reductions in 2006. After that we may plateau, but at a very low level.
BTN: What is the impact of fuel prices
(see story)?Leonard: We are hedged at 47 percent for the second quarter. Our goal is to go in any quarter at 50 percent. Third and fourth quarters are in the 15 percent to 20 percent range, and we buy almost daily. Any time there is a drop in the price, we buy another 25,000 or 50,000 barrels. And our fleet's average age is three years—getting younger as the new 737s come in—and is more fuel-efficient than anything it is up against. When we fly one of our new 737s against one of Delta Air Lines' 737-200s, we burn 23 percent less fuel. When we fly one of our Boeing 717s against one of Northwest Airlines' DC-9s, we burn 23 percent less fuel.
BTN: Please describe AirTran's approach to distribution.
Leonard: We book about 65 percent of our tickets through the Internet and we think we can take that up another 10 points over time. When you sell tickets on the Internet, you have a natural clientele to use the Internet to check in. We turned our airport kiosks on in March of last year and now we have 54 percent of people using them or the Internet to check in. We certainly believe we can get that number up another 10 or 15 points.
BTN: Meanwhile, traditional travel agencies accounted for only 13 percent of AirTran's 2004 bookings. Is that high enough to justify participation in the major global distribution systems?
Leonard: We think so. It is quite a bit more expensive, but we would be worse off if we didn't keep that channel open, especially considering the corporate accounts that we have. At the same time, we also have invested a lot in the Web site, to make it easier for travel agencies and corporate travel managers to deal with us.