Paul Tate, Reno's vice president of finance, admits it's all a matter of recourse. 'A lot of so-called experts have been pontificating on why all new entrants are unsafe. People are concerned, [even] some of the more experienced flyers.'
Before the crash of Flight 592, ValuJet was a success story, all around. The government, which wanted low-fare startups to succeed, applauded its every move; Wall Street, which had significantly over-valued ValuJet's worth, jumped at a $100 million bond issue just before the crash; and consumers flocked to the carrier, making it profitable two months after its October 1993 start.
Then, after the accident, came the congressional hearings, the charges of FAA incompetence from the Department of Transportation's inspector general, the review of records detailing takeoffs in unsuitable weather conditions, the incidents involving aircraft skidding off runways, and countless editorial cartoons lampooning the bumblings of the FAA and ValuJet.
For ValuJet, the results of an ill-fated flight have been nothing short of disastrous, and could even spell the end. But the shadow from the proceedings has been cast across the US airline industry and hit investor confidence in the entire sector. US transportation officials have been forced to rethink their activist-like support of consumer-friendly players like ValuJet. And common industry practices, such as outsourcing and the use of ageing aircraft, are being questioned.
The consequences could be serious for other low-fare startups inspired by ValuJet, like AirTran in Orlando and Fresno's Air 21, as well as dozens still in the planning stages. Already these carriers are attributing significant traffic declines in the two months after the crash to the association with ValuJet. It remains unclear whether this adolescent sector of the airline business can survive. 'Things are different,' acknowledges Mark Morro, president of Air 21, which was launched at the end of 1995. 'As a result of the accident, it will take much longer and much more money for a carrier to emerge today.'
ValuJet, the story goes, was so cost-conscious that it could not even afford another 'e' for its name. But as a low-fare competitor to home-town giant Delta Air Lines, the new entrant was simply premised on the idea of low costs supporting its low fare structure. This was not a revolutionary concept: Southwest lays claim to that title. What was new was that it combined elements of Southwest's practice, like outsourcing all the heavy maintenance (11 vendors were used), while using only old DC-9s flown by crews being paid some of the US industry's lowest wages.
It worked well, especially with the airline growing almost as fast as Jack's beanstalk: from two DC-9s in October 1993 to more than 50 two-and-a-half years later. 'There are few airlines that have grown as fast as [ValuJet],' says Anthony Broderick, the former FAA assistant administrator of safety oversight who resigned over the ValuJet affair. And this rapid growth was the airline's downfall. 'They grew too fast, [especially] from September 1995 to June 1996, without enough attention to infrastructure.'
What this meant, as the FAA audit noted, was both an inattention to actual maintenance problems and primarily an inattention to detail. There were incidents that involved either inappropriate maintenance practices, or no corrective action whatsoever: for instance the third-party mechanic in his first job, who rigged a tailcone improperly.
But sources at other airlines and within the government say much of the government's case against ValuJet was related to improper documentation of services. 'The FAA doesn't nail you for not doing maintenance, it nails you for not doing your records, which is where ValuJet made a mistake,' says one source.
Yet sloppy book-keeping in the airline industry is, nonetheless, tantamount to safety violations. According to T Wakelee Smith of consultants SH&E in New York, ValuJet has woken up to the same realisation as almost every other airline: the concept of outsourcing is easily misconstrued to mean 'once it is outsourced it is not our problem.' The point of outsourcing may be to remove overheads from a company's operations, but often executives miss the other point: it should not remove oversight.
Smith believes the ValuJet affair is a watershed for outsourcing in the airline industry. Though the practice is integral for small carriers to enter the competitive fray, it has to be used with discretion: 'Outsourcing is going from a chic management concept to a mature management tool. ValuJet furthers the maturation process. It may not demonstrate that outsourcing is bad, but it does demonstrate that there is need for more intensive management of anything outsourced.'
