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CEO says carrier locked in prices before big hike, giving it a leg up in a tight, competitive industry
By Liz Fedor
Minneapolis Star Tribune
Published on Sunday, Mar 30, 2008
MINNEAPOLIS: AirTran Airways built a 2008 business plan based on oil at $90 a barrel. So the recent spike in crude above $100 has created what AirTran Board Chairman Joe Leonard calls a ''tough'' and ''scary'' year for the entire airline industry.
But Leonard argues that the Orlando, Fla., low-fare carrier, which turned a $53 million profit last year, is in a better position than many of its competitors to survive the heavy fuel-price burden.
He said that AirTran has a new, fuel-efficient fleet, the lowest operating cost in the industry and a large portion of its fuel costs hedged, or locked in, against high prices.
In a wide-ranging interview in St. Paul, Minn., Leonard said: ''It looks like, after a very brief respite, that the industry is back into huge losses again.''
AirTran has responded by slowing its growth rate to 8 percent or less, selling two Boeing 737s and dropping unprofitable routes.
AirTran, which had revenue of $2.3 billion in 2007, is a growing airline and it has continued to make inroads in Atlanta, where it operates its major hub.
Delta Airlines, which also has a major hub there, had 71.8 percent of the Atlanta market in 2007 compared with 19.3 percent for AirTran. Back in 2000, AirTran's market share was 9.1 percent, according to a Credit Suisse study.
AirTran's fleet of 87 Boeing 717s and 52 Boeing 737s has an average age of three years, which Leonard said is helping to conserve fuel at a time of record oil prices.
AirTran and Southwest Airlines — the nation's largest low-fare airline — have the lowest unit costs among the big network and low-fare carriers. Although major airlines, such as Northwest and Delta, slashed their costs in bankruptcy, there is still a gap between the low-fare airlines and big six airlines.
For example, excluding fuel costs, AirTran and Southwest spent 4.7 cents per seat mile in 2007 to operate. Northwest's comparable cost was 7.7 cents, while United Airlines was at 9.4 cents.
The big airlines carry more overhead to support far-flung international operations and historically have had higher labor costs.
Most of the major airlines have hedged just a fraction of their fuel supplies for 2008.
''Most of the experts tell you not to go out and buy fuel because it's going to go down. Our view is we're going to protect the business,'' Leonard said.
At a recent J.P. Morgan conference, AirTran reported that it had hedged 40 percent of its 2008 fuel for the first quarter, and 41 percent, 35 percent and 29 percent for the remaining three quarters.
AirTran recently was paying more than $3.25 a gallon for jet fuel. After the effects of hedging, the carrier expects its first-quarter price for fuel to be between $2.95 and $3 a gallon.
If AirTran's combination of hedges and market prices can yield the equivalent of oil at $90 a barrel this year, Leonard said, AirTran could make money in 2008. But he said profitability ''gets iffy'' when oil exceeds $90.
UBS analyst Kevin Crissey has predicted that AirTran will lose 57 cents a share in 2008. J.P. Morgan's Jamie Baker recently predicted a loss of 40 cents a share.
AirTran has been on a rapid growth trajectory. The carrier grew by 19.4 percent last year. After slowing to about 8 percent this year, the carrier expects to expand at the rate of 5 percent in 2009.
Leonard, 64, became AirTran's president, chief executive and chairman in 1999 and intends to retire this year. He owns a home in Forest Lake, Minn., and plans to retire in that state with wife, Phyllis, who is a St. Paul native.
But Leonard doesn't expect to be idle. The Georgia native said he was looking at office space in downtown Minneapolis, and he plans to work as a consultant and serve on more boards of directors.
Last year, Leonard spent considerable energy trying to acquire Milwaukee-based Midwest Airlines. Ultimately, AirTran was outbid by a partnership consisting of TPG Capital, a private-equity firm, and Northwest Airlines. They closed on the transaction early this year.
Leonard said that he thinks it's ironic that Northwest and its partner ''paid $453 million for something that was probably worth $125 million at the date of closing, in order to try to keep us out of Milwaukee.''
By summer, AirTran will be serving 15 cities from Milwaukee. ''We've already announced LaGuardia and Washington National, which are their two most profitable routes,'' Leonard said. ''So all of the effort and all of the hubbub to try to keep us out of Milwaukee was for naught.''
Ben Hirst, a Northwest senior vice president, said that when Northwest did the Midwest deal last August, it was concerned about maintaining its presence in Milwaukee.
''It is a competitive marketplace and AirTran is free to compete wherever they like,'' Hirst said.
MINNEAPOLIS: AirTran Airways built a 2008 business plan based on oil at $90 a barrel. So the recent spike in crude above $100 has created what AirTran Board Chairman Joe Leonard calls a ''tough'' and ''scary'' year for the entire airline industry.
Get the full article here.
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