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AirTran Airways 2005

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Title: AirTran Airways 2005


1
AirTran Airways 2005
  • A Strategic Management Case Study

Graphics are the property of AirTran Airways
2008, Danielle Boucher, Matt Bouchard, Darius
Parker, Takefumi Kawahara, UMFK
2
Overview - Getting to know a low-fare leader
  • A brief history of AirTran Airways
  • EOY 2004
  • Mission, Objectives, Strategies
  • 2005
  • New Vision and Mission
  • External Analysis
  • Opportunities Threats
  • CPM
  • EFE
  • Internal Analysis
  • Financial Data
  • Strengths and weaknesses
  • IFE
  • Financial ratios
  • Strategic Analysis
  • SWOT Matrix
  • SPACE
  • IE matrix
  • Grand Strategy Matrix
  • Possible alternative strategies
  • Our Recommendation
  • Strategies
  • Long range objectives
  • EPS/EBIT
  • Implementation Issues
  • Proposed annual objectives (goal) and polices
  • Proposed procedures for evaluation
  • Epilogue
  • Current Performance
  • Questions
  • Resources Utilized

3
History of AirTran Airways
  • In 1992, the predecessor airline, ValuJet
    Airlines was founded
  • ValuJet Airlines started with two former Delta
    Air Lines' DC-9 aircraft
  • First commercial flight occurred between Atlanta
    and Tampa on October 26, 1993.
  • The airline was the first to launch ticketless
    travel in 1993.
  • In the spring of 1994, barely eight months after
    launching service between Atlanta and three
    Florida cities, the airline went public by
    listing its stock on the NASDAQ and trading under
    the ticker symbol VJET.
  • In late 1995, the airline placed an order to be
    the launch customer for the Boeing 717. ValuJet
    was the youngest airline ever to serve as a
    launch customer for an aircraft type.

4
History of AirTran Airways
  • At the end of 1995, ValuJet was named as the top
    company in the famed Georgia 100 as published by
    the Atlanta Journal-Constitution
  • and the airline posted high margins with a 67
    million net profit
  • revenues of 367 million.
  • The publicly traded airline stock was increasing
    in value on a seemingly weekly basis.
  • The original AirTran Airways, a Boeing 737
    operator with service to/from Orlando, was
    founded by AirTran Corporation, the holding
    Company of Mesaba Airlines of Minneapolis,
    Minnesota, operating as a Northwest Airlink
    carrier with hubs in Minneapolis and Detroit. In
    1994,
  • AirTran Holdings purchased a start up 737
    operator named Conquest Sun and renamed the
    airline AirTran Airways.

5
History of AirTran Airways
  • Conquest Sun, similar to ValuJet, was an airline
    started by former Eastern Air Lines employees.
  • The original AirTran Airways moved its
    headquarters to Orlando, Florida, and grew to 11
    Boeing 737 aircraft serving 24 cities in the East
    and Midwest providing low-fare leisure travel to
    Orlando.
  • In 1995, AirTran Airways was spun off by Mesaba
    and formed its own independent holding company
    named Airways Corporation.
  • On July 10, 1997, ValuJet, Inc., the holding
    company for ValuJet Airlines, Inc., announced
    plans to acquire Airways Corporation, Inc., the
    holding company for AirTran Airways, Inc. of
    Orlando, Florida. The deal was scheduled to close
    on November 17, 1997.
  • On September 24, 1997, ValuJet Airlines changed
    its name to AirTran Airlines. While the hub
    remained in Atlanta, the headquarters of the new
    entity was combined in Orlando, Florida, on
    January 28, 1998.

6
History of AirTran Airways Management
  • January 1999
  • A new management team led by Joe Leonard, a
    veteran of Eastern Air Lines, and Bob Fornaro, of
    US Airways, took the reins at the airline.
  • Leonard, Chairman and CEO, improved operating
    efficiencies while Fornaro, President and COO,
    built a sustainable route network which increased
    the presence of the Atlanta hub while adding
    focus cities in Baltimore/Washington,
    Philadelphia and Chicago.
  • On August 15, 2001, Leonard and Fornaro joined
    twelve Crew Members in ringing the opening bell
    at the New York Stock Exchange where the
    company's stock began trading under the ticker
    symbol AAI.

7
History of AirTran Airways Management
  • January 1999
  • The airline grew quickly under Leonard and
    Fornaro's leadership and has transformed itself
    into a strong competitor operating
  • the youngest all Boeing fleet in the nation
  • to more than 56 cities coast-to-coast
  • more than 700 flights per day
  • over 9,000 Crew Members
  • serving nearly 20 million passengers per year.

