Kevin O'Toole/ATLANTA
ValuJet's success has been remarkable by any standard. With its own distinctive brand of low-cost operations, and scant regard for conventional wisdom, the start-up carrier has stormed up the US airline industry rankings.
Operations were launched in October 1993. Less than two years later, ValuJet ranks among the 12 largest US passenger airlines, having produced growth rates that make Southwest Airlines, patron saint of low-cost airlines, look sluggish by comparison.
The airline now offers its no-frills, low-frequency, services to more than 20 major cities within striking distance of its base in Atlanta, Georgia, while a second front has been opened up at Washington DC, serving another nine.
Fares have been kept astoundingly low, to the point where the airline believes that it is competing with the car rather than other carriers. Travelling the 1,000km (600 miles) from Atlanta to Miami starts at $59.
"It's the most successful start-up carrier ever," says president Lewis Jordan, without too much fear of contradiction. As he points out, even Southwest took six years to get to ten Boeing 737s. ValuJet is now running around 30 of its favoured McDonnell Douglas DC-9-30s, and aircraft are still being added at the rate of 18 a year.
Most importantly, ValuJet has made profits from the outset, turning in some of the industry's highest margins in 1994 - its first full year of operation.
Such vital statistics have not gone unnoticed on Wall Street. The share price has risen fivefold, since ValuJet's public offering a year ago. Financial analysts have also been quick, however, to start asking questions over how much longer ValuJet can maintain its death-defying growth.
Recent history has not been kind to low-cost start-ups. More modest success stories than that of ValuJet have begun to run out of steam as expansion leaves them overstretched, or even grounded.
As ValuJet is keen to point out, it is no ordinary start-up. Jordan believes that much of the debate over the airline's future misses the mark. There are, he says, no hard growth goals or great ambitions, only a formula which works.
"We're doing something very different here. We haven't got a five-year plan, and I've never seen one work at any airline," he says. "It's like embarking on a journey. You can either set out to reach a specific point, or else you can travel along, make good progress and continue to move ahead until it stops being enjoyable." ValuJet is clearly still enjoying the journey.
A visit to the company's modest headquarters, on the outskirts of Atlanta's Hartsfield Airport, helps to illustrate the point. Like its services, the offices are no-frills, informal and friendly, with no suits or ties in sight.
Jordan's own informal dress and workaday office give few clues that he was a former president of Continental Airlines and of Flying Tigers before that.
That is part of the ValuJet formula. The external enthusiasm belies some tough business expertise behind the running of the young company.
The three original founders are all veterans of US industry. Chairman Robert Priddy has a string of start-ups to his name, including Atlantic Southeast Airlines, Air Midwest (now part of Mesa Airlines) and Florida Gulf Airlines. Maury Gallagher and Tim Flynn had co-founded WestAir and built it into one of the largest US commuter operations before it too went to Mesa.
Looking around for another business to found, not necessarily an airline, the three partners eventually settled on a concept for a charter carrier in Atlanta, to be called "Chirter Way". A study of other start-ups, in particular Morris Air, helped change the direction towards a low-frequency scheduled operation, and the ValuJet concept began to be born.
Jordan, then recently departed from Continental, was invited to join the operation as president and chief operating officer. He accepted, but on condition that he took a financial stake in founding the company.
Against the $1 million invested by each of the three, Jordan contributed $200,000 cash, signed a note for a similar amount, with the remainder to come over the next five years in "sweat equity". He is a tireless champion of incentives and the belief is reflected throughout the company. While salaries, including his own, are modest by airline standards, bigger earnings have come through stockholding and profit share.
ValuJet's pilots have their annual wage set at a notoriously low basic of only $42,000, but, with a cash profit bonus and valuable stock options, Jordan points out that their earnings in 1994 were in the region of $94,000.
"It appeals to the entrepreneurial. We treat pilots like managers," says Jordan, adding that his mail bag is full of applications of pilots wanting to join the airline.
Jordan admits that the other founders had some reservations about his own experience on major airlines, but adds that they should not have worried. "They had some concerns that I would approach business from a big airline perspective, but I was convinced we should run very hard in the opposite direction," he says.
He sidesteps any comment on his experience at Continental, including the ultimately failed Lite operation. Jordan only cites the oft-repeated wisdom of Southwest chairman Herb Kelleher that it is easier to build a new house than to refurbish an old one.
