AirTran Airways 1

AirTran Airways Case Study

AirTran Airways 2

BAM 479 February 27, 2007

AirTran Airways 3 Mission Statement Innovative people dedicated to delivering the best flying experience to smart travelers. Every day. Although simple and straightforward, AirTrans mission statement is too broad and doesnt address some key areas. Revised Mission Statement Innovative people dedicated to delivering and growing (growth) the best domestic (markets) flying (product) and working experience, in terms of safety and service (self-concept & philosophy), to our employees and smart travelers (customer). Striving everyday to keep our promise of, not only safety and service (self-concept), but also leaving a small footprint in the environment (public image) through advances in mechanical technology (technology). Every day. Case Statement AirTrans major challenge is to remain profitable against the rise in competition from Delta Air Lines. Critical Milestones 1996 1997 1999 1999 1999 2004 2004 2004 2005 2005 ValuJet plane crashes in Florida Everglades halting company service AirTran formed through merger of AirWays Corp. and ValuJet. AirTran leaves Richmond, Virginia Joe Leonard joins AirTran as CEO and Chairman AirTrans fleet becomes youngest in industry Awarded Best Airline Website Ranked second in Airline Quality Report AirTran remains profitable compared to industry AirTran returns service to Richmond, Virginia and receives subsidies from Richmond Adds service to 9 US locations and to Cancun (International)

Trend Statement AirTran Holdings, Inc. growth can be attributed to its low-cost strategy, commitment to safety and service, and high utilization of planes and service routes.

AirTran Airways 4 Internal Factor Evaluation Matrix Weight .18 .14 .11 .07 .03 Rating 4 4 4 3 3 Weighted Score .72 .56 .44 .21 .09

Strengths 1. Remaining Profitable 2. High Service Quality 3. High Plane Utilization 4. Large Airport Presence 5. Young Airline Fleet Weaknesses 1. High Operating Cost per ASM 2. Concentrated to East US 3. Small International Presence 4. Low Ratings in Select AQR Categories 5. Highly Dependent on Fuel

.18 .10 .09 .06 .04 1.00

1 2 2 2 2

.18 .20 .18 .12 .08 2.78

Explanations Strengths 1. AirTran needs to remain profitable, both to survive but more importantly to keep investor interest and confidence. 2. High service quality is key for AirTran to keep a recurring customer-base healthy. 3. Especially important in AirTrans low-cost strategy, utilizing planes to their fullest potential is key. 4. AirTran has a high airport presence throughout eastern United States. 5. AirTran benefits from a young airplane fleet through cost savings, quality and marketing efforts. Weaknesses 1. A major weakness of AirTran is its high operating cost per available seat mile compared to other low-cost providers like Southwest and JetBlue. 2. Through increased competition, especially Delta, AirTran is only available mainly in the eastern United States. Customers needing to travel to the western US probably will choose another airline that could create brand loyalty for another airline. 3. AirTran is highly dependent on domestic travel. Diversifying to other markets will help ease all eggs in one basket effect. 4. Even though AirTran received a number two position in airline quality rating (AQR) there are still areas that AirTran lags in, like on-time performance and denied boardings performance. 5. Although mainly out of AirTrans control, their income and costs are highly associated to the cost of fuel.

AirTran Airways 5

AirTran is doing fine overall with respect to its internal strengths and weakness. Key areas to improve are its high operating cost per available seat mile (ASM), domestic and internal presences and other minor areas.

AirTran Airways 6 External Factor Evaluation Matrix Weight .18 .15 .11 .05 .03 Rating 2 3 1 2 2 Weighted Score .36 .45 .11 .10 .06

Opportunities 1. Decrease Operating Cost per ASM 2. Increase US Presence 3. Increase International Presence 4. Increase Select AQR Ratings 5. Add Consumer Technologies to Fleet Threats 1. Increased Competition 2. High Fuel Costs 3. Increasing Labor Costs 4. Political Policies 5. Labor Strikes

.2 .14 .06 .04 .04 1.00

3 3 2 4 4

.6 .42 .12 .16 .16 2.54

Explanations Opportunities 1. A major opportunity for AirTran to drastically increase income would be to decrease their operating cost per available seat mile (ASM). 2. AirTran has a major opportunity to expand drastically its US presence by moving airport terminals westward. 3. As noted in the milestones, AirTran is beginning service to Cancun, a popular vacation destination, but with increased competition AirTran needs to diversify its offerings. 4. One major opportunity to gain and keep loyal customer is to continue to improve its airline quality rating (AQR). Even though AirTran is currently rated number 2 there are still areas that could use improvements. 5. One way to gain customer loyalty through increased competition is to offer more consumer technologies and luxuries. AirTran is already incorporating XM Satellite radio into each plane, but other technologies could include iPod hookups for each seat and even in-cabin internet access (wired or wireless) for laptops. Threats 1. The largest threat to AirTran is the increased competition with the low-cost sector and the industry itself. 2. AirTran is highly dependent on the fluctuations of fuel costs. Since fuel is one of the largest costs to AirTran a slight adjustment can mean the difference between a loss and a profit. 3. Along of fuel, labor costs are one of the largest costs to AirTran and a slight adjust can mean the difference between a loss and a profit.