8
NYSE Ticker AAI
www.airtran.com
9
The year of new planes, new people, and new
determination. AirTran CEO, Joe Leonard
AirTran Airways 2004
10
2004 Mission
Innovative people dedicated to delivering the
best flying experience to smart travelers. Every
day.
11
Guiding Principals
  • We celebrate bringing people together through
  • Safety Taking personal responsibility for
    the safety of each traveler and every Crew
    Member.
  • Courtesy Showing respect and providing
    caring customer service to travelers and Crew
    Members.
  • Pride In our work, in one another and in
    contributing to the success of our airline.
  • Teamwork Supporting one another and valuing
    our diverse contributions to meet every
    traveler's needs.
  • Innovation Acting with an empowered "can
    do" spirit to continuously improve our airline.
  • Cleanliness Of work areas and our equipment
    says everything to our customers pick it up,
    keep it clean.
  • Anticipation Of customer, crew member and
    business needs is a key requirement of every
    position. Look ahead be ready!
  • Results Every crew member is expected to
    contribute to our success through measurement and
  • continuous improvement. Know your numbers!

12
Our Values
  • A Total Commitment to Safety In every
    decision and every action, every time, every day.
  • Compliance with Regulatory Standards In
    every decision and every action, every time,
    every day.
  • Technical Excellence and Continuous Learning
    We do it right, then we improve to do it better.
  • Honesty, Trust and Integrity In all actions
    with one another, our suppliers and our
    customers.
  • Respectful Communication and Constructive
    Disagreement To get to the best result,
    together.
  • Personal Responsibility for Resolving Issues
    We do not pass the buck or quit on a Crew
    Member.
  • Acting with Purpose and Urgency We make
    decisions to do the right thing and then act on
    it.
  • Hard Work We take pride in doing the
    difficult things that make our airline better
    than the others.
  • Fun We are positive people who celebrate
    success, learn from mistakes and enjoy our work.
  • Profit We deliver a sustainable profit to
    support the growth and improvement of our
    company.

13
2004 Strategies
  • Introducing the newest fleet of Boeing 737 to
    appeal to customers safety concern
  • Develop flights to Mexico
  • Preservation of good relations with our employees
    (46 represented by union)
  • Low-fare price point

14
2004 Objectives
  • Remain profitable despite increased fuel prices
  • To satisfy the transportation needs of our target
    customers, but also to provide customers with a
    travel experience worth repeating.
  • Minimize rising expenses while increasing
    revenues.

15
2004 Issues
  • Lost the bid to a major expansion of 14 gates at
    ATA airlines to Southwest Airlines.
  • Increased fuel prices
  • Labor costs (government mediation)
  • 4 Hurricanes hit Orlando
  • Negotiations between US and Mexico

16
A New Vision
AirTran Airways vision is to become the leading
affordable, safe and enjoyable short distance
airline in the nation.
17
A New Mission
The mission of AirTran Airways is to provide
safe, clean, and affordable short distance
flights for business and leisurely travelers as
well as crew members. We are focused on
innovative ideas to provide for profitable growth
for our shareholders, while being mindful of
compliance and regulatory standards. We believe
that employees should have a respectful,
courteous, and fun experience while being part of
AirTran Airways. AirTran is committed to
improving the quality of life of others and
improving communities through a diverse range of
charitable activities.
18
New Mission Evaluation
The new mission fulfills the following questions
  • Customers Who are the firms customers?
  • Products or services What are the firms major
    products?
  • Markets Geographically, where does the firm
    compete?
  • Technology Is the firm technologically current?
  • Concern for survival, growth, and profitability
    Is the firm committed to growth and financial
    soundness?
  • Philosophy What are the basic beliefs, values,
    aspirations, and ethical priorities of the firm?
  • Self-concept What is the firms distinctive
    competence or major competitive advantage?
  • Concern for public image Is the firm responsive
    to social, community, and environmental concerns?
  • Concern for employees Are employees a valuable
    asset of the firm?

19
External Audit Opportunities
  • Appeal to public due to new safe planes
  • Negotiations between Mexico and United States may
    allow in more opportunities for service to Mexico
    from U.S. airlines
  • 950,000 federal grant to advertise the new
    AirTran service and 1 million from Greater
    Richmond Chamber of Commerce.
  • International and nationwide flights.
  • Allow for computer reservations
  • Delta and U.S. Airways of reduced services and
    capacity in the eastern United States

20
External Audit Threats
  • Unionized and subject to union actions as
    collective bargaining agreement expire
  • Societys view of flying after September 11, 2001
  • Rising fuel costs (66 from 2003 to 2004)
  • Major competitor Delta is 1 in Atlanta
    (AirTrans main hub)
  • Flight delays and cancellations due to weather on
    eastern and southeastern coasts.
  • Outsourced maintenance may compromise safety
  • More intense competition as they broaden their
    geographic locations

21
AirTran Airways CPM
22
AirTran Airways EFE
23
2004 Consolidated Balance Sheet
24
2004 Consolidated Balance Sheet
25
Consolidated Statement of Operations
26
Internal Audit Strengths
  • Classified by U.S. Department of Transportation
    as a major carrier
  • 1 billion or more annual revenue
  • Average plane age is 2.5 years (youngest fleet in
    the country)
  • Consumes 24 less fuel than old planes
  • Joe Leonards (CEO) credibility
  • Additional seating in place of galleys since
    meals are not served on the short-haul planes
  • XM Satellite Radio
  • 2004 Best Airline Website by the Web Marketing
    Associates
  • Business class is available (not common on
    short-distance flights)

