How Carriers Fare In Fight For Survival

<B>How Carriers Fare In Fight For Survival</B>
<I>Low-Fare Airlines: Last Part In A Three-Part Series</I>

By David Jonas

As corporate buyers increasingly examine the viability of lower-fare airlines, many of these carriers still are struggling to survive in an industry wrought with heavy competition and financial pitfalls. While this segment always has been under pressure, even amidst the government's heightened awareness of alleged predatory behavior by larger competitors, the lingering specter of fuel costs makes the situation today all the more precarious. As such, corporations should be cautious when selecting which carriers to use and support, since some may not be around tomorrow.

The recent grounding of ProAir is a perfect example of the thin ice on which many new entrants skate. The Federal Aviation Administration late last month revoked the Detroit-based carrier's operating certificate, citing maintenance, record keeping and quality control problems. ProAir had shown promise and raised many eyebrows when it forged corporate agreements based on set monthly fees with General Motors and then-Chrysler (BTN, June 22, 1998). However, the carrier--which operated three Boeing 737s from the small Detroit City Airport to a few business destinations--never was able to capitalize on the interest or become financially sound. "No airline has been as mismanaged," said Terry Trippler, airline expert at Onetravel.com.

ProAir has appealed to the FAA, but must remain grounded during the appeals process.

"What ProAir did for the market is to show us that new entrants could affect not only fares and service levels, but the number of people that can take to the air," said Charles Braswell, now director of global travel management and business services for DaimlerChrysler AG. "When you look at it on a broader scale, you can see how important competition is. If ProAir can overcome its obstacles, we would definitely take another look at using the carrier again."

Other low-fare carriers, more vulnerable to high fuel costs than larger airlines, have had less than stellar financial results.

American Trans Air parent Amtran, for example, posted a third-quarter net income of just $3 million, down 78 percent from a year earlier, as fuel expenses jumped more than 54 percent. "For the fourth quarter, we expect to see significantly higher fuel costs occurring during what has always been our weaker quarter," said John Tague, Amtran president and CEO. "The results of these factors could possibly lead to a net loss for the full year." Indeed, ATA has no fuel hedges in place and the analyst consensus for the full year, as measured by First Call, a service that provides a consensus of Wall Street analysts, is just $0.04. Last year, earnings per share were $3.47.

The news is not all bad for ATA, as its scheduled service revenues jumped nearly 20 percent, to $206.5 million. Traffic and capacity both increased about 7 percent and passenger yield and RASM both improved by nearly 12 percent.

Looking ahead, ATA in the spring will begin rejuvenating its fleet with new Boeing 737s and 757s. The new equipment will help fuel efficiency while allowing network expansion.

Operationally, ATA in February will move into a new terminal at Chicago Midway Airport, complete with ticketing kiosks, gate readers, agents armed with handheld checkin devices and curbside checkin. As a result, the carrier expects to double its presence in Chicago.

On the healthy side of the coin, Frontier Airlines, which reports its quarterly earnings later this week, is expected by First Call to notch earnings per share around $0.84. That would easily beat last year's $0.47. For the quarter ended June 30, the carrier reported earnings per share of $0.85, which was more than double the results from a year earlier. EPS estimates of $0.21 and $0.47 for the next two quarters also would significantly surpass earnings from the respective quarters a year earlier.

Operationally, September revenue passenger miles grew 46 percent versus a capacity increase of 24 percent, pulling systemwide load factor up 10.4 points, to 67.8 percent. Frontier now flies to 23 cities aboard a fleet of 25 Boeing 737s.

Meanwhile, despite a 97 percent year-over-year increase in fuel expenses and an overall cost increase above 13 percent, AirTran still managed to notch its seventh consecutive quarter of profitability. Earnings per share of $0.13 more or less were in line with First Call estimates. Net income of just under $9 million was 127 percent higher, excluding non-recurring items, while quarterly revenue reached an all-time high of $161.5 million. Operating margin, load factor and total traffic all rose significantly. Yield was up 2.1 percent.

In just a few years of operations, AirTran has grown its network to 33 destinations served by 300 daily departures. Moving forward, it is targeting 18 percent to 22 percent annual growth, including three to five new cities each year, made possible by new deliveries of Boeing 717 medium-range jets. In New York, for example, it has asked the Department of Transportation for additional slots so it can expand service to Atlanta. "Our main competition has practically hourly service, so we are looking at possible growth to New York," said spokesman Jim Brown. "Maybe we'll call it a focus city or a mini-hub down the road, but that decision is still a ways off." The carrier also announced Pittsburgh as its 34th destination, with service to Atlanta, Chicago Midway and New York LaGuardia to begin Dec. 12.