The direct result of the ValuJet tragedy will see all airlines ensure they have maintenance inspectors who are much more knowledgeable about contractors, says Broderick. There will also be a winnowing of the vendor pool: 'Outsourced maintenance is not inherently inferior to in-house maintenance, but those facilities that were not up to the airline standards might get out of the business.'
But maintenance outsourcing must continue as a practice, otherwise new entrants will face impossible hurdles, says Jess Coker, chief marketing officer of TranStar Airlines, a new entrant trying to start in Dallas. 'Outsourcing is not going to go away. It's the only way that small carriers can operate. You have to have the ability to fly at low seat mile costs and getting the right vendors is part of that.'
Nonetheless, the FAA will be coming down much harder on outsourced maintenance, and the added regulatory burden will be a heavier one to absorb for the new entrants than for the majors, which still have maintenance subsidiaries and larger fleets that offer economies of scale. 'If ValuJet has had a real impact, it is that it will cost smaller carriers more to satisfy government requirements,' says Jim Ryan, analyst at Solomon Brothers.
The concerns about the use of older aircraft raised by the media reporting of Flight 592 are certainly not new. Most industry officials dismiss the 'ageing aircraft issue' as a non-issue, just as the age of new aircraft involved in fatal accidents is generally not an issue. The case of a 1991-build B757 from American Airlines that flew into the side of a Colombian mountain earlier this year is an example of a crash that incited no controversy over age, exactly because the aircraft was only five years old. But to ValuJet officials, such an example points to the bitter irony of the ValuJet crash and subsequent outcry: the apparent cause of the disaster - live oxygen generators that ignited - had nothing to do with the age of the aircraft.
But even if there are no direct corollaries to suggest safety is compromised by aircraft age or outsourcing of maintenance, there is a public perception that statistics can rarely influence. Although there is usually a brief period of heightened public anxiety about such issues following a high-profile crash, the ValuJet affair seems to have catalysed public concerns over aircraft safety like never before. Airlines - especially new entrant or low-fare carriers akin to ValuJet - have caught on quickly. Besides Reno Air's in-flight announcements, Fresno-based Air 21 posts a public notice on every flight detailing the number of years of service of the captain, the maintenance record for the aircraft, and the name of the lead mechanic who performed the check the night before.
Whether public concern will drive the political and regulatory agenda is one question that can only be answered in the long term. If, for mechanical or non-mechanical reasons, older aircraft keep falling from the sky, many airline officials are bracing for federally defined limits on passenger aircraft age. The crash of the TWA B747-100 in mid-July could precipitate any action, although investigators were increasingly leaning towards a bomb attack at presstime. Regulating aircraft age would be difficult to enact, however, since attempts to define an age limit are bound to provoke a lot of controversy in the industry.
But what could be pushed, either through voluntary compliance or regulation, is commonality across the spectrum. ValuJet's controversial variance of aircraft type - the 50 aircraft in its fleet included 11 types, mainly different variants of the DC-9 - has given momentum to a campaign by the Flight Safety Foundation. The organisation has lobbied commercial aircraft manufacturers to produce a standard cockpit for all new aircraft types, says executive director Stuart Matthews. ValuJet itself has agreed to reduce the number of types of DC-9s to three in planning for its re-launch. 'Same aircraft type will be an issue for the FAA going forward [in certifying new airlines],' says one ValuJet official. 'If they had it to do over, the FAA would have been more careful as to what they let us put on our [operation specifications].'
Safety certainly is one goal of fleet standardisation. But the ultimate goal is cost savings. In the post-ValuJet climate, however, safety and cost savings are becoming more and more entangled. Moody's Investors Service analyst Tassos Philippakos believes the combination of safety concerns and the higher costs associated with older aircraft 'will impact on a longer term basis on the value of older aircraft,' meaning values will go down.
DC-9 prices are already being depressed by the prospect of 30 ex-ValuJet aircraft coming back on the market. The effect is far reaching, too: in Venezuela, grounded domestic carrier Aeropostal has delayed a privatisation attempt because its fleet of DC-9s has been devalued. Adds Philippakos: 'The whole industry is looking into this issue, and as a result airlines are becoming less interested in older aircraft.'