AirTran Airways 7 4. Political policies enforced by the US and other countries in which AirTran operates can have a huge impact on the company as a whole. With terrorism a top priority of the government, new policies can cause a huge burden on AirTran for new technologies or more labor costs (security, maintenance). 5. As with any business labor strikes can halt a companys operations causing the company to loose millions in revenue. AirTran is performing average in their external environment. Most of AirTrans opportunities and threats need to be addressed more aggressively, such as decreasing operating costs, expanding internationally, and increased competition.

AirTran Airways 8 Industry Analysis

Porters Five Forces

Substitute Products Bus Service Train Service Charter Planes Taxis

Suppliers Fuel Providers Pilots Mechanics Flight Attendants

Competition AirTran Delta JetBlue SouthWest

Consumers Business Travelers Regular Travelers

Potential Entry of New Competitors Government Regulations (FAA) Brand Loyalty and Identification Airport Contracts

AirTran Airways 9 Industry Analysis Continued Rivalry Among Competing Firms HIGH Competition among major competitors is extremely intense in many aspects. Since most competitors directly competing with AirTran emphasize a low-cost strategy many consumer look only to cost as a determining factor in a purchase, this indeed creates an intense environment. Switching costs are generally low, even though companies have tried to increase switching costs with the use of frequent flyer programs. Potential Entry of New Competitors HIGH Entry in to the airline industry is very hard, due to many factors. Some included are government regulations and licensing from the Federal Aviation Association, brand loyalty and identification of major airlines, contracts between airlines and airports for use of runways and terminals, and the substantial costs associated with forming an airline (airplanes purchases, labor costs, fuel costs, maintenance, etc.). Potential Development of Substitute Products LOW Substitute products are of little threat to the airline industry. No other product domestically competes directly with airlines in terms of cost and speed of travel. Bus services may cost less but travel speed extremely slow and tedious with many stops before your destination. Train service is generally much more expensive than airplane and only have select stations/ stops. Generally charter planes are much more expensive than commercial airlines. Taxis are tremendously expensive for long distance and are constricted to speed limits and road layouts. Bargaining Power of Suppliers HIGH All suppliers have tremendous bargaining power with the airline industry. There are few fuel providers and no reliable alternative to fuel. There are only so many pilots in the job market and planes cannot be flown without pilots. Mechanics for airplanes are in short supply and planes cannot be flown without being serviced. Flight attendants provide services that cannot easily be replaced and customer satisfaction without flight attendant would be detrimental. Finally airports are in limited supply and you need airport to land planes and board passengers. Bargaining Power of Consumers LOW Generally speaking consumers, business or regular travelers, have little bargaining power with airlines. Either they buy the ticket or not, one traveler does not hurt the airline. Also there are only a select few airline to choose from and even less at an individual airport. Either the consumer wants to fly or they dont.

AirTran Airways 10 Competitive Strategies Competitive strategies for AirTran include the following: Market Penetration AirTran is seeking to increase market share in its current markets through increased marketing efforts and capacity. AirTran was voted the Best Airline Website in 2004 that showcases AirTrans efforts to increase its market share. Along with marketing efforts, AirTran is expanding its capacity by replacing airplane galleys with seating. Adding extra seats per flight increase the amount of revenue per flight and also decreases cost per passenger per flight. Market Development AirTran is trying to expand from its eastern US concentration into western US and international to popular vacation spots like Cancun, Mexico. Product Development AirTran is improving its present airplanes with consumer technologies like XM Satellite Radio for each passenger free of charge. Retrenchment In an industry of decreasing profits and increases costs, AirTran is trying to find ways to cut its fat by outsourcing mechanic work.