From the start, ValuJet has kept costs down by pioneering the first entirely ticketless system, helped by the computer expertise of Maury Gallagher. Passengers can simply phone through their credit-card bookings to the airline's confirmation system and turn up on the day. Only around 20% of tickets are purchased through travel agents and ValuJet flights are not listed on any computer-reservation system.
The fare structure is also deliberately uncluttered by discounts and specials, and the airline has eliminated the weekend-stay requirement. Standard one-way fares have helped endear the airline to businessman usually penalised for weekday travel. Services are naturally the classic single-class, no-frills, no-meals flights pioneered by the likes of Southwest.
ValuJet's choice of Atlanta also initially raised eyebrows. Although the city has become one of the fastest growing in the USA, and the demise of Eastern Airlines had left it without a strong second carrier, the conventional wisdom suggested that new operators would be killed by Delta Air Lines with its vice-like grip on the hub.
Early on, Delta discounted fares in head-on competition in key ValuJet markets, but has since appeared to back off, with speculation that anti-trust concerns came into play.
Competing with the car
Jordan remains relaxed about the threat, arguing that Delta has found little cause to worry about the impact of its low-cost colleague. He adds that, on the contrary, Delta has been achieving record numbers of passengers at Hartsfield in recent months.
"We didn't base the operation on the premise of stealing traffic. We made our own," says Jordan. "We carry people who would have driven automobiles or stuck at home, or businessmen who would have made a phone call."
ValuJet has no intention of stepping out of this niche, carved out at the bottom end of the market ,well away from the service levels of the network carriers, says Jordan.
He rejects fears that the niche will run out, at least in the foreseeable future. Almost any major city within a 1,400km-radius of Atlanta and now Washington, plus the occasional connection, is fair game for three or four flights a day, provided the price is right, he argues.
Little more than half the cities identified as potential targets have so far been added into the network and the formula could be repeated elsewhere around the country, if and when the business case is made out, Jordan says.
There are no great pressures to grow, or to raise the cost base. "We've taken critical mass out of our vocabulary. What we want to be is profitable," he adds.
So far, the airline has got its wish. ValuJet ended 1994 with a net income of nearly $21 million, and an operating margin of just under 26%. Costs of ¢4.2 per revenue available seat kilometre (¢6.5 per available seat mile) undercut even those of its friends at Southwest.
Fears that costs will begin to edge up have yet to be proved. In the first quarter of 1995, unit costs dipped to the ¢4 mark, despite threefold growth in both passengers and capacity. Load factors have actually been edging up, reaching 71.5% in May.
Jordan concedes that the network carriers, including Delta, are aggressively cutting their own systemwide costs, but doubts that they will seriously attack ValuJet's cheap, low-frequency, niche. He stresses that ValuJet needs only 50 passengers a flight to break even, and rarely runs more than four daily services from any city.
"When we started in Washington, USAir said that they would run us into the ocean," says Jordan, but ValuJet is still there, although it recently pulled off the Montreal route. Even Southwest, which may yet stray across into the key Florida market, is based around higher frequencies, says Jordan. "It would hurt Delta more than us," he adds.
Perhaps a more tangible constraint on ValuJet's formula is that the airline must one day run out of its trusty 113-seat DC-9-30s to continue building its fleet.
Jordan says that buying new aircraft for $20 million apiece was never an economic option. Including hushkit and refurbishment, ValuJet has recently been spending around $5.5 million apiece on its aircraft. While that is considerably more than the cost of the initial ex-Delta fleet purchased from MDC, even adding in penalties on fuel and maintenance, the DC-9s win out easily on cost.
"The DC-9 is a real bargain right now," he says, although he concedes that they are harder to find. Recent aircraft have come from as far afield as Italy, Colombia and Turkey, again with the help of MDC. New additions will take the fleet up to 36 by the year-end, but more will have to be found to keep growth going in 1996 and beyond.
"If someone would sell us a fleet of 40 DC-9s, we'd buy them. At the moment, we have to be opportunist and purchase the ones that we can," he says. In the future, MD-80s are not ruled out as an alternative, although the $10-12 million price tag may cause a pause for thought.
Rumours still abound that the airline may eventually be sold or simply lose its magic, but, for the time being at least, ValuJet is still having fun proving its formula right and its critics wrong.
Source: Flight International
