Airtran Chips Away At Delta


Aug 22, 2002
AirTran chips away at Delta
Discount airline now has 13 percent of Atlanta market
Mary Jane Credeur
Staff Writer
Discount carrier AirTran Airways continues to wedge its way into the Atlanta market, growing its market share here from less than 5 percent in the mid-1990s to nearly 13 percent today.

During those same years, Atlanta-based Delta Air Lines Inc. (NYSE: DAL) has watched its share of its home territory shrink from nearly 75 percent to 67 percent, according to Atlanta airport records.

AirTran's success has been largely tied to its ability to undercut mainline carriers on their own turf by offering cheaper tickets on high-demand business routes to New York, Chicago or Washington, D.C., and on leisure routes to cities like Orlando and Fort Lauderdale, Fla.

AirTran (NYSE: AAI) has further edged into legacy carrier territory with its recent addition of cross-country flights to Las Vegas, San Francisco and Los Angeles.

"Atlanta is the foundation of AirTran Airways, and from Atlanta we have the strength to go forward and become a more national carrier," said Bob Fornaro, president and chief operating officer of Orlando-based AirTran. "These new cities like Los Angeles are important destinations from our other 44 markets."

Today, AirTran operates 531 daily flights serving 45 cities, with 197 of those flights originating in Atlanta, where both AirTran and Delta have their main hubs.

Although Delta's 980 daily flights out of Atlanta still dwarf AirTran's operations here, analysts note AirTran has started competing head-to-head on more city pairs and underserved markets, such as Baltimore.

The smaller airline also has begun promoting its business-class cabin and recently announced plans to offer XM Satellite Radio for free on all its flights.

"We've seen AirTran become this small and scrappy carrier that can do their job just as well as the next guy," said Henry Harteveldt, an airline analyst with Forrester Research Inc.

Competition to New York
AirTran had 1.7 million enplaned passengers at Hartsfield-Jackson Atlanta International Airport last year, compared with Delta's 7.5 million, according to the Bureau of Transportation Statistics.

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AirTran's largest route out of Atlanta is to New York's LaGuardia, with 133,000 passengers traveling there in 2003, followed by Chicago-Midway with 117,000 passengers and Orlando with 89,000 passengers, BTS data shows.

The Atlanta to LaGuardia route also is Delta's busiest route, with 466,000 passengers flying there last year, followed by Boston and Los Angeles.

Although Delta still dominates nearly all routes out of Atlanta, analysts say AirTran is "consistently chipping away" at some of Delta's most profitable routes along the East Coast.

Delta's fares to most East Coast cities often start in the $200 range, but can quickly reach several hundred dollars due to its complex pricing structure. AirTran, meanwhile, charges flat rates starting at $69 each way, and doesn't require a Saturday night stay.

"There is no question that AirTran is biting into Delta," said Harteveldt. "Delta's pricing is complex and nobody understands it, and their customer service has suffered. They took their eye off the ball and took for granted that customers in their home market would always love them and be loyal."

To better compete out of New York and Atlanta, Delta recently began offering discounted fares to and from certain airports -- like Hartsfield-Jackson and John F. Kennedy International Airport -- starting at $79 each way.

Delta spokesman John Kennedy said the airline has always tried to "compete vigorously with all carriers in all of our markets," and Delta will continue to add flights or adjust pricing where appropriate, regardless of what its competitors are doing.

Kennedy pointed out Delta has resumed its hourly business shuttle flights to cities like Chicago, Philadelphia, Boston, Newark, New York (LaGuardia) and Washington, D.C., (Reagan) as demand has returned in recent months.

"What other carriers do is not necessarily going to impact whether we add or pull back flights," Kennedy said.

Airline analyst Mike Boyd, of The Boyd Group, said Delta is "responding very aggressively" to AirTran and other carriers.

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"Delta is by no means dead meat," Boyd said. "There's a collective rearrangement of the market happening, and it's good for the consumer and good for competition and it makes everybody work just a little bit harder."

AirTran's pricing power
What makes AirTran such a formidable competitor to Delta and other "legacy" carriers is its extremely low cost per available seat mile (CASM), an industry figure that takes into account all costs and overhead relative to seat capacity.

Unlike legacy carriers with costly and complex hub-and-spoke systems, low-fare carriers like AirTran and JetBlue Airways Corp. (Nasdaq: JBLU) fly point-to-point in just a few dozen city pairs, allowing them to serve only profitable markets.

AirTran has one of the lowest CASM figures in the industry, at 8.26 cents. Delta's is far more expensive, at 10.38 cents (only US Airways Group Inc. [Nasdaq: UAIR] is higher, at 11.68 cents).

"AirTran is in the enviable position of continually finding those expensive routes with lots of traffic, putting a couple of planes in the air and then slashing costs so the price is lower," said Mo Garfinkle, CEO of Arlington, Va.-based airline consulting firm GWC Consulting LLC.

While Delta is weighed down by $20.6 billion in debt and pilot costs that are 50 percent to 60 percent higher than anyone else in the industry, AirTran has a relatively small $250 million in debt and pilot wages and employee costs that are among the lowest in the industry.

Delta's revenues last year were $13.3 billion, and its net loss for the year was $790 million. Delta on May 10 warned its investors again that Chapter 11 bankruptcy remains a possibility if it can't get its costs restructured soon.

Last year, AirTran posted a profit of $100 million on revenues of $918 million, making it one of the best-performing carriers in the industry.

Stock in AirTran has been one of the best performers in the industry during the past five years, going from about $5 a share to the $12.50 range today.

AirTran's market cap is now $1.4 billion, almost double that of rival Delta's $570 million market cap. Delta stock has gone from $60 a share five years ago to the $4.50 range today.

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"AirTran's gains have been very impressive, considering the sad shape they were in just five years ago," Harteveldt said.

When Joe Leonard was named CEO of AirTran in 1999, the airline was still struggling to recover from the devastating effects of the May 1996 Everglades crash that killed 110 passengers and crew. (At the time of the crash, the company was named ValuJet.)

In the late 1990s, AirTran's fleet had an average age of 22 years, and the company posted losses of $40 million in 1998 and $100 million the following year. The company had no lines of credit, and its cash reserves were limited to a few tens of millions of dollars at any given time.

Carving new markets
Today, AirTran has one of the youngest fleets in the industry, with an average age of 3 years. The company had cash reserves of $385 million at the end of last year, and AirTran recently ordered 50 new Boeing 737s with an option to buy 50 more (at a total cost of $5 billion).

Those larger 737s allow AirTran to fly longer distances and add more capacity on busier routes.

Fornaro said the larger planes could also help AirTran quickly pick up routes if one of the mainline carriers were to scale back or face bankruptcy or liquidation. US Airways recently warned in a regulatory filing that it may end up in bankruptcy a second time, and some analysts believe that could lead to liquidation.

"The industry has a lot of restructuring ahead of it, and we needed a longer-range airplane that could take advantage of market opportunities," Fornaro said.

Though AirTran has been largely dependent on Atlanta for the bulk of its growth in recent years, management is trying to diversify its network by initiating more daily departures at airports such as Baltimore-Washington, Orlando, Philadelphia and Tampa, Fla.

Lately, AirTran officials have been looking closely at other high-fare routes along the East Coast and the Midwest where AirTran might be able to offer better rates, Fornaro said.

Reach Credeur at [email protected].