Kitty Hawk, Inc.

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Kitty Hawk, Inc.

1515 West 20th Street
DFW International Airport, Texas 75261
U.S.A.
(800) 654-8966
Fax: (972) 456-2298
Web site: http://www.kha.com

Public Company
Incorporated: 1985
Employees: 281
Sales: $164 million (1996)
Stock Exchanges: NASDAQ
SICs: 4522 Air Transportation, Nonscheduled; 4731 Arrangement Transport, Freight and Cargo; 6729 Holding Companies, Not Elsewhere Classified

Kitty Hawk, Inc. is a holding company that provides air freight and logistics charter services throughout the world. The company is a leader in the United States among on-demand air charter services and scheduled air cargo shipping firms. The expedited air forwarder operates from auxiliary airports, ensuring less traffic and thereby achieving faster response times. In fact, faster service is Kitty Hawk’s hallmark. The company offers next-flight-out or same-day deliveries. Its average delivery time is three and one-half hours from the time a customer first places an order until final delivery. Kitty Hawk operates Kitty Hawk Air Cargo, Inc.; Kitty Hawk Systems, Inc., which designs and markets data systems using proprietary software; and Kitty Hawk Financial, which offers financial services to the aviation industry.

Tom Christopher’s Business Takes Flight in 1970s

M. Tom Christopher, in sales for Burlington Northern Air Freight, started a little sideline business for himself in 1976. When one of his clients missed Burlington’s last flight, Christopher, also a pilot, volunteered to fly the shipment of hydraulic hoses in his Beech Craft Baron. He only asked that the client pay for the gas.

Christopher continued these special flights while working full-time at Burlington for about two years. When he refused to share a $35,000 commission for flying explosives to Italy in 1978, Burlington executives were irritated; the vice-president of marketing dismissed Christopher, his top sales executive in the Dallas area. By that time, however, Christopher’s sideline business was strong enough to support him. The former sales associate had so much business that he established his sideline as Christopher Charters, Inc. With only one airplane, Christopher contacted the charter companies listed in the local Yellow Pages to fly freight for his clients. By 1985, Christopher earned enough to purchase one of these charter companies, Dallas-based Kitty Hawk Airways, also in business since 1978.

Air Freight and Air Logistics Services

Christopher merged his company with the charter service to form the current Kitty Hawk in 1985. He then split Kitty Hawk into two divisions that contributed equally to the company’s revenues. One division—Kitty Hawk Air Cargo—acted as an air charter logistics service that offered on-demand shipping and same-day delivery to high-profile clients such as General Motors, IBM, the Wall Street Journal, and medical firms. Kitty Hawk Air Cargo provided a high level of service to clients willing to pay a high price to overcome time constraints. “We’re an emergency business,” Christopher explained in Air Cargo World. “You call with an emergency, and we run out and immediately jump in the airplane and move the freight.” Kitty Hawk Air Cargo typically transported its cargo 650 miles in three and one-half hours at a cost of $5,800 per shipment. Kitty Hawk Air Cargo was comprised of a fleet of 25 company-owned aircraft, as well as three leased aircraft. By 1997, Kitty Hawk flew as much as 40 percent of all on-demand cargo flights in the United States.

Kitty Hawk’s second division—Kitty Hawk Charters, Inc.—offered logistics services using proprietary computer software. Basically, Kitty Hawk Charters transported freight for other carriers, including Burlington Air Express, DHK Airways, and Emery Worldwide. Kitty Hawk moved the freight using its own aircraft and crews; its clients only paid for fuel and operating expenses.

Excellent Customer Service

Christopher made pleasing customers a priority for Kitty Hawk. Kitty Hawk achieved a 99 percent on-time/reliability ratio for many of its customers. When the company flew for the U.S. Air Force’s Log Air program—until the program ceased operations in 1992—Kitty Hawk maintained a 100 percent reliability ratio. It was the only service in the program to attain a perfect record while serving this important customer. According to the Kitty Hawk company overview, “Service means being responsive, creative, and cost conscious. Excellent service creates a repeat customer and turns one-time engagements into long-term relationships. Kitty Hawk is known for delivering fair pricing and extraordinary quality service. This on-demand service philosophy has become the standard for all facets of the Kitty Hawk services.... One of the best records for performance and customer satisfaction in the scheduled cargo airline and air charter business belongs to Kitty Hawk.”

