AirTran Taps the Brakes on Growth
07/29/08 - 03:26 PM EDT
by Ted Reed

After growing at a 20% rate during the past five years, AirTran is stepping on the brakes.

The carrier now says capacity will decline by 7% to 8% during the last four months of 2008 and by 4% to 8% during 2009, as it moves to sell aircraft and to defer 22 deliveries. "Our priorities have clearly shifted," said CEO Bob Fornaro, on an earnings conference call Tuesday. "Growth is far down on the list of things we are interested in. Number one is maintaining liquidity and ultimately returning to profitability."

AirTran's planning reflects the broad impact of the airline industry's effort to reduce capacity. Until recently, industry leaders like Gerard Arpey, CEO of AMR, have called for capacity reductions but had trouble convincing fast-growth, low-cost carriers to seriously commit. Now, the industry is expected to reduce capacity by 10% in the fourth quarter.

Ironically, the AirTran cuts come as the cost of fuel is falling. Oil traded Tuesday below $122 a barrel, continuing its decline from a record high above $147 earlier this month.

AirTran reported a disappointing second quarter. Revenue per available seat mile, or RASM, grew at just 0.1%, the lowest rate among major airlines. The carrier reported a net loss of $13.5 million, or 12 cents a share. Excluding special items, including a hedging gain equivalent to 22 cents a share, the loss was 29 cents a share. Analysts surveyed by Thomson Reuters had estimated a loss of 25 cents.

"These results are unacceptable and we are taking numerous steps to adjust," said CFO Arne Haak, on the company's earnings conference call. He said slow RASM growth followed a 12.3% second-quarter capacity increase, by far the highest in the industry, and a shift in consumer behavior to buying less-expensive tickets. "The decision to continue growth through the summer was made early this year, with fuel at $100," Haak said.

Despite disappointing results, AirTran shares were trading up 51 cents, or 19%, at $3.21 Tuesday afternoon. The gain reflected falling oil prices, improved liquidity and possibly the impression that the carrier had beaten estimates.

At the end of June, AirTran had unrestricted cash and investment balance of $445.9 million, a record quarterly high. Additionally, it negotiated an extension with its primary credit card processor through 2009 and also received a commitment for a letter of credit facility up to $150 million, which could be applied to a credit card holdback. The deals addressed two problems: "Previously, we had no provisions for a holdback and the agreement was up for renewal at the end of the year," Haak said.