27
Internal Audit Weaknesses
  • Most flights originate from AirTrans Atlanta,
    Georgia hub causing a heavy reliance on Atlanta
  • Strictly domestic flights
  • Primarily east coast flights
  • Net income dropped from 100.5 in 2003 to 12.3
    million in 2005
  • High labor costs
  • AirTrans fleet of Boeing 717s are made only for
    efficient short-haul services
  • Rated in 2003 by Airline Quality Report
  • Among the lowest for on time-performance
  • among the highest in denied boarding
  • above industry average for passenger complaints

28
AirTran Airways IFE
29
Financial Ratio Analysis
30
Financial Trends
NA

-
19.0


31
AirTran Airways Stock Performance
32
AirTran Airways Net Worth (December 31, 2004 in
thousands)
33
Strategic Analysis SWOT Matrix
34
Strategic Analysis Space Matrix
35
Strategic Analysis Space Matrix (Contd)
AirTran is competing fairly well in an unstable
industry
36
Strategic Analysis Grand Strategy Matrix
Rapid Market Growth
Weak Competitive Position
Strong Competitive Position
  • Quadrant IV
  • Related diversification
  • Unrelated diversification
  • Joint ventures

Slow Market Growth
37
Strategic Analysis IE Matrix
38
Strategic Analysis QSPM
39
Strategic Analysis QSPM (Continued)
40
Matrix Analysis
41
Current Flight Routes
42
Possible Alternative Strategies
43
Recommendations
  • Domestic Expansion (Strategy 1)
  • Purchase 4 more Boeing 717 fuel efficient planes
    which will increase the number of Non-Stop
    flights
  • Create networks at various major tourist airport
    Hubs such as those in the Pacific, and Mountain
    regions of the United States of America
  • Increase the number of promotions, and packages
    to new, untapped markets in the Pacific, and
    Mountain regions of the country
  • Estimated cost 275 million (includes increased
    advertising for flights to new domestic regions
  • http//www.boeing.com/commercial/prices/

44
Recommendations
  • International Expansion (Strategy 2)
  • Purchase 4 Boeing 777 fuel efficient planes to
    travel international
  • Create contracts with international airports to
    allow Air Tran to land at their airport. As a new
    venture, Air Tran should expand to South America,
    Caribbean, Europe, then further international
    destinations will be established after Air Tran
    is stable in the international market
  • Get permission from international destinations to
    fly in their airspace, and make sure that all
    legalities such as customs are dealt with prior
    to operating internationally
  • Establish connections with international tourist
    destinations, and create promotional travel
    packages to introduce the new destinations that
    Air Tran will help promote the new services that
    Air Tran will be providing
  • Estimated cost 1 billion (including contracts,
    and advertising costs

45
Recommendations
  • Advertising for Businesss (Strategy 3)
  • Provide freight-like services for companies
    shipping packages from one of our service hubs to
    another
  • Establish contracts with various businesses to
    opt to use Air Tran for their various business
    related tasks such as business trips, shipping
    etc.
  • Set up a plan with businesss that would give
    them discounts on tickets if they have all their
    employees fly with Air Tran
  • Estimated cost 10 million

46
EPS/EBIT
47
Implementation Issues
  • FFA regulations
  • Homeland Security
  • Current economy conditions
  • Rising fuel expenses

48
Proposed Annual Objectives and Policies
  • Continue rapid growth
  • Bidding on gates that become available at
    current hubs
  • Expand into new hubs
  • Increase revenues
  • 25 per year
  • Increase efficiency
  • Cut expenses wherever possible while abiding by
    AirTrans beliefs and values (culture of company)
  • Maximize passengers per flight

49
Proposed Procedures for Evaluation
Airline Quality Report (AQR) Quarterly
financial reports o Operating Performance -
Available Seat Mile (ASM) o Financial
Performance - Revenue Passenger Mile (RPM)
Quarterly meetings to evaluate current plan and
respond necessary changes
50
Epilogue
  • 2005
  • In June 2005, AirTran announced plans to launch
    services from Atlanta and Tampa to Cancun,
    Mexico.
  • 2006
  • AirTran Airways partnered with Frontier Airlines,
    allowing frequent flyers to earn airline miles in
    either AirTran's A Rewards, or Frontier's
    EarlyReturns frequent flyer program. In addition
    the airlines will refer customers to each other
    when appropriate.

51
Epilogue
  • 2007
  • AirTran announced new daily nonstop service from
    Atlanta (ATL) to Phoenix Sky Harbor (PHX) along
    with many other additional routes
  • AirTran Airways' online survey which asked
    consumers, Where do you want low fares next
  • AirTran has shifted its attention to building up
    their operations at General Mitchell
    International Airport. The airline is now trying
    to compete directly with rival Midwest Airlines
  • Failed in attempt to acquire Midwest Airlines

52
Current Stock Performance
53
Resources
  • Case Notes
  • Fred R. David, Francis Marion University
  • AirTran Holdings 10-K, December 31, 2004
  • www.AirTran.com
  • MSN Money
  • Almanac Business and Industry Financial Ratios
    2008

54
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