Interview: AirTran chief executive Bob Fornaro

Lacrosse is a highly physical, highly competitive sport that relies both on individual courage and on team-playing. It is the sport that paid ­AirTran chief executive Bob Fornaro's way through college, where his lacrosse scholarship taught him that the offence is important but so also is taking advantage of the other team's mistakes.

Now a decade into his tenure at AirTran, Fornaro is team captain. The airline's long-time leader, Joe Leonard, has left the scene entirely, having gradually ceded titles and responsibilities to Fornaro, who took the chief executive role in late 2007 and became chairman of the board of directors in May 2008.

Leonard knew all along the value of a team, and it was his decision to bring in Fornaro, a former US ­Airways planning and strategy executive. Leonard was clearly grooming Fornaro to succeed him, and as the Long Island native assumed greater responsibilities, he played from team strengths. Fornaro started with basics. "Look, when I came here 10 years ago we were an airline with an old fleet and at best a mixed reputation," Fornaro says in the New York accent he has retained despite his 10 years in the South. "We were a company with no money. We had a fleet age of 29 years. We had to refinance $230 million of debt, and we were able to do that in early 2001. The first thing that we did as an airline was fix the fleet. We had the Boeing 717 coming in and that is a great plane. Airlines live and die by their ­aircraft choices."

©Terri Hanson

By late 2003, all of the old McDonnell Douglas DC-9s were gone from the fleet, replaced by 717s. By the middle of 2003, AirTran was flying coast to coast, but was using another company's aircraft under a wet-leasing pact. "We realised we needed something with longer legs than the 717 and so we went with the Boeing 737," says Fornaro. In July of 2003, it ordered 50 737-700s with options for 50 more and also picked up 10 more 717s. As the 737s came into the fleet in a steady flow, AirTran added long-distance routes but also used the aircraft to build up thicker routes. Where the 717 is very much the aircraft that emphasised AirTran's ability to serve smaller communities, the 737s put the carrier in a position to play big time.

The fleet is also central to Fornaro's strategy for keeping AirTran alive through the fuel ­crisis and now through the demand-downturn crisis. He puts it the way a Harvard MA would (and he is one): "Our focus is on monetising the value we have embedded in the airplanes." Fornaro means bluntly that the airline's future is dependent not on the ­revenues that the aircraft can derive from ­passengers or cargo, but from the value of the aircraft on the global market.

"We started the year with 136 airplanes with an intention of going to 147. Basically, since then we have sold 10 airplanes and we have returned one to a lessor. So our fleet is about flat, and we deferred 36 airplanes at the different dates in the future. So, as you look at 2009, our fleet is going to be somewhere between 132 and 138 airplanes, versus our original plan of 161 aircraft. We have the potential for a few more aircraft sales as we enter 2009. Two years ago, we decided to go for double-digit growth. Even in early 2008 we were looking at 10-12% - even with oil at $90 a barrel," he says. But as the year began to unfold, "it became clear that oil was going to be the determining factor in which airlines would prosper and which wouldn't. So we made a decision back in the second quarter we had to reposition our company."

For Fornaro, the challenge at AirTran has changed as he has taken on greater responsibilities. As chief operating officer since March 2001, he worked in an era of growth as the airline expanded its fleet and destinations. AirTran became a low-cost challenger that had grown out of the shadow of Delta and was a player in its own right. In 2004, AirTran carried some 13 million passengers by 2007, this had risen to 23 million, and last year the ­carrier had 24.6 million passengers.

Another of Fornaro's goals, from the moment he walked in the door, was getting AirTran's service ratings up and keeping them up. He concedes: "We were not running a good airline" back in 1999. By any measure, from on-time arrivals to baggage handling to flight completion, the carrier was in the basement. In 2003, for instance, AirTran ranked eighth out of 10 in the Airline Quality Ratings compiled by Wichita State University from US Department of Transportation statistics. But through simple blocking and tackling, AirTran was able to raise that and by 2008 was ranked first among the top 10, bumping JetBlue from the top ranking.

Fornaro says AirTran began its repositioning earlier than other companies did and so is at an advantage. "From a cash situation, certainly again we're going to have a loss this year. We now have a credit card holdback [of 50%]. We took a number of steps to increase our liquidity. We did a debt-equity offering in April, and we did a $215 million credit facility over the summer." AirTran raised $375 million from aircraft sale-leasebacks, the debt offering and other steps. But as fuel fell in the fourth quarter, the hedges put it under water. "We would've made money in the fourth quarter except for the hedges. It would've been our best fourth quarter since 2003." In fact, in 2008 AirTran lost more than $155 million in the first three quarters, despite record revenues in each quarter. The deep red ink follows a string of net profits, from $7.5 million in 2005 to nearly twice that, $14.7 million, in 2006, and to $52.7 million in 2007.