Kitty Hawk instituted a Total Quality Management (TQM) program in 1993 as an extension of its customer service philosophy. As the company’s overview revealed: “Kitty Hawk’s leadership and its employees are excited about the current and long-term benefits of the formalized TQM program. The effects of this program and leadership’s commitment to quality and excellence in serving its customers will flow throughout the organization and Kitty Hawk’s customers will experience it in even greater measure than in the past.”

Kitty Hawk’s dedication to service began to be recognized formally. The CEO Institute and the Caruth Institute of the Business School at Southern Methodist University named Kitty Hawk Dallas’s sixth fastest growing company in 1993. That same year, the Entrepreneur Institute honored Christopher with the Entrepreneur of the Year Award in the service businesses category.

Christopher Wins When He Loses in 1990s

In 1993 Kitty Hawk won then lost a major Express Mail contract, but in so doing the company further proved the mettle of its leadership. Although Kitty Hawk lost the billion-dollar contract in a court challenge, it nevertheless received an $18.5 million settlement. Donna Steph Hansard, a writer for Air Cargo World, commented about Christopher: “Any businessman who can walk away with $18.5 million in losing a contract, obviously knows how to manage a deal.”

Christopher once again demonstrated his business acumen in 1994. Kitty Hawk first considered a public offering of its stock that year, but a falling market prompted Christopher to rethinkgoing public. Kitty Hawk stock at that time would not yield Christopher’s price, so he postponed the company’s initial public offering until 1996.

International Presence in the Mid-1990s

In the meantime, the company began building its business in intracontinental traffic. In 1995 Kitty Hawk secured its first international contract. The company flew a load of fish from some islands in Micronesia to Japan. Other contracts in the Pacific Rim, Europe, and South America followed. Though the company’s aircraft did not fly freight between the continents, Kitty Hawk flights were busy within each continent. “We see ourselves as domestic operators—whether that is domestic in North America, South America, Europe, or Asia,” Christopher explained to Air Cargo World in 1997. “We’re not flying over big bodies of water, but we can be domestic in each continent. That is our uniqueness.”

Kitty Hawk also established an office at an airport in Pontiac, Michigan, a suburb of Detroit, in 1995. Eventually, the company situated warehouses at airports throughout the world to support the distribution of critical parts for its major clients such as General Motors, IBM, and other clients with high volumes and low margins.

Kitty Hawk as a Public Company

In 1996, Christopher launched the initial public offering of Kitty Hawk stock in order to grow the company’s cargo business. Capital acquired from the sale of company stock was slated for the acquisition of new aircraft, particularly for the purchase of additional 727s. Creating a public company was part of Christopher’s overall growth strategy, however, not just a demand for more capital. As Christopher explained in Air Cargo World, “To grow at the rate we wantfed] to grow, while the banks were eager to lend us money, it seemed a nice balance to have that public shareholder out there. While the logistics division grows through pure sales efforts; the charter division grows through the acquisition of aircraft.”

In October Kitty Hawk offered stock at $12 per share. The price of stock quickly rose to $14 a share, then dropped to $8 in December. By May 1997, however, Kitty Hawk stock once again sold at $14 a share. In total, the initial sale of stock raised $30 million for the company. Christopher retained 65 percent of Kitty Hawk’s stock, company employees owned five percent, and the remaining 30 percent went to public stockholders.

Company Perspectives:

The Kitty Hawk commitment to growth and quality begins with the company’s Mission Statement: To be the standard of excellence, pursuing happiness for our employees and families, our suppliers, stockholders, and customers; outperforming in everything we do.

