Economy

Code sharing may help ATA: But analysts say Southwest Airlines unlikely to favor chairman's international destinations

January 3, 2005

During ATA Holdings Corp.'s annual meeting in 2003, George Mikelsons told shareholders low-fare carriers must strike up alliances to weather the industry storm.

He proposed code sharing that would allow passengers buying a ticket on ATA or a partner airline to fly on both and connect to potentially hundreds more destinations. Airlines would share the revenue.

"If we don't act to regroup ourselves," ATA's chairman warned at the time, "we're going to be the Jonahs of aviation, swallowed by the whale."

Though neither AirTran, Frontier nor Southwest Airlines bit on his alliance proposal back then, the instincts of the entrepreneur who started ATA with a single plane he flew himself turned out to be dead right.

Such a code-sharing deal struck last month with Southwest Airlines, amid ATA's Chapter 11 reorganization, is expected to fill more seats and make the Indianapolis airline profitable at its Chicago Midway Airport hub.

Today, the pilot-prophet insists that expanding code sharing with Southwest is to both carriers' benefit by broadening connections he can envision stretching as far as Europe.

"It's certainly my desire to convince Southwest to book international passengers through us," Mikelsons said of his carrier, which flies to the Caribbean and Mexico, and which he dreamed would be the first discount carrier with scheduled service to Europe.

But analysts say Mikelsons would face a number of obstacles pulling off such a feat. Not the least of these are Southwest's Forrest-Gump-simple-but-profitable business plan and burned ATA creditors who are likely to boot current managers and directors.

"It is not going to be something that's expanded" significantly with ATA, insists Michael Boyd, president of Evergreen, Colo., aviation consulting firm Boyd Group.

Code sharing costs money in the form of computerization. Southwest has a rather unique flight reservation system. And as one of few profitable airlines, it certainly doesn't need to swap revenue with hemorrhaging competitors.

Rather, Southwest's offer to code share on some ATA flights out of Midway, which both carriers rule, was toward the ultimate goal of keeping Air-Tran out of Midway, Boyd said, not because Southwest suddenly got codesharing religion. "There was no 'grand plan'" for code sharing at Southwest, Boyd added.

Southwest Airlines spokeswoman Melanie Jones confirmed that the Dallas carrier is not contemplating any sort of strategy toward code sharing with other carriers.

The airline prevailed in a bankruptcy court auction against Orlando-based Air-Tran, which offered to acquire rights to 14 ATA gates at Midway in a deal worth nearly $90 million.

Southwest's $117 million offer picks up just six of those ATA gates, along with a maintenance hangar, for $40 million. The airline also is loaning ATA $47 million.

And, although not quite the whale Mikelsons envisioned in 2003, it is biting off a 27.5-percent equity share in ATA.

For that kind of investment, Southwest wants results. It's already planning to appoint a restructuring executive at ATA. Southwest CEO Gary Kelly said he'd prefer Mikelsons stay on as chairman. That's perhaps a wise move given the Latvian native's iconic identification with ATA and the admiration for him locally and in the industry.

Creditors may think otherwise.

What everyone does seem to agree on is that code sharing should help ATA's bottom line. The airlines said it could bring $25 million to ATA annually. Not only that, but it makes operating out of money-losing Midway a whole different proposition.

"It was a monumental thing for ATA," Mikelsons said. "Airlines spend billions of dollars fighting one another, rather than trying to figure out how to serve the flying public better, their employees better and the investors better."

Initially, the airlines will code share out of Midway, where ATA retains eight gates. The destinations haven't yet been determined, pending the outcome of ATA's route restructuring, Jones said.

Beyond that, the two carriers are exploring code sharing at Las Vegas, Los Angeles, Orlando, Phoenix and Seattle.

Mikelsons is upbeat about the potential that could open hundreds of new destinations and pump revenue into both carriers. For example, he noted that ATA doesn't fly to Omaha, Neb., while Southwest doesn't fly to New York's LaGuardia airport.

Mikelsons' other idea for code sharing would be virtual heresy in the corporate offices of Southwest-expanding it to international flights.

In January, when skies looked brighter for ATA and as international travel began a rebound, Mikelsons floated the idea of launching scheduled low-fare flights to Europe.

Rather than compete against major carriers like Germany's Lufthansa on major routes such as New York to London, he wanted to take a page from his early domestic strategy of targeting secondary destinations-perhaps smaller airports in England or Ireland, for example.

ATA's new, stretched versions of Boeing 737s and 757s are capable of such distances from the United States. ATA Holdings has plenty of experience with international charter flights. Its Ambassadair travel club and military charter flights already circle the globe.

"[Southwest officials] have listened to me talk about that with some interest," Mikelsons said, but acknowledged, "code sharing is brand new to Southwest in the first place."

Indeed. The Gospel According to Herb Kelleher, Southwest's chairman, is simplicity right down to a single type of aircraft, grunge versions of the 737. New CEO Kelly is steeped in the Southwest culture, having joined the airline in 1986 as controller.

"[Trans-Atlantic] is something that is contrary to the Southwest business model on so many levels," said George Novak, an analyst at George Washington University Aviation Institute. At best, "They may say [to ATA], 'Look, you can do this with a single aircraft.'"

No way, said Boyd, who insisted there is already low-fare service across the Atlantic: "It's called the economy class of American Airlines and the economy class of British Airways."

Mikelsons said ATA would first have to convince Southwest that code sharing domestically is successful. Then, if Southwest can't be convinced to try Europe, it might consider the Caribbean and Mexico-already ATA destinations.

"George is a brilliant businessman himself. I think he probably knows there is a business model out there" for lowfare trans-Atlantic, Novak said. "Southwest doesn't invest in losing propositions, either. They wouldn't just throw money at someone because they like George or just because they get six gates" in Chicago.

Southwest's Kelly said his airline intends to sell its equity stake in ATA at some point, hinting it has no long-term intention with the Indianapolis carrier.

Or not. Southwest might fully acquire ATA or a major part of its operation, and code sharing might be a step along the way, said Mort Beyer, principal of Morten Beyer & Agnew, a Washington, D.C., aviation consulting firm. "I do think they may have a larger plan [for ATA] downstream."

Mikelsons said he's not thinking much about his role in the restructured company.

"I honestly haven't focused on that," he said shortly after U.S. District Bankruptcy Court Judge Basil Lorch III approved the Southwest rescue plan for ATA last month. "This is a pretty traumatic experience to go through Chapter 11 and we've all been pretty wrung out."

ATA filed Chapter 11 in October, citing high aircraft lease payments amid a brutal fare war and soaring jet fuel costs. ATA launched an expensive new fleet of Boeing 737s just before the September 2001 terrorist attacks that decimated air travel.

Mikelsons said there were other options besides Chapter 11. ATA's chief restructuring officer, Gilbert Viets, testified previously in bankruptcy court that several airlines made offers for ATA assets last summer.

"There were options that would have been financially better for me, personally, but certainly not in the best interest of the enterprise," said Mikelsons, who owns about 70 percent of ATA's crippled stock.

He compared Chapter 11 to a parent doing the best thing for a child when it's not necessarily in the parent's best interest. "I have three kids: two boys and ATA."

The question is whether he will ply his ideas at ATA or somewhere else-perhaps as an entrepreneur, again, in his late 60s.

"Gosh, Ronald Reagan was two years older than I am when he took on the presidency for eight years," Mikelsons observed. "If ATA doesn't need me, I will most certainly do something else."
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