Fornaro insists that AirTran will not be the net acquirer it tried to be in late 2007 when it launched an offer for Midwest Airlines, an offer the Milwaukee-based carrier ultimately thwarted with a private equity buyout from TPG Group that included a Northwest ­Airlines stake. "Instead, we've grown at Milwaukee organically and we'll probably grow there more," he says. "As some of the hubs of the Upper Midwest become excess as the Delta/Northwest merger drives consolidation, AirTran will look at places like Minneapolis, Detroit and Memphis."

Because it does not have aircraft to spare, AirTran will have to be extraordinary in any move it makes. Stuart Klaskin of Florida-based KKC Aviation consultancy says: "The AirTran guys are among the most focused teams anywhere. They don't go into anything lightly. They're more tough-minded than tough, but they have the competitive mindset. And everyone there has known for a long time that Fornaro would succeed Joe, so it's not as if there are or should be any jealousies."

Fornaro knows that labour issues will present themselves this year, especially if the airline makes money. He is confident, however, because "these guys know that their job security lies with a carrier that is going to grow. We had to do some layoffs [earlier in 2008] and that was painful, but the pilots know that their future is tied to the airline's." A small, independent union now represents AirTran's 1,600 pilots, but it is in talks to affiliate with the Air Line Pilots Association.

As last year's crisis deepened, AirTran added new routes and cities, but cautiously. For instance, in November, it added Columbus, Ohio, a market where the brief existence of very low-fare player Skybus had whetted the public appetite for cheap seats. It did not just add Atlanta flights, but also serves Orlando and Fort Myers in Florida, and in March will begin nonstop flights between Columbus and Fort Lauderdale. With the Columbus service, AirTran now straddles Ohio, from Akron/Canton in the east to Columbus in the centre to Dayton in the southwest. This effectively positions AirTran to avoid the high-fare fortress hubs of Cleveland (Continental) and Cincinnati (Delta) while still staying in driving distance of those cities for discount-hungry flyers. Cincinnati, where the fares are, by the calculation of the Bureau of Transportation Statistics, about the highest in the nation, "has been talking to us for years", says Fornaro, but he is not eager to serve the airport. "It would be hard" to go into Cincinnati, he says.

© Terri Hanson

The carrier recently signed an agreement with the new, privately-funded airport in Branson, Missouri. AirTran is the first airline to do so, and was attracted by a guarantee that it would be the only carrier to fly between the country music resort and Atlanta. It starts in May, when the airport opens.

But with a shrinking fleet, AirTran is looking at ways of maximising revenues. It has turned to ancillaries, though it has done so in a very paced and measured manner. As the US majors sought to add new revenue streams and began adding fees for such services as checking a bag or getting a priority seating reservation, AirTran held back at first and did not add a first checked-bag fee until after Delta did so in November.

Fornaro explains: "We took a number of fare increases and a fuel surcharge, but we had a substantial focus on ancillary revenues. We began to offer an advance seat-assignment at the time of purchase for certain leisure tickets either for aisle or window seats. We had change fees. We have a call-centre fee. Everything we have heard is that there has been very little change in behaviour, and this first bag fee will be substantial going forward." The seating fees, at $6, are generating about $30 million on an annualised basis, and the fees for checked luggage could generate another $50 million.

But it is AirTran's identity in the market long-term that Fornaro knows will be his challenge once it gets past this downturn. For instance, the carrier has long had a business-class section on every aircraft. It also has on-board entertainment in the form of satellite radio with free earphones at every seat. For years, former AirTran chief Joe Leonard bragged abut the XM Satellite Radio as a differentiator, but now with JetBlue, Frontier, Virgin America and others with their on-board television, movies and other advanced in-flight entertainment, Fornaro says: "We'll have to look at something more. The radio is just not enough. We're talking to various [IFE] companies and we should have a decision in a few months".

AirTran has moved beyond its early days as an Atlanta-based carrier that existed and thrived as far as it did mostly by not being Delta. In its early days, including the days of the disastrous May 1996 crash in the Everglades of an Atlanta-bound DC-9 operated by AirTran's direct predecessor ValuJet, the carrier attracted passengers simply by being cheaper than Delta.

