AirTranAirways1

AirTranAirwaysCaseStudy

AirTranAirways2

BAM479February27,2007

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MissionStatementInnovativepeoplededicatedtodeliveringthebestflyingexperiencetosmarttravelers.Everyday.

Althoughsimpleandstraightforward,AirTransmissionstatementistoobroadanddoesntaddresssomekeyareas.

RevisedMissionStatementInnovativepeoplededicatedtodeliveringandgrowing(growth)thebestdomestic(markets)flying(product)andworkingexperience,intermsofsafetyandservice(selfconcept&philosophy),toouremployeesandsmarttravelers(customer).Strivingeverydaytokeepourpromiseof,notonlysafetyandservice(selfconcept),butalsoleavingasmallfootprintintheenvironment(publicimage)throughadvancesinmechanicaltechnology(technology).Everyday.

CaseStatementAirTransmajorchallengeistoremainprofitableagainsttheriseincompetitionfromDeltaAirLines.

CriticalMilestones

1996 ValuJetplanecrashesinFloridaEvergladeshaltingcompanyservice

1997 AirTranformedthroughmergerofAirWaysCorp.andValuJet.

1999 AirTranleavesRichmond,Virginia

1999 JoeLeonardjoinsAirTranasCEOandChairman

1999 AirTransfleetbecomesyoungestinindustry

2004 AwardedBestAirlineWebsite

2004 RankedsecondinAirlineQualityReport

2004 AirTranremainsprofitablecomparedtoindustry

2005 AirTranreturnsservicetoRichmond,VirginiaandreceivessubsidiesfromRichmond

2005 Addsserviceto9USlocationsandtoCancun(International)

TrendStatementAirTranHoldings,Inc.growthcanbeattributedtoitslowcoststrategy,commitmenttosafetyandservice,andhighutilizationofplanesandserviceroutes.

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InternalFactorEvaluationMatrix

Weight Rating WeightedScoreStrengths1.RemainingProfitable .18 4 .722.HighServiceQuality .14 4 .563.HighPlaneUtilization .11 4 .444.LargeAirportPresence .07 3 .215.YoungAirlineFleet .03 3 .09

Weaknesses1.HighOperatingCostperASM .18 1 .182.ConcentratedtoEastUS .10 2 .203.SmallInternationalPresence .09 2 .184.LowRatingsinSelectAQRCategories .06 2 .125.HighlyDependentonFuel .04 2 .08

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ExplanationsStrengths

1. AirTranneedstoremainprofitable,bothtosurvivebutmoreimportantlytokeepinvestorinterestandconfidence.

2. HighservicequalityiskeyforAirTrantokeeparecurringcustomerbasehealthy.3. EspeciallyimportantinAirTranslowcoststrategy,utilizingplanestotheirfullestpotential

iskey.4. AirTranhasahighairportpresencethroughouteasternUnitedStates.5. AirTranbenefitsfromayoungairplanefleetthroughcostsavings,qualityandmarketing

efforts.

Weaknesses1. AmajorweaknessofAirTranisitshighoperatingcostperavailableseatmilecompared

tootherlowcostproviderslikeSouthwestandJetBlue.2. Throughincreasedcompetition,especiallyDelta,AirTranisonlyavailablemainlyinthe

easternUnitedStates.CustomersneedingtotraveltothewesternUSprobablywillchooseanotherairlinethatcouldcreatebrandloyaltyforanotherairline.

3. AirTranishighlydependentondomestictravel.Diversifyingtoothermarketswillhelpeasealleggsinonebasketeffect.

4. EventhoughAirTranreceivedanumbertwopositioninairlinequalityrating(AQR)therearestillareasthatAirTranlagsin,likeontimeperformanceanddeniedboardingsperformance.

5. AlthoughmainlyoutofAirTranscontrol,theirincomeandcostsarehighlyassociatedtothecostoffuel.

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AirTranisdoingfineoverallwithrespecttoitsinternalstrengthsandweakness.Keyareastoimproveareitshighoperatingcostperavailableseatmile(ASM),domesticandinternalpresencesandotherminorareas.