Meanwhile, the carrier expects to continue offsetting high fuel costs with the new 717s. The carrier said the aircraft already have saved $3 million in the past year by being 24 percent more fuel efficient than the DC-9s in its fleet. By year-end, AirTran will have 15 717s in service, with 35 more on the way during the next three years.

Its fuel hedging strategy, including a new agreement announced last week, also covers 50 percent of fuel requirements for the next two quarters at under $29 per barrel.

"AirTran has been profitable the past several quarters by planning routes carefully," said Darryl Jenkins, executive director of the Aviation Institute at George Washington University, citing new service to Akron, Ohio. "They also have done a very good job in Atlanta with their inexpensive business product and now have over 140 flights a day there."

Moving forward, analyst estimates for the fourth quarter, as measured by First Call, put AirTran at $0.13 per share, slightly below last year. Full-year earnings per share are estimated at $0.63, which would be well above last year's $0.43 figure. However, AirTran also must restructure $230 million in debt due next April.

Mike Boyd, president of The Boyd Group in Evergreen, Colo., said the overall prognosis for established low-fare carriers is fair. "The Frontiers and AirTrans won't be knocked off the perch," he said. "However, if the economy turns sour, the big guys will be hurt last and the little guys will suffer."

Meanwhile, one of the newest carriers, JetBlue Airways, reported its first profitable month for August after just six months in the air. CEO David Neeleman said the airline's quick road to profitability is rare and that everything has progressed "according to plan."

The carrier also has accumulated a total of $160 million in equity, giving it the deepest pockets at any startup.

Operationally, JetBlue canceled only 10 flights through the end of August and clocked in with an on-time performance rate above 80 percent for its first six months. Its load factor of 71.6 percent is impressive for such a new entrant.

Though initial focus has been on the Northeast and Florida--markets include New York JFK, Buffalo, Burlington, Vt., Ft. Lauderdale, Orlando, Rochester, N.Y., and Tampa--JetBlue has begun westward expansion with flights to Los Angeles/Ontario County, Oakland and San Francisco. Daily nonstop flights from JFK to Salt Lake City will launch Nov. 17. The carrier said its fares--as low as $99 each way--are 84 percent less than the regular advanced purchase one-way fares now available. It also serves Cleveland and will add West Palm Beach and Ft. Meyers, Fla., in the coming weeks.

Southwest Airlines, no longer a new entrant but still the king of the low-fare breed, posted another quarter of excellent earnings, proving yet again that proper management can translate into success, without adhering to the traditional large-carrier model (see page 8).

Low-fare carriers that focus primarily on leisure markets and discretionary travelers are the most susceptible to a downturn in the economy. For the moment, however, they too are basking in the industrywide traffic boon.

Privately held Spirit Airlines, for example, grew September traffic and capacity for the 25th consecutive month. Traffic outpaced capacity, generating a load factor hike of 3 points, to 66.6 percent. Service to Florida from both Chicago O'Hare and Washington Reagan National Airport kicked in earlier this month. Fleet replacements--more efficient MD-80s in and aging DC-9s out--will help offset skyrocketing fuel costs.

Las Vegas-based National Airlines, also privately held at the moment, is pulling in decent load factors and this month began service to Washington Reagan National. It also will begin service on Jan. 25 to Chicago O'Hare, its 11th destination, complementing flights to Chicago Midway.

National's launch was funded in part by Harrah's and Rio, two local resorts. However, the carrier expects divestiture and entry into the public market sometime next year. It turned a profit in the spring, just 10 months after beginning service. It also recently signed on with Talus Solutions, a provider of pricing and revenue optimization products. "National is a long-term player, no question about it," Boyd said.

Vanguard Airlines, also leisure-oriented, is working to build its Kansas City hub and recently announced new nonstop flights to business destinations New York LaGuardia and Los Angeles. This year it also launched flights to both Pittsburgh and New Orleans. However, in consolidating operations in Kansas City, Vanguard retreated from the Chicago-Minneapolis/St. Paul market, due in part to the arrival of American Trans Air on the route.

Financially, Vanguard is on shaky ground. The carrier posted net losses in the first two quarters of the year and, as of June 30, had only $235,000 in cash. The stock price, falling steadily since last December's 52-week high of $4.50, at press time was about $1.28.