AirTran Airways 11 Financial Analysis

Ratios derived from 2004 data

Industry (RMA, SIC 4512) L M H Current Ratio 2.04 .60 1.1 1.6 For every dollar of current debt (liability), AirTran has $2.04 of current assets to pay for that debt. This number is above the industry average of 1.1, meaning that AirTran is doing a great job of managing its assets. Quick Ratio 1.9 .40 .70 1.1 For every dollar of current debt (liability), AirTran has $1.90 of current assets, not counting inventory, to pay for that debt. Again this number is above the industrys average of .7 meaning that AirTran is doing a great job of managing its very liquid assets. Debt-to-Assets 0.63 For every dollar of assets, AirTran has $.63 of debt issued. Debt-to-Equity 1.71 -4.6 .90 1.8 For every dollar of equity, AirTran has $1.71 in debt. Compared to the industry average of $.90 AirTran is doing very good. Long-term Debt-to-Equity 1.11 For every dollar of equity, AirTran has $1.11 of long-term debt issued. Compared to the previous ratio, this shows that most of AirTrans debt is long-term. Times-Covered Ratio 1.69 2.2 4.5 10.6 For every dollar of interest, AirTran has $1.69 to pay for those interest charges. Compared to the industry, AirTran is far below the industry. Note: The number, 1.69, may be artificially deflated since there is income earned from interest. Activity Ratios Inventory Turnover 36.79 For every dollar in inventory, AirTran generates $36.79 in sales. This number is artificially inflated and contains little value since AirTran is primarily a service company and little inventory is stocked. Fixed Asset Turnover 2.71 1.4 3.6 8.9 For every dollar of fixed assets, AirTran is able to generate $2.71 in sales. This is average compared with the industry average of $3.60. This number for AirTran may be low due to the high costs/ worth associated with their young airplane fleet.

AAI

AirTran Airways 12 Total Asset Turnover 1.15 1.0 2.1 3.0 For every dollar of assets, AirTran is able to generate $1.15 in sales. This below average compared to the industry average of $2.10. Compared to the previous ratio, AirTran must have a greater amount of current assets (cash and non-fixed assets). Capital Intensity Ratio .87 1.0 .48 .33 AirTran needs $.87 in assets to generate a dollar in sales. This is quite high compared to the industry average of $.48. This ratio confirms that AirTran needs to reduce its operating costs, which is one of its weaknesses. Reducing this number will greatly improve AirTrans profitability.

Profitability Ratios Gross Profit Margin 3.15% For every dollar of sales, 3.15% of the sale goes into AirTrans gross profits. This number seems extremely low, but it is confirmed by AirTrans high operating costs. This number was determined by (Sales Revenue-Operating Expenses)/ Sales Revenue. Cost of Goods Sold was not used because AirTrans costs are mainly operation related (fuel, labor). Therefore, using cost of goods sold would artificially inflate AirTrans gross profit. Net Profit Margin 1.18% For every dollar of sales, 1.18% of the sale goes into AirTrans net profit, profits after taxes and interest. This is directly related and could be increased by decreasing AirTrans overly high operating costs. Return on Total Assets .01 For every dollar of assets, AirTran is able to generate $.01 of net income. This number is horrible; AirTran needs to more efficiently utilize its assets. Return on Shareholders Equity .04 For every dollar of equity, AirTran is able to generate $.04 of net income. Again this number is horrible; AirTran need to better utilize its equity.

AirTran Airways 13 Financial Analysis

Note: Shaded cells offer areas of interest.

AirTrans other income increased drastically from 2002 to 2003. Possibly this was due to other travel revenues from package shipping. The increase in fuel expense by 38.74% can be attributed to the high increase in the cost of fuel. Aircraft rent increased from 2002 to 2003 possibly by a larger number of planes in AirTrans fleet. Aircraft insurance and security decreased from 2002-2003 may be from increased airport security, so AirTran didnt need to hire as many and insurance rates may have decreased. Depreciation may have decreased do to AirTrans planes getting older and depreciating less. An influx in income for 2003 seems to be associated with a decrease in operating costs and extra income coming from interest, income tax benefits, and government subsidies.

AirTran Airways 14 Financial Analysis

Note: Shaded cells offer areas of interest.

Cash grew substantially from 2002 to 2003 probably from AirTrans huge profits and subsidies; this in turn increases current assets. Inventories from 2002 to 2003 grew, maybe to include more spare parts or customer amenities. Accounts payable increased a lot from 2002 to 2003 possibly from in credit accounts at the time the balance sheet was obtained. Common stock from 2002 to 2003 for AirTran must have been a hot ticket item, or AirTran issued more stock.

AirTran Airways 15 Financial Analysis

Note: Shaded cells offer areas of interest.

Substantial income was made in 2003 mainly due to a decrease of operating expenses as a part of total revenues. Major decreases seem to have come from wages and fuel, which happen to account for most of the companys expenses.

AirTran Airways 16 Financial Analysis

Note: Shaded cells offer areas of interest.

The 2.98% increase in marketable securities is probably associated with stock in other companies. Current assets increase slightly compared to previous years, but this is probably associated with AirTrans deferred income taxes. Fixed (Non-current) assets increased maybe from increased labor or plane purchases or maintenance.

AirTran Airways 17

Recommendation I would recommend that AirTran continue its expansion into other domestic and international markets, and to work hard to decrease is operating costs per available seat mile (ASM) to better compete with its competition, notably Delta Air Lines.

AirTran Airways 18 Sources Cited AirTran Airways Corporate Website (http://www.airtran.com) Strategic Management, Concepts and Cases, p. 202-213 CNN Money, AAI (http://money.cnn.com/quote/financials/financials.html?symb=AAI)