AirTran Airways 1

AirTran Airways
Case Study

BAM 479
February 27, 2007
 AirTran Airways 2

Mission Statement
Innovative people dedicated to delivering the best flying experience to smart
travelers. Every day.

Although simple and straightforward, AirTran’s mission statement is too broad

and doesn’t address some key areas.

Revised Mission Statement

Innovative people dedicated to delivering and growing (growth) the best
domestic (markets) flying (product) and working experience, in terms of safety
and service (self-concept & philosophy), to our employees and smart travelers
(customer). Striving everyday to keep our promise of, not only safety and
service (self-concept), but also leaving a small footprint in the environment
(public image) through advances in mechanical technology (technology). Every
day.

Case Statement
AirTran’s major challenge is to remain profitable against the rise in
competition from Delta Air Lines.

Critical Milestones
1996 ValuJet plane crashes in Florida Everglades halting company
service
1997 AirTran formed through merger of AirWays Corp. and ValuJet.
1999 AirTran leaves Richmond, Virginia
1999 Joe Leonard joins AirTran as CEO and Chairman
1999 AirTran’s fleet becomes youngest in industry
2004 Awarded “Best Airline Website”
2004 Ranked second in Airline Quality Report
2004 AirTran remains profitable compared to industry
2005 AirTran returns service to Richmond, Virginia and receives
subsidies from Richmond
2005 Adds service to 9 US locations and to Cancun (International)

Trend Statement
AirTran Holdings, Inc. growth can be attributed to its low-cost strategy,
commitment to safety and service, and high utilization of planes and service
routes.
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Internal Factor Evaluation Matrix

Weight Rating Weighted Score

Strengths
1. Remaining Profitable .18 4 .72
2. High Service Quality .14 4 .56
3. High Plane Utilization .11 4 .44
4. Large Airport Presence .07 3 .21
5. Young Airline Fleet .03 3 .09

Weaknesses
1. High Operating Cost per ASM .18 1 .18
2. Concentrated to East US .10 2 .20
3. Small International Presence .09 2 .18
4. Low Ratings in Select AQR Categories .06 2 .12
5. Highly Dependent on Fuel .04 2 .08
1.00 2.78

Explanations
Strengths
1. AirTran needs to remain profitable, both to survive but more importantly
to keep investor interest and confidence.
2. High service quality is key for AirTran to keep a recurring customer-
base healthy.
3. Especially important in AirTran’s low-cost strategy, utilizing planes to
their fullest potential is key.
4. AirTran has a high airport presence throughout eastern United States.
5. AirTran benefits from a young airplane fleet through cost savings,
quality and marketing efforts.

Weaknesses
1. A major weakness of AirTran is its high operating cost per available
seat mile compared to other low-cost providers like Southwest and
JetBlue.
2. Through increased competition, especially Delta, AirTran is only
available mainly in the eastern United States. Customers needing to
travel to the western US probably will choose another airline that could
create brand loyalty for another airline.
3. AirTran is highly dependent on domestic travel. Diversifying to other
markets will help ease “all eggs in one basket” effect.
4. Even though AirTran received a number two position in airline quality
rating (AQR) there are still areas that AirTran lags in, like on-time
performance and denied boardings performance.
5. Although mainly out of AirTran’s control, their income and costs are
highly associated to the cost of fuel.
 AirTran Airways 4

AirTran is doing fine overall with respect to its internal strengths and
weakness. Key areas to improve are its high operating cost per available seat
mile (ASM), domestic and internal presences and other minor areas.
 AirTran Airways 5

External Factor Evaluation Matrix

Weight Rating Weighted Score

Opportunities
1. Decrease Operating Cost per ASM .18 2 .36
2. Increase US Presence .15 3 .45
3. Increase International Presence .11 1 .11
4. Increase Select AQR Ratings .05 2 .10
5. Add Consumer Technologies to Fleet .03 2 .06

Threats
1. Increased Competition .2 3 .6
2. High Fuel Costs .14 3 .42
3. Increasing Labor Costs .06 2 .12
4. Political Policies .04 4 .16
5. Labor Strikes .04 4 .16
1.00 2.54

