AirTran Airways Still Focused On Significant Growth

Low-fare carrier AirTran Airways is among the few U.S. carriers maintaining profitability and significantly expanding services. Chairman and CEO Joe Leonard this month spoke with BTN airline editor David Jonas about the airline's utility within corporate programs, success in fending off larger competitors and his outlook for the remainder of the year.

BTN: Please explain how AirTran is becoming a more relevant player within managed corporate travel programs.

Joe Leonard: We purposely have designed our products around business flyers. We have a business class section—more and more you are seeing regional jets without a business class section go into various routes—a frequent flyer program and Internet booking and checkin. We'll have new airport kiosks by late-April or May. The value proposition, which is what people really are looking for today, is helping us quite a bit. We are in the neighborhood of 50 percent of passengers being business flyers. Before 9/11, we believed it was about 60-40 in favor of business flyers, but it is down for everybody.

BTN: AirTran has six or seven revenue guarantees from local businesses, also called travel banks. Please explain how you have been able to make those work.

Leonard: In this environment, we are in a very low-risk tolerance mood. We won't go into small or even medium-size cities without some assurance of breaking even in years one and two. Everyone is a little different, but typically the city, or the city in conjunction with businesses or the businesses themselves will create a pool of money. They are looking for an encouragement to use us. In the past, we'd go into cities and everybody loved us and the fact that we bring fares down. Yet, if they can get the same fare on whoever they have been flying and keep frequent flyer miles and all those things, then that is what they do. If we are not around, these guys that have killer deals will see them go away very rapidly. We had a few situations where the travel managers were doing precisely what they were supposed to—get a better deal—but we went to the CEO or CFO and said, "Do you realize what is going to happen here?"

BTN: AirTran is growing at a pretty good clip. What is the strategy?

Leonard: In a big market, we typically run limited frequencies. We don't try to match the major airlines flight for flight, but we are trying to get each of our stations up to seven, eight or nine flights a day. You start to get efficiency and the opportunity to get airplane utilization up. We are going to continue to grow overall at 25 percent. We have not run out of markets. We spent all of 1999 and half of 2000 with no growth whatsoever. We did that purposely to make sure we had the operational infrastructure in place and the financial house in order. We were patient. In retrospect, we probably could have grown a little faster.

BTN: Your operations only will get more efficient as you take delivery of more Boeing 717s.

Leonard: We have two a month coming from now until the end of the year. We took 20 airplanes last year, we are taking 23 this year. We will retire all DC-9s by October and will end the year with 73 717s, with an average fleet age of less than three years, literally one of the youngest fleets in the world. They are highly reliable and burn 24 percent less fuel. If we were to operate our schedule this year with DC-9s versus 717s, we'd pay $50 million more in fuel. It has saved our bacon, in that regard.

BTN: Looking at your competitors, US Airways on the one hand is shrinking and opening up opportunities for AirTran, and on the other is restructuring to be more cost-competitive.

Leonard: They obviously have created enormous opportunities for us by shrinking. I have tremendous respect for [president and CEO] David Siegel and [CFO] Neil Cohen, having worked with those guys over at Northwest, but they are going to end up as a high-cost regional airline. They are reducing their costs from the absurdly high levels they had before, but they certainly won't have costs anywhere near where we are.

BTN: Looking at the market conditions, clearly AirTran has outperformed the big guys, but there must be some current concerns weighing heavily?

Leonard: The war and the war and the war and the war. Clearly it will affect both fuel and revenue. Fortunately, we don't have any international routes so we will be impacted certainly less than the legacy carriers. To prepare for it, we have hedged much of our fuel needs and are protected as well as we can reasonably be, much better than most of the other airlines. On the revenue side, we have accepted more forward bookings than we normally would this time of year. If you look back at the Gulf War, people who had already booked tended to fly. People who had not booked might have taken another look. We tried to secure a little more business early.

BTN: Is there a concern that relief measures enacted by Congress to offset war-related costs artificially would prop up financially weaker carriers, delaying shutdowns that could spur overall industry recovery?

Leonard: There will be some carriers that fail, regardless of what the government does. Their lives may be extended for a while but there are carriers that are fundamentally flawed, and I don't know who those are. If you would have asked me six months ago who the winners and losers would be, it would be a different list than it is today.

BTN: What will be the impact of airline failures on the industry at large and on AirTran?

Leonard: It depends on who fails, but I still think there is way too much capacity in the system. One thing that aggravates me a bit with my peers at legacy airlines is that revenue is down 20 percent from the summer of 2000 and yet capacity is only down 13 percent. It is not surprising they are having problems. To the extent that capacity is removed from the system, it clearly will help everybody. Depending on who it is and where, it will affect us more or less. We have the ability to move faster than anyone in the industry. We are not big enough nor have the balance sheet to muscle our way in, so we have to be opportunistic.