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BEHIND THE NEWS: ATA's new flight plan: Rely on military for bulk of revenue

December 5, 2005

ATA Holdings Corp. has been so busy in recent months slashing scheduled service and reducing costs in other ways that its comparatively problem-free militarycharter business has received almost no public attention.

But new filings in bankruptcy court show that business is expected to generate nearly 52 percent of ATA's revenue in 2006, providing stability and a steady profit as the airline tries to regain its footing in scheduled service.

The company, which sought Chapter 11 protection in October 2004, hopes to emerge from bankruptcy in February. From March through the end of next year, it expects to pocket $367 million in military charter revenue.

In that period, the company expects total revenue of $711 million, with $301 million coming from scheduled service. It expects to collect the remaining $43 million from a hodgepodge of sources, primarily nonmilitary charter.

Expansion stumbles

The shift reflects a huge retrenchment: In 2003 and 2004, scheduled service alone had generated more than $1 billion in annual revenue.

The airline had no choice but to bank on its military charter business because efforts to gain an advantage over rivals in scheduled service have failed, said Mike Boyd, president of the Boyd Group, a Colorado-based aviation consulting firm.

Indeed, when the company landed in bankruptcy court 14 months ago, it said it planned to expand service in Indianapolis. But it backtracked after rivals also added flights, and last month it said it would eliminate all routes here.

The company also has retreated at Chicago Midway Airport, where just two years ago it was the biggest carrier, with eight gates.

ATA plans to retain just one of those gates, exploiting its niche as the airport's only carrier with flights to New York-LaGuardia and Washington-Reagan. In court papers, ATA says it's also faring well providing scheduled service from Western states to Hawaii.

The company is counting on a further boost from a newly expanded code-sharing arrangement with Dallas-based Southwest Airlines. The pact allows passengers booking trips on one airline to transfer to the other.

The agreement, and ATA's few successes on the scheduled-service front, aren't enough to satisfy its thirst for growth, however. In its business plan, ATA says it will unearth additional scheduled-service opportunities, boosting projected revenue for that division to $402 million in 2007 and $505 million in 2008.

Consultant Boyd is skeptical.

"There aren't a whole lot of places to go," he said. "They are squeezed out of Chicago. They are squeezed out of Indianapolis. I don't know where you go from here."

Scaled-back ambitions

ATA CEO John Denison was not available for comment. However, in court papers, the company said it had wanted to emerge from bankruptcy court with a stronger scheduled-service presence, but concluded late this year that lining up financial backing was "improbable" unless it scaled back its ambitions.

Ultimately stepping forward to back the more conservative plan was New York-based MatlinPatterson Global Opportunities Partners, which committed up to $120 million in debt and equity financing.

And even that plan might have been impossible to finance had ATA not been able to tout its long record of growth in military charter service. The company began ferrying passengers for the military in 1983. Revenue has increased at least five years in a row, swelling from $126 million in 1999 to a projected $395 million this year.

ATA now is the second-biggest military carrier, behind Georgia-based World Airways. It's a less tumultuous business than scheduled service, ATA says, in part because the government provides full reimbursement for fuel expenses.

Yet relying on military charters isn't free of risk. In effect, ATA is betting its future on a single business relationship. And as ATA consultant Navigant Capital Advisors acknowledges in a report, the airline faces "uncertain future demand for military [flights] post-Iraq."

But in an airline industry strewn with carnage, you take what you can get. And so far, the military relationship has served the company well. Without it, ATA probably already would be in liquidation.
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