The net result is that AirTran has one of the lowest levels of cost per ASM in the industry.
In terms of weaknesses, one major weakness is that AirTran has no discernable source of sustainable competitive advantage. Its success to date has been based on its ability to combine many small sources of advantage into a single airline. Yet, none of these sources can be considered sustainable in the long run. The industry is highly competitive. Competition comes from all manner of airlines both domestic and international. Any or all of these competitors and potential competitors, including new entrants, could replicate AirTran's success factors.
AirTran also has a high level of debt, the bulk of which derives from debt and lease obligations on their fleet. They presently hold over $800 million in debt on their balance sheet. The debt-to-equity ratio is 3.18, up from 2.25 a year ago. The company has invested in these airplanes with an eye to expanding their service, but it exposes the company to several significant risk factors. Should their business be adversely affected by either industry-wide issues such as a dramatic spike in fuel prices or additional regulation, or by company-specific issues such as the entrant of a strong new competitor to the marketplace, AirTran's profitability will be negatively affected by these long-term obligations.
One of the major threats to AirTran is that of competition, in particular new entrants. The industry is highly competitive, but also in a state of flux. Existing players frequently shift strategy. The market is open to new entrants, some of whom could be existing airlines seeking to make better use of existing aircraft. AirTran's long-term contracts with their key airports lends them a certain degree of protection against direct competition entering these markets, but much of AirTran's current or potential market is subject to the strong threat of new entrants.
Another major threat is that of rising fuel prices. Already fuel accounts for more than one-third of AirTran's operating expenses.
The existence of the discount airline industry is dependent on the ability of companies to offer flights at a low enough price to entice consumers to fly. Most of this form of travel is discretionary rather than essential. For many routes, driving can be substituted. For all routes, electronic means of communication, ranging from e-mail to virtual meetings, can replace air travel should the price of jet fuel render the service prohibitively expensive. This is an especially strong threat to AirTran, given that their target customer is, in their terms, "cost-conscious."
There are, however, some strong opportunities for growth. In this industry, market share is perpetually up for grabs. The main driver for consumer decision-making remains price. To this point, AirTran has demonstrated steady growth while operating within a fairly narrow market both in terms of geography and customer base. In particular, geography offers many opportunities for growth. AirTran management has stated that there remain many routes and markets that they feel are either underserved or served but overpriced.
The use of the B737 has given further opportunities for AirTran to grow. This aircraft has a longer range than their first aircraft, the B717. They now have the capability to servicing coast-to-coast routes. Furthermore, this aircraft gives them the ability to enter international markets such as Canada, Mexico, Central America and the Caribbean.
Financial Analysis
As a relatively young, growing airline, AirTran is highly leveraged. The debt/equity ratio was 3.183 in 2006, compared with 2.257 the year previous. The bulk of increase in debt is directly related to the purchase of additional airplanes. Taking a look at some of the basic debt analysis ratios, interest coverage was 2.6 in '06, 2.24 and 2.3 the two years previous respectively.
However, interest expense does not reflect the total debt burden of AirTran. The airline industry is characterized by a high amount of obligations beyond interest-bearing debt. These obligations are essential to the conduct of business, such as airplane leases and landing fees. So in this case the best measure of coverage is the Fixed Charge Coverage, which was 1.07 in 2006 and 1.045 in 2005, a modest improvement.
In terms of raw performance measures, AirTran improved last year. Cash flow from operations was $112, 834, 000 versus $87,338,000 the year previous, an improvement of 29%. Operating income was up 79% to $42,133,000. Net income was up 92% to $15,514,000. This was due to improvements in both gross and net profit margin. The performance in 2005 was largely growing...
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