ATA flies closer to black: Airline doing better, but doesn’t plan to resume local service

ATA, the incredibly shrinking airline that once was the busiest at Indianapolis International Airport, appears to have shrunk in a favorable category-its financial losses.

The Indianapolis-based carrier that ended scheduled service here in January had a loss of $5.27 million in the second quarter, according to data compiled by the U.S. Department of Transportation.

Now privately owned, ATA Holdings Corp. lost $26.3 million during the second quarter in its domestic operations, according to DOT. But it earned $21 million in trans-Atlantic service, which includes flights to the Caribbean and military charters.

The data reflect ATA’s first full quarter since coming out of bankruptcy last February. ATA emerged from its 16-month financial nightmare a considerably smaller carrier with new management. Chairman and CEO J. George Mikelsons, who founded ATA in the 1970s, retired.

ATA was awash in debt after a huge fleet and route expansion begun just prior to the September 2001 terrorist attacks. Soaring fuel costs and fare wars tipped the airline into Chapter 11 bankruptcy in October 2004.

ATA lost more than $450 million in 2005-much of that restructuring costs-and has lost $1.5 billion since 2000.

Executives declined to confirm the results, which airlines report to the Federal Aviation Administration. They said the numbers are probably still tainted by “extraordinary issues” associated with its reorganization.

“That being said, we are pleased with our performance vs. our business plan,” said Subodh Karnik, executive vice president and chief operating officer.

The goal of the business plan is longterm survival, but also includes helping primary equity holder, New York-based Matlin Patterson Global Opportunities Partners, cash out with a profit.

Matlin has pumped $95 million into ATA. From the start, it’s been expected that one way the investors would exit would be to sell shares of the new ATA to the public within the next few years. The company was delisted from NASDAQ last March and its old shares became worthless.

ATA, Spirit Airlines and Continental Airlines were the only airlines among the 21 the government tracks to report operating losses in the quarter.

The entire group reported a domestic operating profit margin of 7.9 percent in the second quarter-the best performance since 2000.

ATA’s improving financials follow the airline’s cutting more than 4,800 jobs, over $85 million in payroll costs, and tens of millions of dollars in aircraft lease payments, moves that saved hundreds of millions of dollars.

ATA is now at roughly half the size it was 1-1/2 years ago.

Downsizing didn’t end with ATA’s emergence from Chapter 11 in February, however. Then, it had about 1,300 employees in Indianapolis; now, the number is barely 700.

There also have been schedule tweaks, but, “net-net, we like to believe we’ve reached our trough,” Karnik said.

Hitting bottom came by clipping the wings of marginally profitable and unprofitable routes, including those from Indianapolis and some at its Chicago Midway Airport hub. Most recently, in April, ATA axed Midway flights to Orlando and Fort Myers, Fla.

ATA also is being careful not to step on the toes of its code-sharing partner, Southwest Airlines. In late-2004, the Dallas carrier bought a half-dozen of ATA’s gates at Midway for $30 million.

It also launched what was for Southwest an unprecedented code-sharing agreement, in which each carrier would fly to destinations the other didn’t through a single set of tickets. For example, Southwest started selling trips to Hawaii that ATA flies from Los Angeles, with Southwest feeding passengers to L.A. for the last leg of the trip.

Southwest tie strengthened

Late last year, the two carriers renegotiated their code-sharing agreement for another seven years. Now, through ATA’s Web site, passengers have full access to Southwest’s reservation system. That gives ATA passengers access to flights by Southwest to and from cities ATA does not serve.

“Do you satisfy the travel needs of most of the customers?” Karnik asks. “If you don’t have scope, it doesn’t matter what the [fare] prices are.”

Not that low prices aren’t an ATA selling point. Karnik argues that ATA has some of the lowest fares in the industry, something it can better afford thanks to the massive expense reductions. ATA’s cost of flying one seat one mile was 10.3 cents in the second quarter-better than all the major carriers, but about mid-pack among the so called low-cost carriers, according to DOT data.

It costs Southwest 8 cents to fly a passenger one mile. JetBlue had the lowest cost per mile at 7.8 cents.

But in revenue yield-how much an airline makes for flying one seat one mile-ATA and JetBlue made the least of all carriers, at 8.5 cents a mile.

The good news for ATA is that it’s packing its planes, breaking company records in June and August at nearly 90 percent load factor for scheduled service.

The heavy passenger loads verify that ATA is targeting the right markets, Josef Loew, vice president of scheduled service, said in July.

Among those markets is the Hawaiian city of Hilo, which had no mainland service for almost 20 years despite its industrial, agricultural and tourist attractions.

Niche key for small carrier

Historically, ATA prospered when it picked niche routes that it flew under the radar of larger carriers.

“If you’re trying to be a really small carrier in this day and age, you have to have a clearly defined niche,” said Clint Oster, an aviation expert and professor at Indiana University’s School of Public and Environmental Affairs.

Of course, much of ATA’s fortunes now are tied to Southwest. For now, the deal appears to be favorable to Southwest, which said it generates at least $50 million a year from the ATA code sharing deal. ATA won’t quantify what the deal brings to its revenue stream.

Oster said while the ATA deal initially was attractive to the Dallas carrier as a way to snatch ATA gates at Midway and dominate the airport, Southwest benefits in other ways.

ATA has a fleet of Boeing 757s and longer-range Boeing 737s that can fly to distant locations, like Hawaii, that Southwest’s smaller fleet of 737s can’t. The partnership is more cost-effective for Southwest than adding larger planes to its fleet and upsetting the economics it enjoys from aircraft commonality.

“For Southwest, it would be a huge departure from their business plan to buy 757s and operate them themselves. ATA really does, at this point at least, fill a niche Southwest would like to draw on,” Oster said.

As for what growth is planned, Karnik holds his cards tight. This year and next are “hunker down years” to get the airline fine-tuned and to potentially “do a little growing.”

One way to enhance revenue has been to expand ATA’s onboard food/beverage and merchandise sales. Flight attendants now carry portable credit card scanners on West Coast and Hawaiian flights.

The question everyone has asked since Karnik moved to Indianapolis from Atlanta: Will ATA resume scheduled service from here? Karnik said the answer is no. It’s too risky right now, with the intense competition here in the wake of ATA’s pullout. But Karnik said he realizes there’s danger in waiting too long to capitalize on the local market.

“I completely and totally continue to be amazed at the loyalty to this airline,” he says. “At the back of one’s head is the knowledge the loyalty will eventually dissipate.”