Explanations

Opportunities
1. A major opportunity for AirTran to drastically increase income would be
to decrease their operating cost per available seat mile (ASM).
2. AirTran has a major opportunity to expand drastically its US presence
by moving airport terminals westward.
3. As noted in the milestones, AirTran is beginning service to Cancun, a
popular vacation destination, but with increased competition AirTran
needs to diversify its offerings.
4. One major opportunity to gain and keep loyal customer is to continue to
improve its airline quality rating (AQR). Even though AirTran is currently
rated number 2 there are still areas that could use improvements.
5. One way to gain customer loyalty through increased competition is to
offer more consumer technologies and luxuries. AirTran is already
incorporating XM Satellite radio into each plane, but other technologies
could include iPod hookups for each seat and even in-cabin internet
access (wired or wireless) for laptops.

Threats
1. The largest threat to AirTran is the increased competition with the low-
cost sector and the industry itself.
2. AirTran is highly dependent on the fluctuations of fuel costs. Since fuel
is one of the largest costs to AirTran a slight adjustment can mean the
difference between a loss and a profit.
3. Along of fuel, labor costs are one of the largest costs to AirTran and a
slight adjust can mean the difference between a loss and a profit.
4. Political policies enforced by the US and other countries in which
AirTran operates can have a huge impact on the company as a whole.
With terrorism a top priority of the government, new policies can cause
 AirTran Airways 6

a huge burden on AirTran for new technologies or more labor costs

(security, maintenance).
5. As with any business labor strikes can halt a company’s operations
causing the company to loose millions in revenue.

AirTran is performing average in their external environment. Most of AirTran’s

opportunities and threats need to be addressed more aggressively, such as
decreasing operating costs, expanding internationally, and increased
competition.
 AirTran Airways 7

Industry Analysis

Porter’s Five Forces

Substitute
Products
Bus Service
Train Service
Charter Planes

Suppliers Competition Consumers

Fuel Providers AirTran Business
Pilots Delta Travelers
Mechanics JetBlue Regular Travelers
Flight Attendants SouthWest
Airports

Potential Entry of
New Competitors
Government
Regulations (FAA)
Brand Loyalty and
Identification
Airport Contracts
Costs
 AirTran Airways 8

Industry Analysis Continued

Rivalry Among Competing Firms HIGH

Competition among major competitors is extremely intense in many aspects.
Since most competitors directly competing with AirTran emphasize a low-cost
strategy many consumer look only to cost as a determining factor in a
purchase, this indeed creates an intense environment. Switching costs are
generally low, even though companies have tried to increase switching costs
with the use of “frequent flyer” programs.

Potential Entry of New Competitors HIGH

Entry in to the airline industry is very hard, due to many factors. Some
included are government regulations and licensing from the Federal Aviation
Association, brand loyalty and identification of major airlines, contracts
between airlines and airports for use of runways and terminals, and the
substantial costs associated with forming an airline (airplanes purchases,
labor costs, fuel costs, maintenance, etc.).

Potential Development of Substitute Products LOW

Substitute products are of little threat to the airline industry. No other product
domestically competes directly with airlines in terms of cost and speed of
travel. Bus services may cost less but travel speed extremely slow and
tedious with many stops before your destination. Train service is generally
much more expensive than airplane and only have select stations/ stops.
Generally charter planes are much more expensive than commercial airlines.
Taxis are tremendously expensive for long distance and are constricted to
speed limits and road layouts.

Bargaining Power of Suppliers HIGH

All suppliers have tremendous bargaining power with the airline industry.
There are few fuel providers and no reliable alternative to fuel. There are only
so many pilots in the job market and planes cannot be flown without pilots.
Mechanics for airplanes are in short supply and planes cannot be flown
without being serviced. Flight attendants provide services that cannot easily
be replaced and customer satisfaction without flight attendant would be
detrimental. Finally airports are in limited supply and you need airport to land
planes and board passengers.

Bargaining Power of Consumers LOW

Generally speaking consumers, business or regular travelers, have little
bargaining power with airlines. Either they buy the ticket or not, one traveler
does not hurt the airline. Also there are only a select few airline to choose
from and even less at an individual airport. Either the consumer wants to fly or
they don’t.
 AirTran Airways 9

Competitive Strategies

Competitive strategies for AirTran include the following:

Market Penetration
AirTran is seeking to increase market share in its current markets through
increased marketing efforts and capacity. AirTran was voted the “Best Airline
Website” in 2004 that showcases AirTran’s efforts to increase its market
share. Along with marketing efforts, AirTran is expanding its capacity by
replacing airplane galleys with seating. Adding extra seats per flight increase
the amount of revenue per flight and also decreases cost per passenger per
flight.

