AirTranAirways1
AirTranAirwaysCaseStudy
AirTranAirways2
BAM479February27,2007
AirTranAirways3
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
1.00 2.78
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
1.00 2.54
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)
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