AirTran Airways

AirTran Airways

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

Suggested Mission Statement:
Innovative, vital, impervious, and customer oriented firm striving to service smart travelers. Every day.

Case statement:
Our mission is to maintain our profitability in face of rising competition and fuel cost.

Background:
“AirTran Airways, a subsidiary of AirTran Holdings (NYSE: AAI), is a low-fare airline designed for business travelers, offering Business class, new planes with XM Satellite Radio and EasyFit Overhead Bins, assigned seats, and our accommodating frequent flier program A+ Rewards. AirTran Airways' mix of low fares and an affordable Business Class with excellent customer service and one of the world's youngest all-Boeing fleets has continued to strike a chord with the public.” (www.airtran.com)

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
4. Low Ratings in Select AQR Categories .04 2 .08
5. Highly Dependent on Fuel .06 2 .12


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


Weaknesses
• A major weakness of AirTran is its high operating cost per available seat mile compared to other low-cost providers like Southwest and JetBlue.
• Through increased competition, especially Southwest, 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.
• Even though AirTran received a high position in airline quality rating (AQR) there are still areas that AirTran lags in, like on-time performance and denied boardings performance.
• Although mainly out of AirTran’s control, their income and costs are highly associated to the cost of fuel.
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.

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).

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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 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.
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.
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
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.

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, a Fortune 1000 company, offers more than 700 affordable, daily flights to 58 U.S. destinations. With 8,900 friendly Crew Members and America's youngest all-Boeing fleet, AirTran Airways provides XM Satellite Radio and Business Class seating on every flight. For more information and free online booking, visit http://www.airtran.com .

Shares of most airlines fell Friday along with the broader market, as the price of oil jumped more than $1 a barrel and several airlines reported their March passenger traffic results.
Onetime flights
Cancellations
30% oil price increase in past 6 months
Mishandled maintenance
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