Market Development
AirTran is trying to expand from its eastern US concentration into western US
and international to popular vacation spots like Cancun, Mexico.

Product Development
AirTran is improving its present airplanes with consumer technologies like XM
Satellite Radio for each passenger free of charge.

Retrenchment
In an industry of decreasing profits and increases costs, AirTran is trying to
find ways to cut its “fat” by outsourcing mechanic work.
 AirTran Airways 10

Financial Analysis

Ratios derived from 2004 data

AAI Industry (RMA, SIC 4512)
L M H
Current Ratio 2.04 .60 1.1 1.6
For every dollar of current debt (liability), AirTran has $2.04 of current assets
to pay for that debt. This number is above the industry average of 1.1,
meaning that AirTran is doing a great job of managing its assets.

Quick Ratio 1.9 .40 .70 1.1

For every dollar of current debt (liability), AirTran has $1.90 of current assets,
not counting inventory, to pay for that debt. Again this number is above the
industry’s average of .7 meaning that AirTran is doing a great job of managing
its very liquid assets.

Debt-to-Assets 0.63
For every dollar of assets, AirTran has $.63 of debt issued.

Debt-to-Equity 1.71 -4.6 .90 1.8

For every dollar of equity, AirTran has $1.71 in debt. Compared to the industry
average of $.90 AirTran is doing very good.

Long-term Debt-to-Equity 1.11

For every dollar of equity, AirTran has $1.11 of long-term debt issued.
Compared to the previous ratio, this shows that most of AirTran’s debt is long-
term.

Times-Covered Ratio 1.69 2.2 4.5 10.6

For every dollar of interest, AirTran has $1.69 to pay for those interest
charges. Compared to the industry, AirTran is far below the industry.
Note: The number, 1.69, may be artificially deflated since there is income
earned from interest.

Activity Ratios

Inventory Turnover 36.79

For every dollar in inventory, AirTran generates $36.79 in sales. This number is
artificially inflated and contains little value since AirTran is primarily a service
company and little inventory is stocked.

Fixed Asset Turnover 2.71 1.4 3.6 8.9

For every dollar of fixed assets, AirTran is able to generate $2.71 in sales. This
is average compared with the industry average of $3.60. This number for
AirTran may be low due to the high costs/ worth associated with their young
airplane fleet.

Total Asset Turnover 1.15 1.0 2.1 3.0

 AirTran Airways 11

For every dollar of assets, AirTran is able to generate $1.15 in sales. This
below average compared to the industry average of $2.10. Compared to the
previous ratio, AirTran must have a greater amount of current assets (cash
and non-fixed assets).

Capital Intensity Ratio .87 1.0 .48 .33

AirTran needs $.87 in assets to generate a dollar in sales. This is quite high
compared to the industry average of $.48. This ratio confirms that AirTran
needs to reduce its operating costs, which is one of its weaknesses. Reducing
this number will greatly improve AirTran’s profitability.

Profitability Ratios

Gross Profit Margin 3.15%

For every dollar of sales, 3.15% of the sale goes into AirTran’s gross profits.
This number seems extremely low, but it is confirmed by AirTran’s high
operating costs.

This number was determined by (Sales Revenue-Operating Expenses)/ Sales

Revenue. “Cost of Goods Sold” was not used because AirTran’s costs are
mainly operation related (fuel, labor). Therefore, using cost of goods sold
would artificially inflate AirTran’s gross profit.

Net Profit Margin 1.18%

For every dollar of sales, 1.18% of the sale goes into AirTran’s net profit,
profits after taxes and interest. This is directly related and could be increased
by decreasing AirTran’s overly high operating costs.

Return on Total Assets .01

For every dollar of assets, AirTran is able to generate $.01 of net income. This
number is horrible; AirTran needs to more efficiently utilize its assets.

