The term 'survivor' may be sorely overused in the airline industry, but it remains the most appropriate description for AirTran Airlines, the product of a merger with the ill-fated ValuJet whose once-bright future ended abruptly in 1996 with a controversial crash in a Florida swamp.
Not that there is much that is recognisable of the old ValuJet these days. The changes are everywhere: from the name to the livery; from the chief executive officer to the corporate culture; from the service offered to the company headquarters. The new slogan - 'It's something else' - carries a weight of meaning not normally credited to a one-liner. AirTran may sit on the rich cash mountain it inherited from its ValuJet days, but in every other sense this is different airline.
AirTran's forthright, no-nonsense president and chief executive officer, Joseph Corr, makes no apology for stripping the airline of its old identity. It took him, he says, 'about two weeks' to realise that, if ValuJet was to survive at all, the metamorphosis would have to be ruthless and total. It took a little longer to persuade the board of directors, he adds with a wry smile. If, however, as he anticipates, the second quarter results show a return to profitability - following two years in which the accumulated net losses totalled $146 million - Corr believes his decision will be justified. Ironically this would mean that, while so many startup carriers in the US remain in the red financially due in some part to the ripple effect of the ValuJet crash and the ensuing high-profile inquiry, the son-of-ValuJet has bounced back into the black.
'It has been a long climb back, but it's done,' says Corr, who describes the second quarter profits as 'meaningful'. For the 1998 first quarter, AirTran reported a net loss of US$7.9 million on operating revenues of $94.5 million, compared with a net loss of $18.5 million on revenues of $36.9 million for the 1997 first quarter. Corr predicts that the airline will be 'solidly profitable' for 1998 overall.
In May 1996, the fast-growing and profitable ValuJet, which had established itself in Atlanta, Georgia as a no-frills, low-fares carrier, became the subject of intense public scrutiny after one of its DC-9s crashed shortly after take-off from Miami. The official accident report found that incorrectly labelled oxygen canisters loaded by a contractor into the cargo hold had started an intense fire that quickly spread through the cabin. ValuJet was never able to shrug off fully the resulting suspicions over safety that the American public harboured about low-cost airlines generally and ValuJet in particular. The situation was aggravated when ValuJet suspended operations in the face of a Federal Aviation Administration investigation into its maintenance practices.
For most airlines, especially a low-fares startup, there would have been no second chance. But ValuJet had a major advantage over most startups - it was cash rich. Even after the shutdown and the costs of the 1997 merger with AirTran Airways and relaunch as AirTran Airlines - which Corr says used up well over $110 million - the airline has a cash reserve of $73 million. It is this, admits Corr, that convinced him a turnaround was possible. 'Fixing businesses is what I do,' says Corr, who turned operating losses into profits at both Continental Airlines and TWA in the 1980s. 'I get a lot of interesting calls to fix businesses, but when you look at them you see why. The patient is already dead. I didn't think that with ValuJet because it had a lot of money. I looked at ValuJet and thought it was eminently fixable.'
Strangely, therefore, Corr is not wedded to the idea of preserving all of the $73 million that remains. A hushkitting programme for the airline's 39 DC-9s, at $2 million per aircraft, will eat into that cash reserve, as will a predelivery payment for the 50 new Boeing 717s the airline has on order (along with 50 options that Corr expects to confirm next year). Again, Corr admits he had to nudge the board into agreement. 'I felt that some of that cash had to be used to protect the business rather than just sitting there as a lifeboat. That's why I needed to spend the $110 million. The more successful you are, the less cash you need because you can borrow what you need. However, it is in our business plan to maintain a comfortable cash position.'
ValuJet's makeover was kicked off in September 1997 when Corr, who had joined the company 10 months earlier, unveiled a new business strategy for ValuJet and its merger partner, Orlando-based AirTran Airways. The corporate headquarters was moved from Atlanta to Orlando; the brash blue, white and yellow livery of ValuJet - along with 'Critter', its smiling cartoon aircraft logo - was dropped in favour of muted turquoise and beige, and the casual Polo shirts and trousers worn by all ValuJet employees were traded in for more traditional business attire and uniforms.
'The ValuJet name still had a lot of value then, so it took guts to throw it away,' says Corr. 'But it had to be done. We had to rebuild a new image - that we are serious people doing serious things in a business-like way. Businesses make a mistake when they don't realise that the world changes sometimes. In ValuJet's case it changed more abruptly and dramatically than is typical, so the response had to be dramatic.'
The ValuJet model, according to Corr, was to be low-fare, leisure-orientated and travel agent unfriendly and use little advertising. AirTran's goal is to appeal to a broader spectrum of passenger. 'The landscape has changed, in my view, and you cannot compete on just cost alone now. You have to have something else - customer loyalty.'
Preassigned seating and a business class cabin are now available on all aircraft. The 11 Boeing 737s have eight business and 111 coach seats while the DC-9s have 16 business and 90 coach seats. No meals are served in either cabin, but passengers can purchase the roomier business seats for just $25 on top of the full one-way economy fare, or $40 for a multi-stop flight. 'In the US, the first-class seat is usually priced so high that you have to give it away - that seems fundamentally dumb to me,' remarks Corr. 'Our's is affordable and the seat pitch is every bit as good as anyone else's. We've just omitted the pressed chicken lunch.' Still, the idea has been slow to take off. 'At first, we thought we had made a mistake because the loads were extremely light at the front. But it has built and built and we are very pleased with it now,' adds Corr.