Under Leonard that changed, with the new fleet, a corporate travel programme, an innovative plan that refers travellers to Frontier Airlines for Frontier destinations and sends Frontier passengers to AirTran's website for travel to AirTran destinations. "There aren't many other carriers where an arrangement like that is possible, though," says Fornaro, adding that AirTran would be open to discussing a codeshare with Southwest.

He says AirTran's diversification will include some Caribbean and Mexican flying, but the carrier is also poised to benefit from other airlines' domestic pullbacks. At Atlanta's Hartsfield/Jackson, which he likes to note is the world's largest low-fares hub, the carrier has limited its exposure to Delta ("a very tough competitor"), lowering its traffic there from 90% in 2001 to 65% as operations at Baltimore/ Washington (BWI) and Orlando grew. AirTran's Atlanta market share is 22%, compared to 70% for Delta and its affiliates. At BWI it is 14% while Southwest's is 54%, and at Orlando, it is about 12%, compared to Southwest's 23% share. But in each of these markets, AirTran is the number two player.

"[At BWI], which has been very, very strong this year, we are seeing double-digit capacity reductions by others right now and going forward. And as a lot of carriers have abandoned Florida, we have become basically another airline that goes in and out of Florida, and it has done very nicely in 2008, and we have seen double-digit capacity coming out of most cities in Florida. We are the beneficiary."

Michael Derchin, the FTN Midwest Securities airline analyst, is bullish on the changes that Fornaro and team have made. AirTran "has right-sized its schedule for a recession in 2009", he says, forecasting an actual 5% decline in capacity. AirTran is now the undisputed low-cost carrier leader with a cost per seat mile (not counting fuel) of about 6 cents at a 734 mile stage length, which is "impressive for a hub-and-spoke carrier". Derchin said in December that he sees AirTran as profitable for the whole of 2009 as its fuel hedges wind down, even with a decline in unit-revenue growth. Fornaro will not predict financial performance. He will very confidently, almost brashly, however, predict that "we will be around. We are and will be a survivor".

"We made a decision back in the second quarter we had to reposition our company"

MARKING 10 YEARS

Bob Fornaro joined AirTran in 1999 and is now celebrating his 10-year anniversary with the Orlando, Florida-based airline. His roots lie in the Northeast, and the native of New York's Long Island won a lacrosse scholarship to Rutgers University in New Brunswick, New Jersey. After taking an undergraduate degree in economics and then a master's degree from Harvard, Fornaro worked for the old TWA in scheduling and planning. Later, at Northwest from 1988 to 1992, he managed international and regional carrier partnerships. But Fornaro's time at US Airways, where he was senior vice-president for planning from 1992 to 1998, gave him experience in managing a carrier that was growing domestically and internationally.

Now 56, he has been married for more than 30 years. ("Who ever thought I would have been married this long?" he says with a laugh.) Fornaro has three grown children, two sons and a daughter.

TEAM OF COLLEAGUES

Bob Fornaro's titles may have changed since he joined AirTran Airways a decade ago, but the one job he has had since coming to Orlando has been that of team builder.

Under former AirTran chairman Joe Leonard, Fornaro had considerable latitude in bringing in managers, and he has built his team from former colleagues.

For instance, Kevin Healy, who is the senior vice-president for marketing and planning, is a former US Airways executive, as is John Kirby, AirTran's long-time network planner who is now senior director of strategic planning and scheduling.

In September, Steve Rossum, a former US Airways planning executive, was lured back to AirTran, which he left in 2001 after managing its leveraged recapitalisation. Rossum is now AirTran's executive vice-president of corporate development.

Healy and Kirby work in adjacent offices to Fornaro in the carrier's compact Florida headquarters, and often pop their heads round the door to discuss issues. Fornaro's decision-making is informal: executives present their points of view, but Fornaro makes the final decision and takes the final responsibility.

Some AirTran officers work from Atlanta, where the carrier has its major hub, and so have considerable autonomy. Are there issues in managing a carrier with its hub in Atlanta from Orlando, some 400 miles away? "No," Fornaro says firmly. "We're building a $7 million operations centre here and it makes you a lot more connected. We're small enough that we know what we're doing."

To read our earlier feature about AirTran Airways, go to: flightglobal.com/limelight

Source: Airline Business