Return on Shareholder’s Equity .04

For every dollar of equity, AirTran is able to generate $.04 of net income.
Again this number is horrible; AirTran need to better utilize its equity.
 AirTran Airways 12

Financial Analysis
Income Statement- Horizontal- In Millions
2004 2003 2002
% change % change

Operating Revenues
Passenger 1,005.263 12.96% 889.950 24.69% 713.711
Other 36.159 28.73% 28.090 42.89% 19.659
Total Operating Revenues 1,041.422 13.44% 918.040 25.18% 733.370

Operating Expenses
Salaries, wages and benefits 273.514 18.03% 231.728 13.91% 203.435
Aircraft fuel 247.980 38.74% 178.737 15.71% 154.467
Aircraft rent 150.959 21.54% 124.203 70.87% 72.690
Maintenance, materials and repairs 69.514 9.30% 63.600 34.50% 47.288
Distribution 50.890 12.21% 45.354 5.19% 43.115
Landing fees and other rents 62.322 18.01% 52.810 24.87% 42.291
Aircraft insurance and security services 22.888 16.28% 19.684 -32.87% 29.323
Marketing and advertising 27.569 14.34% 24.112 15.00% 20.967
Depreciation 14.628 15.84% 12.628 -26.03% 17.072
Other operating expenses 88.314 11.98% 78.866 9.29% 72.159
Total Operating Expenses 1,008.578 21.26% 831.722 18.34% 702.807
Operating Income 32.844 -61.95% 86.318 182.43% 30.563

Other (Income) Expense:

Interest Income -5.275 57.70% -3.345 59.13% -2.102
Interest Expense 19.428 -31.36% 28.303 -3.08% 29.203
Other -1.332 - -
Government Grant - - -0.640
Payment Under the Emergency Wartime Supplemental -Appropriations Act,
-38.061
2003 -
Deferred Debt Discount/ Issuance Cost Ammortization - 12.257 -
SFAS 133 Adjustment - - -5.857
Other (Income) Expense, Net 12.821 n/a -0.846 n/a 20.604

Income Before Income Taxes 20.023 -77.03% 87.164 775.23% 9.959

Income tax expense (benefit) 7.768 n/a -13.353 1598.85% -0.786
Net Income 12.255 -87.81% 100.517 835.48% 10.745

Note: Shaded cells offer areas of interest.

AirTran’s “other” income increased drastically from 2002 to 2003. Possibly

this was due to other travel revenues from package shipping.
The increase in fuel expense by 38.74% can be attributed to the high increase
in the cost of fuel.
Aircraft rent increased from 2002 to 2003 possibly by a larger number of
planes in AirTran’s fleet.
Aircraft insurance and security decreased from 2002-2003 may be from
increased airport security, so AirTran didn’t need to hire as many and
insurance rates may have decreased.
Depreciation may have decreased do to AirTran’s planes getting older and
depreciating less.
 AirTran Airways 13

An influx in income for 2003 seems to be associated with a decrease in

operating costs and extra income coming from interest, income tax benefits,
and government subsidies.
 AirTran Airways 14

