U.S. DOT Adds AirTran to List of Major Carriers

The U.S. Department of Transportation made an addition last week to the list of airlines it classifies as major carriers - those with $1 billion or more in annual revenue - that may surprise even the most frequent of fliers.

It is AirTran Airways, the once-struggling company that started in the early 1990s as Valujet and nine years ago next month had a crash in the Florida Everglades that killed 110 people and almost put it out of business.

Today, AirTran has virtually no resemblance to the airline it once was.

AirTran's fleet of 90 Boeing jets is among the youngest in the industry, and is growing at the rate of two planes a month. It made money the last two years while most other airlines were losing.

Industry analysts no longer worry that it is so fragile it could be driven off a new route, or put out of business altogether by going head on with much larger rivals such as Delta Air Lines and US Airways.

AirTran displays no fear of the big guys, operating a connecting hub in Delta's hometown of Atlanta, going up against US Airways in Philadelphia and Pittsburgh, and starting operations a month from today in US Airways' hub in Charlotte, N.C. At Philadelphia International Airport, where US Airways serves 120 cities and has more than 60 percent of the traffic, AirTran flies to seven places and has 4 percent.

These days, AirTran is the one giving the headaches to bigger carriers, not only driving down fares but also offering an experience that the airline's executives say makes customers want to come back for more.

"The days when people would fly you just because you had low fares are over," Joe Leonard, AirTran's chairman and chief executive officer, said in an interview last month at the airline's modest, one-story headquarters on the edge of Orlando International Airport. "You have to have excellent service."

Among the ways AirTran reels in customers is by being the first airline to offer free XM Satellite Radio. The airline has an easy-to-use Web site where it sells more than half its tickets. Its frequent-flier program gives awards that can be used on any carrier worldwide, even though AirTran flies to just 48 cities, largely in the eastern United States.

And unlike Southwest Airlines and some other low-cost carriers, AirTran has a first-class cabin on each plane, where it charges $35 to $75 on top of the price of a coach ticket. On other big airlines, first class could cost almost twice as much as a coach ticket, but seats usually are filled with frequent fliers using free upgrades. AirTran's strategy both increases revenue and rewards business travelers willing to pay a bit more, said Kevin P. Mitchell, chairman of the Business Travel Coalition advocacy group in Radnor.

That approach to first class is "not matching the competition, it's going beyond it," Mitchell said.

At the same time, Leonard, the CEO, pointed out, AirTran doesn't serve meals, which allows it to have no galleys in the back of its planes.

"That saves 700 pounds of weight in each aircraft and allows us to put in nine more seats," he said. "It costs more in fuel to haul that extra weight around than we would make selling food. And for the last 18 months, we've had only seven complaints about not having meals for sale... . We spend money where customers tell us it's important to spend money."

For all that's going its way, AirTran still could face turbulence this year, for the same reason the industry as a whole is looking at its fifth straight year of losses: the $50-plus cost of a barrel of oil. Practically every U.S. carrier - even low-cost operators such as AirTran - is likely to have lost money in the first quarter, despite revenue growth through higher airfares, analysts say.

"The revenue environment is proving stronger than our expectations in the first quarter," Gary Chase, a Lehman Bros. analyst, said in a report last week. Except for fuel costs, "the airline industry continues to make progress toward profitability."

But analysts have expressed concern that AirTran may be growing too rapidly, starting service on three or four new routes a year without undertaking as meticulous a job of traffic projection as Southwest does in markets it enters. AirTran president Robert Fornaro said that the airline might add flights between Philadelphia and Chicago and Akron/Canton, Ohio, two places where it wants to build up service.

AirTran's fleet is growing because of an order for 100 new 737s it placed with Boeing in July 2003. The airline has retired all of its old DC-9s. By contrast, Southwest, the largest discount carrier, with more than six times AirTran's annual revenue, had 417 jets in its fleet at the end of 2004.

"AirTran appears increasingly challenged to find a home for its new aircraft," JP Morgan Chase & Co. analyst Jamie Baker said in an investors' report, leading him to express hope that the airline chooses "slower growth" over "sloppy growth."

AirTran, like fellow low-cost airlines Frontier, JetBlue, Southwest and Spirit, has lower operating costs than older carriers for a variety of reasons, including having a younger workforce, no traditional pensions, and newer jets. Even with recent cuts in labor costs at US Airways, AirTran spends about 25 percent less for each airplane seat it puts in the air than do US Airways and other older carriers.

AirTran executives say the analysts shouldn't fret about its growth plans.

"Our new aircraft order was a key part of our strategy for the next 10 years," chief financial officer Stan Gadek said. "New planes carry warranties, just like new cars," which reduces maintenance costs.

Leonard said it was impossible to overstate how much a new fleet helps the airline's reputation. "The image of a low-cost carrier with old planes, that's in the past," he said.

As eager as AirTran executives are to talk about new planes and good service, some customers say what's impossible to overstate is the airline's effect on East Coast airfares.

AirTran has "had a huge impact here," said Chris McGinnis, director of the Travel Skills Group, an Atlanta-based business travel consultancy. "It's brought fares down to a reasonable level... . If it weren't for AirTran, we'd still be paying $2,000 round-trip to go to California. Today, you can do it for $600 or $700 for a full-coach or first-class ticket."

At Black & Decker Corp., the tool-maker based in Towson, Md., travel and meetings director Peter Buchheit said after AirTran entered the Baltimore-Atlanta market, his company's average cost of a round-trip ticket on the route dropped from $800 to $330. Now he is eager to see AirTran's effect on fares on the Baltimore-Charlotte route, where the average round-trip flight costs $720.

"We've had the feeling we've been held hostage," Buchheit said. "Our prayers are answered."

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