AirTran Holdings, Inc.

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AirTran Holdings, Inc.

9955 AirTran Blvd.
Orlando, Florida 32827
U.S.A.
(407) 251-5600
Fax: (407) 251-5602
Web site: http://www.airtran.com

Public Company
Incorporated: 1993 as ValuJet, Inc.
Employees: 2,800
Sales: $219.64 million (1996)
Stock Exchanges: NASDAQ
SICs: 4512 Air Transportation, Scheduled

AirTran Holdings, Inc. is the product of the 1997 merger of ValuJet, Inc. with AirWays Corporation, the parent company of AirTran Airways, Inc. The merged operations served more than 40 cities, most in the eastern United States. Financially, ValuJet epitomized success among the budget start-ups of the earlier 1990s—small regional airlines that competed primarily on the basis of low fares. However, the crash of its Flight 592 threatened the credibility and very survival of this entire category of airlines.

The 1990s: The Age of the Start-Ups

Deregulation in the 1980s resulted in the demise of several significant American airlines, including Continental, Eastern, and Pan Am. With the industry dominated by a few surviving giants such as United and American Airlines, several entrants tried their hand at serving specific regional niches, trying either to compete on the basis of improved service and amenities (such as Kiwi International) or lower fares. Using this latter strategy, ValuJet, Inc. became the country’s fastest-growing airline.

A group led by Lewis Jordan, a former executive at Continental Airlines, and Lawrence Priddy founded ValuJet, Inc. in 1993 as a no-frills airline. Jordan served as president; the more reserved Priddy, who had previously helped launch Atlantic Southeast Airlines, served as CEO (the two originally met while under the employ of the defunct Southern Airways, also based in Atlanta). Priddy had originally conceptualized ValuJet in 1992 with Maurice Gallagher and Timothy Flynn.

Paper tickets, assigned seats, in-flight meals, and frequent flyer miles were jettisoned. Customers, however, flocked to the carrier, seeking liberation from high ticket prices on the major airlines. Beginning with two planes, ValuJet grew to a fleet of 51 within three years. Its original eight routes (serving Atlanta and Jacksonville, Orlando, and Tampa, Florida) grew to 320.

Employees made do without frills, too. The pay structure was highly incentive-based; base salaries were rather modest: $42,000 for pilots-in-command, $14,000 for flight attendants. In fact, ValuJet only paid pilots when they completed flights. They paid for their own uniforms and even their own training. Executive perquisites were also limited; the corporate headquarters was furnished in an appropriately Spartan fashion: Jordan bragged the furniture came from bargain superstore Office Depot.

The company’s critics contended maintenance and safety checks were thrown overboard as well. The least experienced pilots and mechanics were hired in order to save money. The pressure to produce consistently tempted pilots into flying in the face of equipment problems or inclement weather.

The company bought its planes second-hand from major carriers in the U.S. and as far away as Turkey. In order to further preserve capital, it owned no repair facilities or spare parts inventories and subcontracted all maintenance work.

AirTran Airways, a budget carrier like ValuJet, also began flying with a fleet of just two aircraft. Originally part of Mesaba, an affiliate of Northwest Airlines, it acquired tiny Conquest Sun in Fort Lauderdale and became known by the AirTran name in 1994. AirTran Airways found a new owner in September 1995—the holding company AirWays Corp. It would not expand nearly as quickly as ValuJet. It focused on the lower end of the market—leisure traffic to Orlando—and kept a low profile, running only a flight per day on most routes, in order to avoid prompting a fare war with a major airline.

A Too Rapid Ascent in the Mid-1990s

ValuJet accumulated $368 million in 1995 revenues. In spite of its popularity among civilian business travelers, the U.S. Department of Defense turned down the carrier for a contract ferrying military personnel, citing a lack of management competence and organization and substandard maintenance and training procedures. The number of forced landings had grown to 57 in 1995 from 15 the previous year.

On May 11, 1996, ValuJet Flight 592 crashed into the Everglades, killing all 110 people (including five crew members) on board. The FAA eventually determined that the DC-9, which had been bound for Atlanta, was downed by chemical oxygen generators that caught fire within its cargo hold.

The FAA grounded ValuJet on June 17, 1996, after weeks of newly intensified scrutiny. In the meantime, the flight attendants’ union called for the ouster of Jordan and Priddy. They were not immediately successful, though in the fall, they moved to background roles as former Continental and TWA executive D. Joseph Corr was brought in as president. The airline’s business community backers protested the groundings and urged the FAA to allow ValuJet back in the air.