Financial Analysis

Balance Sheet- Horizontal- In Millions

2004 2003 2002
% change % change

Assets
Cash and Equivalents 307.49 -9.22% 338.71 225.21% 104.15
Marketable Securities 26.98 n/a 0 n/a 0
Receivables 19.38 11.06% 17.45 -8.73% 19.12
Inventories 28.31 46.30% 19.35 109.19% 9.25
Current Deferred Income Taxes 7.44 -85.71% 52.05 n/a 0
Other Current Assets 22.47 -10.16% 25.01 -40.35% 41.93
Total Current Assets 412.06 -8.95% 452.57 159.43% 174.45
Gross Fixed Assets (Plant, Prop. & Equip.) 447.65 37.59% 325.34 20.35% 270.33
Accumulated Depreciation & Depletion 63.72 30.36% 48.88 18.07% 41.4
Net Fixed Assets 383.94 38.88% 276.46 20.77% 228.92
Intangibles 29.92 0.00% 29.92 -11.61% 33.85
Other Non-Current Assets 79.82 61.51% 49.42 36.44% 36.22
Total Non Current Assets 493.67 38.75% 355.8 19.00% 299
Total Assets 905.73 12.05% 808.36 70.74% 473.45
Liabilities
Accounts Payable 20.99 13.46% 18.5 311.11% 4.5
Short Term Debt 13.84 175.70% 5.02 -52.01% 10.46
Other Current Liabilities 167.6 13.26% 147.98 7.75% 137.34
Total Current Liabilities 202.42 18.04% 171.49 12.60% 152.3
Long Term Debt 300.13 24.11% 241.82 21.09% 199.71
Deferred Income Taxes 0 -100.00% 26.1 n/a 0
Other Non-Current Liabilities 69.14 3.60% 66.74 -4.05% 69.56
Total Non-Current Liabilities 369.28 10.34% 334.66 24.28% 269.27
Total Liabilities 571.7 12.95% 506.15 20.06% 421.57
Stockholder's Equity
Common Stock Equity 334.04 10.53% 302.21 482.41% 51.89
Common Par 0.09 12.50% 0.08 14.29% 0.07
Additional Paid In Capital 361.06 7.09% 337.15 79.44% 187.89
Retained Earnings -22.49 -35.28% -34.75 -74.31% -135.26
Other Equity Adjustments -4.62 1611.11% -0.27 -66.67% -0.81
Total Equity 334.04 10.53% 302.21 482.41% 51.89
Total Liabilities & Stock Equity 905.73 12.05% 808.36 70.74% 473.45

Note: Shaded cells offer areas of interest.

Cash grew substantially from 2002 to 2003 probably from AirTran’s huge
profits and subsidies; this in turn increases current assets.
Inventories from 2002 to 2003 grew, maybe to include more spare parts or
customer amenities.
Accounts payable increased a lot from 2002 to 2003 possibly from in credit
accounts at the time the balance sheet was obtained.
Common stock from 2002 to 2003 for AirTran must have been a hot ticket
item, or AirTran issued more stock.
 AirTran Airways 15

Financial Analysis

Income Statement- Vertical- In Millions

2004 2003 2002
% of % of % of
Operating Revenues
Passenger 1,005.263 96.53% 889.950 96.94% 713.711 97.32%
Other 36.159 3.47% 28.090 3.06% 19.659 2.68%
Total Operating Revenues 1,041.422 100.00% 918.040 100.00% 733.370 100.00%

Operating Expenses
Salaries, wages and benefits 273.514 26.26% 231.728 25.24% 203.435 27.74%
Aircraft fuel 247.980 23.81% 178.737 19.47% 154.467 21.06%
Aircraft rent 150.959 14.50% 124.203 13.53% 72.690 9.91%
Maintenance, materials and repairs 69.514 6.67% 63.600 6.93% 47.288 6.45%
Distribution 50.890 4.89% 45.354 4.94% 43.115 5.88%
Landing fees and other rents 62.322 5.98% 52.810 5.75% 42.291 5.77%
Aircraft insurance and security services 22.888 2.20% 19.684 2.14% 29.323 4.00%
Marketing and advertising 27.569 2.65% 24.112 2.63% 20.967 2.86%
Depreciation 14.628 1.40% 12.628 1.38% 17.072 2.33%
Other operating expenses 88.314 8.48% 78.866 8.59% 72.159 9.84%
Total Operating Expenses 1,008.578 96.85% 831.722 90.60% 702.807 95.83%
Operating Income 32.844 3.15% 86.318 9.40% 30.563 4.17%

Other (Income) Expense:

Interest Income -5.275 -0.51% -3.345 -0.36% -2.102 -0.29%
Interest Expense 19.428 1.87% 28.303 3.08% 29.203 3.98%
Other -1.332 -0.13% - -
Government Grant - - -0.640 -0.09%
Payment Under the Emergency Wartime Supplemental Appropriations
- -38.061
Act, 2003 -4.15% -
Deferred Debt Discount/ Issuance Cost Ammortization - 12.257 1.34% -
SFAS 133 Adjustment - - -5.857 -0.80%
Other (Income) Expense, Net 12.821 1.23% -0.846 -0.09% 20.604 2.81%

Income Before Income Taxes 20.023 1.92% 87.164 9.49% 9.959 1.36%
Income tax expense (benefit) 7.768 0.75% -13.353 -1.45% -0.786 -0.11%
Net Income 12.255 1.18% 100.517 10.95% 10.745 1.47%

Note: Shaded cells offer areas of interest.

