Post-bankruptcy turnaround not taking off for ATA

More than 18 months after flying out of a bankruptcy reorganization that unloaded $1 billion of debt and costly aircraft
leases, the parent of ATA Airlines still finds landing a profit elusive.

Indianapolis-based Global Aero Logistics posted a loss of $46.1 million in the first half of 2007, according to documents
it filed with the Securities and Exchange Commission.

It was the last financial snapshot of the company before its $315 million acquisition of Atlanta-based World Air Holdings,
on Aug. 14. World was parent of military and commercial charter carriers World Airways and North American Airlines. Global
plans to run all three airlines independently, at least for now.

Of more immediate concern is ATA's poor financial performance in an industry where most major carriers are back in the
black after years of heavy losses.

The SEC filing on Aug. 27 showed ATA's military and commercial charter segments were profitable in the first half of
the year. Those were the segments that defined the airline's robust early years of the 1970s and 1980s.

But, as was the case before its 2004 Chapter 11 filing, ATA was clobbered in a portion of its scheduled passenger service,
particularly on the East Coast.

"About 9 percent of our [ATA] business is under huge pressure," said Subodh Karnik, president and CEO of Global
Aero.

Reminiscent of his predecessor, ATA founder George Mikelsons, India native Karnik is quick to underscore his point with a
metaphor-saying it doesn't take much to dent earnings in an industry already "flying close to the treetops."

The former Delta Air Lines senior vice president takes pains to emphasize that ATA, which still employs about 700 people
in Indianapolis, is smarting in a relatively small portion of scheduled service.

By contrast, ATA "has done extraordinarily well" in scheduled service it flies to and from Hawaii under a code-sharing
agreement with industry darling Southwest Airlines.

Under code sharing, a passenger can buy seats for connecting flights on the other carrier. It's a cheaper way for an
airline to extend service to a market it doesn't serve with its own planes.

Financial details of the Hawaii code share were not broken out in Global Aero's financial results.

But ATA says it now is the only airline that serves all five primary Hawaiian destinations from the mainland United States.
Not long ago, it became the only carrier offering nonstop scheduled flights to Hilo.

That ATA benefits from the unique code-sharing agreement with Southwest and from military charters during wartime–yet cannot
turn a profit–is unsettling to the union that represents ATA's 600 pilots and flight engineers.

"They should be making money…. Officially, we're not sure why [not]. The Air Line Pilots Association at ATA doesn't
have any more understanding than anyone else as to why they are unable to make a profit," said ALPA officer and ATA captain
Seth Cooperman.

Industry gains lift

The concern is compounded in light of the newfound profitability of major U.S. carriers. During the first quarter, 21 carriers
generated total profit of $817 million after six consecutive years of first-quarter losses, according to the U.S. Department
of Transportation's Bureau of Transportation Statistics.

In the second quarter of this year, even Delta Air Lines, which emerged from bankruptcy only a few months earlier, eked out
a profit after subtracting one-time bankruptcy expenses.

It was pressure from several major carriers that hurt ATA on routes from its hub at Chicago Midway Airport and from New York's
LaGuardia and Washington D.C.'s Reagan National airports.

For example, discount carrier JetBlue this year arrived at Chicago O'Hare International Airport, siphoning some customers
and driving down ticket prices in that city. Delta launched a shuttle from Midway to LaGuardia. And American and United Airlines
cut their fares, compounding the problem.

There were similar competitive incursions in New York and in Washington, D.C.

"The scheduled business is what got them into trouble in the first place," noted Robert Mann, an airline industry
consultant in Port Washington, N.Y.

Mann said ATA's $46 million loss appeared sizable given how ATA has slashed its size–by about half since filing for
Chapter 11 in 2004. Its aircraft fleet at June 30 numbered 28–versus 82 in 2004. Employee count is somewhere around 2,400
vs. a peak of 8,000.

On the other hand, ATA only recently reformulated its strategy and is still implementing it, Mann added.

The scheduled segment had an operating loss of $46.7 million for the six-month period, though ATA officials point out that
losses in that segment narrowed to $16.5 million in the second quarter.

In response to scheduled service challenges in the East, ATA eliminated a route between New York and Houston. With fares
now strengthening, "we're kind of sticking it out and thinking of all kinds of alternatives. The hope is we can stabilize
[those]," Karnik said.