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ExternalFactorEvaluationMatrix

Weight Rating WeightedScoreOpportunities1.DecreaseOperatingCostperASM .18 2 .362.IncreaseUSPresence .15 3 .453.IncreaseInternationalPresence .11 1 .114.IncreaseSelectAQRRatings .05 2 .105.AddConsumerTechnologiestoFleet .03 2 .06

Threats1.IncreasedCompetition .2 3 .62.HighFuelCosts .14 3 .423.IncreasingLaborCosts .06 2 .124.PoliticalPolicies .04 4 .165.LaborStrikes .04 4 .16

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Explanations

Opportunities1. AmajoropportunityforAirTrantodrasticallyincreaseincomewouldbetodecreasetheir

operatingcostperavailableseatmile(ASM).2. AirTranhasamajoropportunitytoexpanddrasticallyitsUSpresencebymovingairport

terminalswestward.3. Asnotedinthemilestones,AirTranisbeginningservicetoCancun,apopularvacation

destination,butwithincreasedcompetitionAirTranneedstodiversifyitsofferings.4. Onemajoropportunitytogainandkeeployalcustomeristocontinuetoimproveitsairline

qualityrating(AQR).EventhoughAirTraniscurrentlyratednumber2therearestillareasthatcoulduseimprovements.

5. Onewaytogaincustomerloyaltythroughincreasedcompetitionistooffermoreconsumertechnologiesandluxuries.AirTranisalreadyincorporatingXMSatelliteradiointoeachplane,butothertechnologiescouldincludeiPodhookupsforeachseatandevenincabininternetaccess(wiredorwireless)forlaptops.

Threats1. ThelargestthreattoAirTranistheincreasedcompetitionwiththelowcostsectorandthe

industryitself.2. AirTranishighlydependentonthefluctuationsoffuelcosts.Sincefuelisoneofthe

largestcoststoAirTranaslightadjustmentcanmeanthedifferencebetweenalossandaprofit.

3. Alongoffuel,laborcostsareoneofthelargestcoststoAirTranandaslightadjustcanmeanthedifferencebetweenalossandaprofit.

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4. PoliticalpoliciesenforcedbytheUSandothercountriesinwhichAirTranoperatescanhaveahugeimpactonthecompanyasawhole.Withterrorismatoppriorityofthegovernment,newpoliciescancauseahugeburdenonAirTranfornewtechnologiesormorelaborcosts(security,maintenance).

5. Aswithanybusinesslaborstrikescanhaltacompanysoperationscausingthecompanytoloosemillionsinrevenue.

AirTranisperformingaverageintheirexternalenvironment.MostofAirTransopportunitiesandthreatsneedtobeaddressedmoreaggressively,suchasdecreasingoperatingcosts,expandinginternationally,andincreasedcompetition.

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IndustryAnalysis

PortersFiveForces

CompetitionAirTranDeltaJetBlueSouthWest

SubstituteProductsBusServiceTrainServiceCharterPlanesTaxis

SuppliersFuelProvidersPilotsMechanicsFlightAttendants

ConsumersBusinessTravelersRegularTravelers

PotentialEntryofNewCompetitorsGovernmentRegulations(FAA)BrandLoyaltyandIdentificationAirportContracts

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IndustryAnalysisContinued

RivalryAmongCompetingFirms HIGHCompetitionamongmajorcompetitorsisextremelyintenseinmanyaspects.SincemostcompetitorsdirectlycompetingwithAirTranemphasizealowcoststrategymanyconsumerlookonlytocostasadeterminingfactorinapurchase,thisindeedcreatesanintenseenvironment.Switchingcostsaregenerallylow,eventhoughcompanieshavetriedtoincreaseswitchingcostswiththeuseoffrequentflyerprograms.

PotentialEntryofNewCompetitors HIGHEntryintotheairlineindustryisveryhard,duetomanyfactors.SomeincludedaregovernmentregulationsandlicensingfromtheFederalAviationAssociation,brandloyaltyandidentificationofmajorairlines,contractsbetweenairlinesandairportsforuseofrunwaysandterminals,andthesubstantialcostsassociatedwithforminganairline(airplanespurchases,laborcosts,fuelcosts,maintenance,etc.).

PotentialDevelopmentofSubstituteProducts LOWSubstituteproductsareoflittlethreattotheairlineindustry.Nootherproductdomesticallycompetesdirectlywithairlinesintermsofcostandspeedoftravel.Busservicesmaycostlessbuttravelspeedextremelyslowandtediouswithmanystopsbeforeyourdestination.Trainserviceisgenerallymuchmoreexpensivethanairplaneandonlyhaveselectstations/stops.Generallycharterplanesaremuchmoreexpensivethancommercialairlines.Taxisaretremendouslyexpensiveforlongdistanceandareconstrictedtospeedlimitsandroadlayouts.

