ATA parent sees potential in World Air, despite its woes: Impact of deal on Indianapolis headquarters unknown

April 23, 2007

The biggest acquisition in the 34-year history of ATA Airlines will steer it closer to its charter roots and further from a scheduled-service binge that led to bankruptcy three years ago.

Analysts say the $315 million deal to buy Atlanta-based World Air Holdings will broaden the revenue base and bring economies of scale for ATA's newly renamed parent, Global Aero Logistics. It also hands ATA a cargo business worth $100 million in 2005.

The deal should give the Manhattan vulture firm that plucked ATA out of bankruptcy, MatlinPatterson Global Advisers, a bigger bang for its $90 million-plus investment in ATA whenever it cashes out.

On the flip side, buying a large company like World-with revenue north of $780 million-always raises the possibility of a headquarters move, as executives ponder integration strategies. World has 300 employees at its Atlanta headquarters; ATA has 800 based in Indianapolis. And ATA /Global CEO Subodh Karnik was until recently a senior executive of Atlanta-based Delta Air Lines.

He'll have his hands full with World Air regardless of its headquarters city.

World has been late in filing its financial reports since it bought Jamaica, N.Y.-based North American Airlines in 2005. It has also suffered financial indigestion from that deal, contributing to a $7.5 million loss in its last second quarter.

As recently as a few weeks ago, big shareholders were writing World executives and directors nasty letters, complaining of "constant missteps over the past few years."

And some are still shaking their heads over the princely moving expenses World offered new Chief Financial Officer Michael Towe.

"I am pleased to inform you that the company hereby agrees to enhance our original commitment to reimburse you for your reasonable relocation expenses ... of $200,000," World CEO Randy Martinez wrote in a letter to ex-GE Capital CFO Towe last month.

The definition of such reasonable expenses included "lawn and pool" maintenance.

That alone, "to me, shows this [World] company could be managed better," said Michael Miller, a partner of Velocity Group, a Washington, D.C.-based aviation consulting firm.

Just how ATA's Karnik plans to do that he isn't saying. Neither company will talk until the deal closes, probably in the third quarter.

With Karnik at the helm, ATA appears to have righted itself financially and is, or soon will be, profitable. The now-privately owned ATA doesn't disclose financials. But data it reported to the U.S. Department of Transportation last year suggested that it narrowed its second-quarter 2006 loss to $5 million compared with a $26 million loss for the same quarter in 2004, the year ATA declared bankruptcy.

ATA is still split between scheduled service and military and commercial charter. But it slashed scheduled flights, including all at Indianapolis International Airport.

World's share of scheduled service is comparatively small-international trips such as New York to Lagos, Nigeria, under its North American Airlines unit.

Bigger subsidiary World Airways flies mostly for the U.S. Air Force and did $525 million in charter business in 2005.

ATA started out as a leisure charter airline. But in 1990-1991, it was the largest civilian passenger carrier of U.S. troops for Operation Desert Storm.

Shortly after Karnik joined ATA in 2005, he said he wanted to grow the carrier's charter business.

Military charter demand should be strong the next five years, at least, said analyst Miller. "Buying out your competitor is a solid move to make if you want to corner the military charter market."

One advantage of charter is that the customer bears the risk of rising fuel costs.

Last year, Karnik told IBJ the company planned to spend 2007 fine-tuning ATA and "potentially do a little growing."

Firms such as MatlinPatterson typically cut costs and look for acquisitions to enhance their investments before cashing out-sometimes through an initial public stock offering, noted George Farra, of Woodley Farra Manion Portfolio Management in Indianapolis.

As for whether it might be tempted to exit Indianapolis for Atlanta, ATA hasn't said it has any such plans, said Gordon Hendry, president of The Indy Partnership.
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