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Travel firm says aloha to ATA deal: Hawaii pact with Southwest may ease loss of business from Pleasant Holidays

July 11, 2005

ATA Airlines Inc., plotting a new business plan that includes "maintaining and possibly expanding scheduled service to Hawaii," has lost a key contract that had bolstered its lucrative lift to the Aloha State.

The end of the agreement with the travel service Pleasant Holidays, starting in January, will be eased partly by a new code-sharing deal the Indianapolis carrier reached with Southwest Airlines last month, according to the increasingly Southwest-dependent ATA.

West Lake, Calif.-based Pleasant Holidays pre-purchases tickets on ATA. It has filled thousands of seats on ATA's Hawaiian flights since the early 1990s.

In 1998, Pleasant Holidays signed a 10-year extension of its agreement with ATA, which filed for Chapter 11 bankruptcy reorganization Oct. 26. But the travel service said recently it will contract with larger United Airlines-also in Chapter 11-giving it greater flight frequency and flexibility.

"We will be able to use them on a more concentrated basis, during peak travel times [such as] holidays, summers," Pleasant Holidays spokesman Ken Phillips said of United.

Neither the travel service nor ATA would reveal financial details of the current agreement.

Hawaii represents 7 percent of ATA's scheduledservice revenue, according to the airline. ATA has 63 daily flights to Hawaii, which represented about 15 percent of its scheduled-service capacity in 2004 vs. 12.9 percent the previous year.

"It's a very profitable part of our business plan," said ATA spokeswoman Roxanne Butler.

She said because the agreement with Pleasant Holidays won't end until January, "we have plenty of time to sort it out."

Butler also noted that ATA late last month announced an expanded code-sharing agreement with Dallas-based Southwest Airlines from Las Vegas to Honolulu.

Southwest flights from 10 cities meet up with Hawaii-bound Boeing 757s ATA operates out of Las Vegas.

Code sharing allows passengers to fly on two airlines using a single ticket, with the airlines sharing the revenue. An airline can add more destinations without the cost of establishing service in cities it doesn't serve.

For example, ATA was swamped with calls from Western cities that will now have access to ATA's Hawaii flights, via Southwest.

"If we had tried to do marketing campaigns, [ATA] would be spending millions of dollars just getting people to know our name," Butler said.

"We are constantly adding more codeshare agreements with Southwest ... We are easily touching 2,000 code-sharing passengers a day. Those are passengers we would never have carried otherwise," she said.

Indeed, as of May, ATA had carried more than 100,000 passengers with Southwest since the two became the first lowfare airlines to set up such an agreement last February.

While ATA won't say how many millions of dollars code sharing has brought it, the practice is believed to be keeping the airline alive as it works to exit Chapter 11.

Southwest agreed to the concept as part of a deal to buy six ATA gates at Chicago Midway Airport, and a maintenance facility there, for $40 million.

The airline also has agreed to provide $47 million in short-term financing and, upon ATA's exit from bankruptcy, to buy a nearly 28-percent stake in the Indianapolis carrier for $30 million.

Southwest executives have said they have no intention of acquiring ATA, but intend to continue with code sharing long term.

Southwest, which never before attempted code sharing on this scale, is using ATA as a test, said Alan Bender, an airline economist at Embry-Riddle Aeronautical University.

Though Southwest said it could reap $50 million annually from ATA code sharing, that amount is a "drop in the bucket" for Southwest, he noted.

"A better term [for ATA] would be guinea pig. And if the guinea pig dies, it's no big deal to Southwest ... [ATA is] completely disposable to Southwest."

That concern left many wondering: What is ATA's niche, apart from Southwest?

"That has really always been the question,''said Doug Abbey, a principal of Washington, D.C.-based Velocity Group. "I'm not any closer to being able to provide an answer."

ATA needs a niche, Bender said, but it's hard to say what it is in an industry now jammed with low-cost carriers and legacy airlines trying to imitate them on some routes.

"I don't think that ATA is distinctive enough to have a loyal clientele to pay the kind of fares necessary to keep them in business," Bender said." I don't believe there's much of a market that exists for them outside of the code sharing with Southwest."

There is at least one niche. ATA founder and Chairman George Mikelsons has long incubated the idea of making his airline the first discount carrier to offer trans-Atlantic service. His idea is to serve secondary airports in Europe, such as Stansted or Shannon, rather than big ones ruled by Lufthansa and other big carriers.

To do so, ATA would have to fly from the East Coast rather than from the short runways at ATA's Chicago Midway hub, Abbey said.

ATA already has experience operating overseas with its military and vacation charter flights, Abbey noted. For a while in the 1990s, it offered scheduled service to Riga, Latvia, from where Mikelsons immigrated in the 1940s.

"I'm very bullish on the notion of an international low-cost carrier," Abbey said.

Europe might be too ambitious, for the moment. But flying to San Juan, Puerto Rico, is on the "wish list" for ATA in 2006, Butler said.

That route would be served through another code-sharing deal with Southwest, she said.
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