ValuJet was cleared to resume limited operations—15 of 51 airplanes—in September. The carrier reorganized its maintenance and engineering management structure and revised the pay scale for pilots to be less dependent on performance incentives. It agreed to become recertified in maintenance-related areas, to provide permanent maintenance inspectors, to gain FAA approval before adding new aircraft, notify the FAA of major alterations or repairs, and provide the agency with computerized records. ValuJet also said it would use fewer subcontractors, whom it would be required to audit in the future. The airline also would commit to installing smoke detection systems on all its planes by 1998, two years ahead of an industry-wide federal mandate. In the next six months of operations, ValuJet would lose $39 million. Its sales for the year were $219.6 million. Intensified price competition from Delta Air Lines did not help the carrier.

The year 1996 was a bad one not just for ValuJet but for the entire flock of regional start-up airlines. Public confidence in this segment was shaken in particular; the explosion of TWA Flight 800 in July frightened passengers further. Eventually the major carriers cut fares as well to lure back customers. In its 1996 fiscal year, AirTran Airways, deemed the airline most seriously affected by the confidence crisis, lost $6.9 million. Other factors hurting the company’s performance included a spare parts purchase of $2 million and engine replacements that were rendered more costly by the $1.1 million the airline spent to buy stranded passengers’ tickets on alternate carriers. In addition, new competition from Delta Express and Southwest Airlines sent AirTran looking for additional hubs. (AirTran used Delta’s ground handling service in Orlando and Cincinnati and five Delta gates at the Orlando International Airport.)

A New Name, New Attitude in 1997

The condition of AirTran Airways steadily improved in early 1997. It carried more passengers in May than it ever had before. The company added more than 200 jobs and saw its share price double. It opened new flights into the minor markets that were its focus, and applied for routes connecting some of these with New York City. In June, it teamed up with the commuter airline Comair (25 percent owned by Delta) in a code sharing agreement offering the AirTran Florida Connection to several Comair destinations in Florida and Nassau.

In July 1997, ValuJet Inc. and AirTran Airways announced the merger of their relative holding companies (which would produce fewer FAA complications than merging the operating companies right away). The merger, to become final in the fall of 1997, helped ValuJet sidestep the name’s negative connotations resulting from intense media coverage of the Everglade crash. ValuJet’s traditional popularity among business travelers also seemed to segue nicely with AirTran’s tourist customers. At the time of the merger, ValuJet was operating 30 aircraft.

The AirTran Airways fleet consisted of 10 Boeing 737s. The company, one-third the size of ValuJet, also brought its Orlando maintenance facility to the deal. The airline, based in Orlando, Florida, served 28 cities. ValuJet supplied the funds to allow both carriers to fly more aircraft. ValuJet advanced AirTran $7 million in July 1997 and $5.7 million in September 1997. The company ordered 50 state-of-the-art MD-95 aircraft from McDonnell Douglas for $1 billion; they were scheduled to begin delivery in June 1999.

Company Perspectives:

Everybody knew changes would have to be made at ValuJet. Changes in safety procedures, operations, customer service, how we handle reservations. Some big changes and lots of little ones. The changes are part of our commitment to provide a very enjoyable travel experience for a very affordable fare.

One dramatic change is that Atlanta-based ValuJet is merging with Orlando-based AirTran Airways. The new airline will have a fleet of 50 aircraft serving 45 cities and will enable us to better compete against larger airlines. That’s important, because when we enter a market, bigger airlines lower their fares to compete with us. But these days, anybody can cut prices. We want to accomplish something more.

Our mission is to deliver affordable, convenient, safe, reliable air transportation to business and leisure travelers. To fulfill this mission, we needed to bring two airlines together to create a new one. More than 2,800 dedicated employees are working hard to make this new airline a success, and satisfy our customers. Our new airline includes product enhancements designed to make air travel a more enjoyable and convenient experience. Customers will soon be able to enjoy our new business class seating, pre-as-signed seating and access to our affordable fares through travel agents.

ValuJet president Joseph Corr became CEO of the new entity. While affordability remained the primary focus, among changes introduced were a new modestly-priced business class service, pre-assigned seating, and travel agent ticket sales.

As Orlando officials began vying to keep the new company’s corporate headquarters, AirTran Airlines continued to utilize the ValuJet offices in Atlanta, while AirTran Airways remained at its site in Orlando. Atlanta and Washington, D.C., also wooed the company in hopes of landing planned maintenance and reservations centers as well.

In their new livery, the tail of AirTran jets sported the letter “a,” said to mean “affordable.” ValuJet achieved $219.64 million in revenues in 1996; AirWays, Inc.’s revenues were $102.62 million for the fiscal year ending in March 1997.