Smaller airlines, then, may lose access to the older aircraft that were so important to ValuJet's launch. Equally discouraging, however, is that new aircraft may also become more expensive to new entrant players because manufacturers could start demanding a more substantial downpayment. For McDonnell Douglas, which had ValuJet as the launch customer for the MD-95, the lesson is severe. 'What has happened with ValuJet makes it more imperative for the manufacturers to avoid taking launch orders from weak or new entrant airlines,' says Philippakos.
Beyond the effect on aircraft values lies the more critical effect the ValuJet affair has had on confidence in the financial markets, particularly on new-entrant financing.
The broader impact has, as of the end of July, helped bring down the index of airline stock market values by more than 20 per cent. Though the cause of the drop - during a time when airlines have been reporting record earnings - is multi-faceted and includes an overall terrible performance of technology company values, few airline financial analysts discount the ValuJet factor. 'ValuJet just highlights the risk [of investing],' says Ryan.
But others say it is more fundamental than just a highly valued airline suddenly losing value. One senior executive at a low-fare carrier saw the airline take its largest single-day stock value drop on the day that the FAA forced ValuJet to shut down in mid-June. That action, says the manager, is the single biggest reason that investor confidence in airlines in general, and startups and smaller carriers in particular, has been so badly hit. And, he believes, since this perception has so much to do with a changed notion of the FAA, it is not necessarily a temporary affair: 'If this can happen to ValuJet, who can it happen to next?' he says. 'There was an implied assumption that the FAA was omnipotent, all seeing and all caring. Now there is an uncertainty factor - a wounded FAA and a Congress that could go and do something onerous to the industry.'
For new entrant carriers, the direct impact has hit hard. Reno Air, for example, 'got slammed by the ValuJet effect,' says Ryan. In late July, the carrier, which has recorded five consecutive quarters of profitability, put off a public offering because of the drop in stock values. Meanwhile, proposed new entrants are finding that the equity markets are closed to startups. Still, some are persevering. TranStar in Dallas was close to finishing a deal for $10 million in startups capital when Flight 592 crashed. 'I do think it put us back between 60 and 90 days on funding,' says the company's chief marketing officer, Jess Coker.
Losing the backing of the markets could have a more profound impact on the low-cost and new-entrants sector because of less tangible factors. The less Wall Street support for new entrants, the less influence these carriers will have in Washington. Combined with the public's heightened perception of safety issues and new entrant and low-fare carriers, this will mean that the Department of Transportation will be much less likely to step in when there are competition concerns raised by smaller players. DOT, for instance, applied pressure to Delta, when ValuJet complained of predatory pricing in late 1993. This followed an order against Northwest Airlines after a complaint by Reno Air of capacity and price dumping.
The real point here, says Air 21's president Mark Morro, is that what had once been a growing class of mid-size, low-fare airlines assured of strong DOT backing, must now get used to a new reality: the DOT does not care - at least not as much. This may not be a bad thing overall, since it was a 'go easy' approach to ValuJet that seems to have compromised the FAA. But for the smaller carriers that benefited from such bureaucratic largesse, the likely consequence is that the majors, which have generally had difficulty competing with the new-entrants' low costs, may now be better placed to compete directly, and hard, against all smaller players.
This possibility, along with the general lack of support ValuJet received from its larger competitors, has pushed Morro to call for the establishment of a an association for low-cost carriers separate from the likes of the Air Transport Association. 'ValuJet was just standing there alone punching back. We may need to have our own association or group to give the public information on how we achieve our low costs, without cutting corners. We are different from the majors, and different from the commuters, which contract with the majors.'
That difference has been the strength of the low-cost carriers until now. Whether the startups and low-cost carriers can retain their distinct identity depends on a number of factors, not least the successful relaunch of ValuJet.
Source: Airline Business