BargainingPowerofSuppliers HIGHAllsuppliershavetremendousbargainingpowerwiththeairlineindustry.Therearefewfuelprovidersandnoreliablealternativetofuel.Thereareonlysomanypilotsinthejobmarketandplanescannotbeflownwithoutpilots.Mechanicsforairplanesareinshortsupplyandplanescannotbeflownwithoutbeingserviced.Flightattendantsprovideservicesthatcannoteasilybereplacedandcustomersatisfactionwithoutflightattendantwouldbedetrimental.Finallyairportsareinlimitedsupplyandyouneedairporttolandplanesandboardpassengers.

BargainingPowerofConsumers LOWGenerallyspeakingconsumers,businessorregulartravelers,havelittlebargainingpowerwithairlines.Eithertheybuytheticketornot,onetravelerdoesnothurttheairline.Alsothereareonlyaselectfewairlinetochoosefromandevenlessatanindividualairport.Eithertheconsumerwantstoflyortheydont.

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CompetitiveStrategies

CompetitivestrategiesforAirTranincludethefollowing:

MarketPenetrationAirTranisseekingtoincreasemarketshareinitscurrentmarketsthroughincreasedmarketingeffortsandcapacity.AirTranwasvotedtheBestAirlineWebsitein2004thatshowcasesAirTranseffortstoincreaseitsmarketshare.Alongwithmarketingefforts,AirTranisexpandingitscapacitybyreplacingairplanegalleyswithseating.Addingextraseatsperflightincreasetheamountofrevenueperflightandalsodecreasescostperpassengerperflight.

MarketDevelopmentAirTranistryingtoexpandfromitseasternUSconcentrationintowesternUSandinternationaltopopularvacationspotslikeCancun,Mexico.

ProductDevelopmentAirTranisimprovingitspresentairplaneswithconsumertechnologieslikeXMSatelliteRadioforeachpassengerfreeofcharge.

RetrenchmentInanindustryofdecreasingprofitsandincreasescosts,AirTranistryingtofindwaystocutitsfatbyoutsourcingmechanicwork.

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FinancialAnalysis

Ratiosderivedfrom2004dataAAI Industry(RMA,SIC4512)

L M HCurrentRatio 2.04 .60 1.1 1.6Foreverydollarofcurrentdebt(liability),AirTranhas$2.04ofcurrentassetstopayforthatdebt.Thisnumberisabovetheindustryaverageof1.1,meaningthatAirTranisdoingagreatjobofmanagingitsassets.

QuickRatio 1.9 .40 .70 1.1Foreverydollarofcurrentdebt(liability),AirTranhas$1.90ofcurrentassets,notcountinginventory,topayforthatdebt.Againthisnumberisabovetheindustrysaverageof.7meaningthatAirTranisdoingagreatjobofmanagingitsveryliquidassets.

DebttoAssets 0.63Foreverydollarofassets,AirTranhas$.63ofdebtissued.

DebttoEquity 1.71 4.6 .90 1.8Foreverydollarofequity,AirTranhas$1.71indebt.Comparedtotheindustryaverageof$.90AirTranisdoingverygood.

LongtermDebttoEquity 1.11Foreverydollarofequity,AirTranhas$1.11oflongtermdebtissued.Comparedtothepreviousratio,thisshowsthatmostofAirTransdebtislongterm.

TimesCoveredRatio 1.69 2.2 4.5 10.6Foreverydollarofinterest,AirTranhas$1.69topayforthoseinterestcharges.Comparedtotheindustry,AirTranisfarbelowtheindustry.Note:Thenumber,1.69,maybeartificiallydeflatedsincethereisincomeearnedfrominterest.

ActivityRatios

InventoryTurnover 36.79Foreverydollarininventory,AirTrangenerates$36.79insales.ThisnumberisartificiallyinflatedandcontainslittlevaluesinceAirTranisprimarilyaservicecompanyandlittleinventoryisstocked.

FixedAssetTurnover 2.71 1.4 3.6 8.9Foreverydollaroffixedassets,AirTranisabletogenerate$2.71insales.Thisisaveragecomparedwiththeindustryaverageof$3.60.ThisnumberforAirTranmaybelowduetothehighcosts/worthassociatedwiththeiryoungairplanefleet.

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TotalAssetTurnover 1.15 1.0 2.1 3.0Foreverydollarofassets,AirTranisabletogenerate$1.15insales.Thisbelowaveragecomparedtotheindustryaverageof$2.10.Comparedtothepreviousratio,AirTranmusthaveagreateramountofcurrentassets(cashandnonfixedassets).