Substantial income was made in 2003 mainly due to a decrease of operating

expenses as a part of total revenues. Major decreases seem to have come
from wages and fuel, which happen to account for most of the company’s
expenses.
 AirTran Airways 16

Financial Analysis

Balance Sheet- Vertical- In Millions

2004 2003 2002
% of % of % of
Assets
Cash and Equivalents 307.49 33.95% 338.71 41.90% 104.15 22.00%
Marketable Securities 26.98 2.98% 0 0.00% 0 0.00%
Receivables 19.38 2.14% 17.45 2.16% 19.12 4.04%
Inventories 28.31 3.13% 19.35 2.39% 9.25 1.95%
Current Deferred Income Taxes 7.44 0.82% 52.05 6.44% 0 0.00%
Other Current Assets 22.47 2.48% 25.01 3.09% 41.93 8.86%
Total Current Assets 412.06 45.49% 452.57 55.99% 174.45 36.85%
Gross Fixed Assets (Plant, Prop. & Equip.) 447.65 49.42% 325.34 40.25% 270.33 57.10%
Accumulated Depreciation & Depletion 63.72 7.04% 48.88 6.05% 41.4 8.74%
Net Fixed Assets 383.94 42.39% 276.46 34.20% 228.92 48.35%
Intangibles 29.92 3.30% 29.92 3.70% 33.85 7.15%
Other Non-Current Assets 79.82 8.81% 49.42 6.11% 36.22 7.65%
Total Non Current Assets 493.67 54.51% 355.8 44.02% 299 63.15%
Total Assets 905.73 100.00% 808.36 100.00% 473.45 100.00%
Liabilities
Accounts Payable 20.99 2.32% 18.5 2.29% 4.5 0.95%
Short Term Debt 13.84 1.53% 5.02 0.62% 10.46 2.21%
Other Current Liabilities 167.6 18.50% 147.98 18.31% 137.34 29.01%
Total Current Liabilities 202.42 22.35% 171.49 21.21% 152.3 32.17%
Long Term Debt 300.13 33.14% 241.82 29.91% 199.71 42.18%
Deferred Income Taxes 0 0.00% 26.1 3.23% 0 0.00%
Other Non-Current Liabilities 69.14 7.63% 66.74 8.26% 69.56 14.69%
Minority Interest 0 0.00% 0 0.00% 0 0.00%
Total Non-Current Liabilities 369.28 40.77% 334.66 41.40% 269.27 56.87%
Total Liabilities 571.7 63.12% 506.15 62.61% 421.57 89.04%
Stockholder's Equity
Preferred Stock Equity 0 0.00% 0 0.00% 0 0.00%
Common Stock Equity 334.04 36.88% 302.21 37.39% 51.89 10.96%
Common Par 0.09 0.01% 0.08 0.01% 0.07 0.01%
Additional Paid In Capital 361.06 39.86% 337.15 41.71% 187.89 39.69%
Cumulative Translation Adjustment 0 0.00% 0 0.00% 0 0.00%
Retained Earnings -22.49 -2.48% -34.75 -4.30% -135.26 -28.57%
Treasury Stock 0 0.00% 0 0.00% 0 0.00%
Other Equity Adjustments -4.62 -0.51% -0.27 -0.03% -0.81 -0.17%
Total Equity 334.04 36.88% 302.21 37.39% 51.89 10.96%
Total Liabilities & Stock Equity 905.73 100.00% 808.36 100.00% 473.45 100.00%

Note: Shaded cells offer areas of interest.

The 2.98% increase in marketable securities is probably associated with

stock in other companies.
Current assets increase slightly compared to previous years, but this is
probably associated with AirTran’s deferred income taxes.
Fixed (Non-current) assets increased maybe from increased labor or plane
purchases or maintenance.
 AirTran Airways 17

Recommendation

I would recommend that AirTran continue its expansion into other domestic
and international markets, and to work hard to decrease is operating costs
per available seat mile (ASM) to better compete with its competition, notably
Delta Air Lines.
 AirTran Airways 18

Sources Cited
AirTran Airways Corporate Website (http://www.airtran.com)

Strategic Management, Concepts and Cases, p. 202-213

CNN Money, AAI (http://money.cnn.com/quote/financials/financials.html?

symb=AAI)