Although the airline does not break down its load factors according to cabin, the overall picture is an upward line. From a 38 per cent load factor in September last year, the numbers climbed to 54 per cent in January and 60 per cent in May. Revenue miles have almost tripled in the 12 months from May 1997 to May 1998 from 125,000 to 305,000 and some 40 per cent of bookings are now made through computer reservation systems compared to less than 15 per cent before the relaunch. Corr says a 'large part' of those new CRS bookings is incremental business. The airline has managed to hold down its cost per available seat mile to around 7.5 US cents while raising average fares from $60 to $79. Yields have held steady at just over 12 cents.
Although Corr plans to continue growing, now that the company has achieved its prime goal of profitability, he says there will be a hiatus over the next few weeks. 'We have stopped from time to time to take a breath and we are doing that this summer, when there will be no growth. We've got the higher load factors, so now is a good time to put our heads down and run a good airline with those sorts of load factors. You can only lead as fast as people will follow. If you see yourself getting ahead, then you have to slow down and I have not been reluctant to do that.'
Corr says he would like some time to be able to hire more experienced middle managers, something that has become a protracted process in the current tight US job market. Employee morale, he insists, is not a problem despite the turmoil of the last two years. 'Everyone said to me when I came on board: ''What are you going to do about morale?" I said I was going to fix the business. That's much more important than passing out warm fuzzies.'
A three-year contract with the company's pilots was agreed earlier this year with few difficulties, and a three-and-a-half-year contract with the mechanics was signed in 1997. So far an agreement with the flight attendants has eluded Corr, however, and he expects those negotiations to go to a national mediation board. 'We are still very far apart after two years of negotiation,' he admits.
The airline now serves 38 cities up and down the eastern US, going as far west as Dallas-Fort Worth, as far north as Rochester, New York, and as far south as Fort Lauderdale, Florida. 'I like the east coast and there are a lot of opportunities there before we start looking at Los Angeles or Seattle,' says Corr, adding that Miami and the Caribbean might be the next new destinations. The airline will remain a mostly short-haul operation, with stage lengths of 1,000 miles or less. But Corr wants to continue building up frequencies on strong business routes, such as Atlanta to New York/La Guardia, where the airline has six daily roundtrip services, and Atlanta to Washington Dulles, where there are eight roundtrips. From 1 July there will be 10 daily nonstops between Atlanta and Orlando. But, while services out of Orlando have been built up over the past year, Atlanta remains the airline's key focus.
Corr's benchmark for a successful airline is how well it is doing on Tuesdays, and he says there is still work to be done here. 'I don't think it takes a particular genius to sell tickets for the Thursday before the fourth of July. What you have to be able to do is sell tickets on a Tuesday in November,' he says. Consequently, some nonstop services between Orlando and cities in the north have been suspended. 'They didn't meet my Tuesday criteria,' explains Corr.
But Corr's dismissal of the new low-cost competition that has emerged since the ValuJet accident is suspiciously light-hearted. Delta Express, set up as an airline-within-an-airline by Delta Air Lines and running a successful no-frills operation up and down the east coast, is waved away by Corr because he says such an airline cannot be 'truly low cost'. Of the similar new operation, MetroJet, launched in June by US Airways, he asks: 'Metro-who?' But the reality is that the east coast has become one of the most fiercely competitive markets in the low-fares sector and the majors that have added to that competition. Southwest Airlines has also entered the east cost with its operation at Baltimore-Washington.
Meanwhile AirTran is once again causing ripples in Atlanta - home hub of Delta - even though no-one believes that Delta will let this revamped ValuJet challenge it in the audacious manner of the old ValuJet before 1996. 'Delta learned that lesson and won't let it happen again. It will protect Atlanta, so AirTran will find the going much more difficult,' says one New York analyst. Corr admits that there have been some run-ins with the major, such as when the Department of Transportation made six daily slots at LaGuardia available to AirTran under its new pro-competition policy. 'Delta put in a big lobbying effort in New York against that move,' says Corr. 'We've seen a big reaction from Delta to our presence this time. But we will beat them with better prices. We'll also have cleaner aircraft, be friendlier and have a better on-time performance.' But, given Delta's recent customer service improvement campaign under new CEO Leo Mullin, that sort of fighting talk may be difficult to follow through.
The Wall Street jury on AirTran is still out, although several analysts support Corr's move away from the ValuJet branding and say the new image seems to be paying off. 'It was absolutely essential to drop the ValuJet name,' says one analyst. 'But they've still got a lot to prove after it went so sour.' Corr says that three or four analysts are now contemplating covering the company once again. 'ValuJet was the darling of Wall Street, then it became the un-darling. But as our fortunes improve once again, we are seeing a return of interest. I think I have a good reputation on Wall Street. You just have to do your job and Wall Street recognises that.'
But Corr is not in a frame of mind to worry too much about the investment community. 'I've done several turnarounds, but I feel as good about this one as any. I look at the figures and it just makes me feel good,' he says.
Source: Airline Business
