AirTran Airways 1

AirTran Airways
Case Study
 AirTran Airways 2

BAM 479
February 27, 2007
 AirTran Airways 3

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 every day 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 lowcost strategy, commitment to safety and
service, and high utilization of planes and service routes.
 AirTran Airways 4

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 customerbase healthy.
3. Especially important in AirTran’s lowcost 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 lowcost 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 ontime 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 5

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 6

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 incabin internet access (wired or wireless) for laptops.

Threats
1. The largest threat to AirTran is the increased competition with the lowcost 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.
 AirTran Airways 7

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 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 8

Industry Analysis

Porter’s Five Forces

Substitute Products
Bus Service
Train Service
Charter Planes

Suppliers Competition Consumers Business

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

Potential Entry of New

Competitors
Government
Regulations (FAA) Brand
Loyalty and
Identification
Airport Contracts
 AirTran Airways 9

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 lowcost 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 10

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 11

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.

DebttoAssets 0.63
For every dollar of assets, AirTran has $.63 of debt issued.

DebttoEquity 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.

Longterm DebttoEquity 1.11

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

TimesCovered 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.
 AirTran Airways 12

Total Asset Turnover 1.15 1.0 2.1 3.0

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 nonfixed 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 RevenueOperating 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 13

Financial Analysis

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 20022003 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.

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

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

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

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 (Noncurrent) 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. 202213

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