Karnik sought to downplay the extent of trouble in ATA's scheduled business. He noted that, in rough numbers, the three
cities hammered by competition generate $100 million of $400 million in annual scheduled passenger service.

"We have three quarters of a business [segment] that is doing very well," he said, noting the solid performance
of Hawaiian and West Coast routes.

ATA also is doing a better job of filling up its planes: Passenger load factor at June 30 was 71.7 percent compared with
67 percent a year earlier.

Military and other charter service generated a profit of $8.5 million in the first half of this year.

One advantage of military and commercial charter is the ability to pass on rising costs of jet fuel, noted Sean Frick, vice
president of corporate finance and former chief restructuring officer for ATA.

A new World

To buy World, Global Aero obtained a $340 million term loan from a consortium of banks. It used some of the loan proceeds
to pay off three higher-interest-rate loans: $82 million owed on a loan guaranteed by the Air Transportation Stabilization
Board and two loans totaling $54.3 million from MatlinPatterson Global Opportunities Partners. The New York investment firm
loaned ATA more than $95 million to help it emerge from Chapter 11 and owns the majority of new parent Global Aero.

The term loan used to pay off the loans and buy World carries an interest rate lower than the roughly 15 percent assessed
on the three loans now retired. As part of the deal, Global Aero also issued $161 million in preferred convertible stock to
MatlinPatterson.

Having gone deeper in debt to buy World, Global Aero is expecting big things from its two airlines, World Airways and North
American Airlines.

Jamaica, N.Y.-based North American Airlines, which World acquired in 2005, flies from JFK to out-of-the-way destinations
such as Lagos, Nigeria; Accra, Ghana; and Georgetown, Guyana. The World Airways line flies cargo and military and commercial
charters.

In 2005, World posted strong profit of $31.6 million on the back of World Airways' military and commercial charter business.
Last year, the parent company lost $2.3 million on revenue of $825.6 million.

With the World assets in tow, Global Aero now has 4,500 employees, nearly 60 aircraft and revenue of $1.6 billion. It also
becomes the dominant contractor in the military passenger charter segment.

But unions representing pilots at all three carriers–ALPA and the Teamsters–complain they haven't received enough information
about Global Aero's strategy and how they fit into the merged companies.

Union officials anticipate that Global Aero will try to integrate some operations to achieve cost savings, which would have
consequences in the form of pilot job security, pay and seniority.

But Global Aero executives said there are practical reasons to keep the carriers separate. Not the least of these is the
ability to better compete for contracts with the military to fly troops. Those contracts are awarded to teams of carriers,
and Global Aero's three airlines may serve on different teams during a given period.

Still, pilots for the carriers say businesses almost always look for ways to combine units following a merger, to save money.

"I don't see efficiencies in running three separate airlines," Cooperman said.

North American pilots have been in contract talks for three years, and the Teamsters union is rattling sabers, warning the
company not to try to use the new ownership structure to get better terms. Both the Teamsters and ALPA have warned Global
Aero not to pit the unions against each other.

More jets in the air

Karnik said he isn't looking at synergies of combining carriers. He noted that each has its own specialty. Rather, he
said, synergies come from the ability to market them collectively. Think of it not as separate carriers but as a combined
fleet of 60 aircraft of various sizes available for charter throughout the world.

"We can now appeal to every commercial charter [customer]," he said. "We have so many more airplanes now in
every range and mission capability."

Karnik also said the World acquisition brings Global Aero a big growth potential in flying cargo, on a so-called wet-lease
basis. Under such a lease, World provides the aircraft, crew, maintenance and insurance while the customer pays for fuel expenses.

Last May, World signed an 18-month contract with Germany's Lufthansa Cargo to haul cargo between the United States and
Europe. Karnik sees Global Aero's carriers as the "wet-lease hired guns throughout the world."

Cargo also is a way to protect the company during downturns in military passenger business, which inevitably will wind down
sometime in the next several years.

"This is going to be a major source of diversification for us," Karnik said of cargo.

As for the Southwest code-share agreement, look for ATA to carry Southwest passengers to international destinations sometime
in 2009, Karnik said.

Last June, Southwest CEO Gary Kelly said ATA would start by carrying Southwest passengers from the East Coast to the Caribbean
and, later, to Europe.