Expanding and Diversifying the Customer Base

Kitty Hawk’s work to diversify its client base proved especially fruitful in 1996 when a strike at General Motors, one of the charter service’s largest customers, stopped operations at the automaker. In a letter to stockholders, Christopher explained why broadening the company’s customer base was critical: “I believe our commitment to reliable, quality service pays off. The thousands of flights that we handle for the automotive industry represent a considerable amount of our business, but for more than two months in the fall of 1996, we received virtually no revenue from a key automotive customer because of strike-related plant shutdowns. In past years, this loss of revenue would have dealt us a very heavy blow. However, business from other customers enabled us to maintain our positive financial performance during the automotive strike.”

The year 1996 also marked Kitty Hawk’s first U.S. Postal Service Christmas Network mail delivery contract. “We lost a lot of sleep and a lot of sweat waiting for this award,” Christopher revealed in Air Cargo Report. Upon earning the contract, Kitty Hawk delivered the U.S. mail to 25 cities from December 11 through December 24. Valued at $21 million, the contract accounted for about 15 percent of the company’s annual revenue.

Consolidation, Acquisition and Expansion

Kitty Hawk moved to a 42,000-square-foot facility at the Dallas-Fort Worth International Airport. The company consolidated many of its operations into the new space, including melding Kitty Hawk Air Cargo with Kitty Hawk Charters. Sales, executive and corporate offices, and Kitty Hawk Systems also occupied space in the new facility, which included a large hangar and a flight operations area.

In 1997 Kitty Hawk’s fleet was comprised of 30 aircraft— 727s, DC-9s, and turbo prop Convairs. The company’s fleet grew substantially in August of that year when Kitty Hawk purchased 16 Boeing 727s from the Kalitta Group for more than $50 million. The sale was part of an overall agreement to merge the large, privately held Kalitta Group companies into the smaller, public Kitty Hawk.

According to the Air Cargo Report, the merger was “designed to capitalize on the strengths of both of the all-cargo carriers.” Traditionally, the Kalitta Group, operators of passenger charters and cargo freight services, earned a reputation for its maintenance and equipment. These assets nicely complemented Kitty Hawk’s dominance in high-tech marketing. The Air Cargo Report commented that the deal “will combine the strengths of both companies and give the new entity a larger market share and ’more clout.”

Kitty Hawk absorbed Kalitta’s American International Airways, Inc., American International Freight, American International Cargo, Kalitta Flying Service, Inc., Flight One Logistics, Inc., and OK Turbines, Inc. With the merger, Kitty Hawk operated 32 727s, five DC-9s, and eight Convairs. In return, Connie Kalitta, chairman and owner of the Kalitta Group, received cash, stock, and a management position. Above all, the Kalitta Group became a public company through the merger.

FAA Regulations for 727s

Despite the fact that in 15 years no 727 freight carriers ever crashed, in 1997 the Federal Aviation Administration (FAA) considered safety modifications for the aircraft in order to repair structural flaws near the main cargo door. The approximate cost of the repairs totaled between $3,000 and $5,000 per plane. The FAA also sought to limit the amount of freight flown on 727s, an edict that worked to Kitty Hawk’s advantage. Since freight loads remained constant, more flights would be needed to move the same amount of cargo. At the time, industry analyst Helane Becker of Smith Barney observed in Air Cargo World: “If the FAA limits the pounds that can be put on the aircraft [727s], the freight won’t go away. It will simply result in more turns in aircraft. For Kitty Hawk, this could turn into a huge potential revenue benefit.”

With Kitty Hawk in control of the 727 situation, its position in the industry seemed secure in late 1997. In the future, Kitty Hawk planned to expand its services abroad, particularly in Europe and the Far East. The company also intended to augment its network of strategically placed warehouses to facilitate the delivery of critical parts for its clients. Given the FAA’s favorable regulatory environment and the company’s well-defined direction, Smith Barney’s Becker declared in Air Cargo World in 1997 that “we are very enthusiastic about Kitty Hawk’s outlook and continued prospects.”