CapitalIntensityRatio .87 1.0 .48 .33AirTranneeds$.87inassetstogenerateadollarinsales.Thisisquitehighcomparedtotheindustryaverageof$.48.ThisratioconfirmsthatAirTranneedstoreduceitsoperatingcosts,whichisoneofitsweaknesses.ReducingthisnumberwillgreatlyimproveAirTransprofitability.

ProfitabilityRatios

GrossProfitMargin 3.15%Foreverydollarofsales,3.15%ofthesalegoesintoAirTransgrossprofits.Thisnumberseemsextremelylow,butitisconfirmedbyAirTranshighoperatingcosts.

Thisnumberwasdeterminedby(SalesRevenueOperatingExpenses)/SalesRevenue.CostofGoodsSoldwasnotusedbecauseAirTranscostsaremainlyoperationrelated(fuel,labor).Therefore,usingcostofgoodssoldwouldartificiallyinflateAirTransgrossprofit.

NetProfitMargin 1.18%Foreverydollarofsales,1.18%ofthesalegoesintoAirTransnetprofit,profitsaftertaxesandinterest.ThisisdirectlyrelatedandcouldbeincreasedbydecreasingAirTransoverlyhighoperatingcosts.

ReturnonTotalAssets .01Foreverydollarofassets,AirTranisabletogenerate$.01ofnetincome.Thisnumberishorrible;AirTranneedstomoreefficientlyutilizeitsassets.

ReturnonShareholdersEquity .04Foreverydollarofequity,AirTranisabletogenerate$.04ofnetincome.Againthisnumberishorrible;AirTranneedtobetterutilizeitsequity.

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FinancialAnalysis

Note:Shadedcellsofferareasofinterest.

AirTransotherincomeincreaseddrasticallyfrom2002to2003.Possiblythiswasduetoothertravelrevenuesfrompackageshipping.

Theincreaseinfuelexpenseby38.74%canbeattributedtothehighincreaseinthecostoffuel.

Aircraftrentincreasedfrom2002to2003possiblybyalargernumberofplanesinAirTransfleet.

Aircraftinsuranceandsecuritydecreasedfrom20022003maybefromincreasedairportsecurity,soAirTrandidntneedtohireasmanyandinsuranceratesmayhavedecreased.

DepreciationmayhavedecreaseddotoAirTransplanesgettingolderanddepreciatingless.

Aninfluxinincomefor2003seemstobeassociatedwithadecreaseinoperatingcostsandextraincomecomingfrominterest,incometaxbenefits,andgovernmentsubsidies.

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FinancialAnalysis

Note:Shadedcellsofferareasofinterest.

Cashgrewsubstantiallyfrom2002to2003probablyfromAirTranshugeprofitsandsubsidies;thisinturnincreasescurrentassets.

Inventoriesfrom2002to2003grew,maybetoincludemoresparepartsorcustomeramenities.

Accountspayableincreasedalotfrom2002to2003possiblyfromincreditaccountsatthetimethebalancesheetwasobtained.

Commonstockfrom2002to2003forAirTranmusthavebeenahotticketitem,orAirTranissuedmorestock.

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FinancialAnalysis

Note:Shadedcellsofferareasofinterest.

Substantialincomewasmadein2003mainlyduetoadecreaseofoperatingexpensesasapartoftotalrevenues.Majordecreasesseemtohavecomefromwagesandfuel,whichhappentoaccountformostofthecompanysexpenses.

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FinancialAnalysis

Note:Shadedcellsofferareasofinterest.

The2.98%increaseinmarketablesecuritiesisprobablyassociatedwithstockinothercompanies.

Currentassetsincreaseslightlycomparedtopreviousyears,butthisisprobablyassociatedwithAirTransdeferredincometaxes.

Fixed(Noncurrent)assetsincreasedmaybefromincreasedlabororplanepurchasesormaintenance.

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Recommendation

IwouldrecommendthatAirTrancontinueitsexpansionintootherdomesticandinternationalmarkets,andtoworkhardtodecreaseisoperatingcostsperavailableseatmile(ASM)tobettercompetewithitscompetition,notablyDeltaAirLines.

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SourcesCitedAirTranAirwaysCorporateWebsite(http://www.airtran.com)

StrategicManagement,ConceptsandCases,p.202213

CNNMoney,AAI(http://money.cnn.com/quote/financials/financials.html?symb=AAI)