Valujet: Up, Up, And A Ways To Go

It's ready for takeoff, but that's just the first hurdle

It was the final exam for ValuJet Airlines Inc., the beleaguered airline that spent a frantic summer trying to end its 10-week shutdown by the Federal Aviation Administration. In late August, FAA inspectors ran a hellish series of "proving runs" to test ValuJet's emergency responses. Faked mishaps included a stuck landing gear and a cabin fire--a grim reminder of the May 11 crash of Flight 592 that killed 110 people and led to the airline's grounding last June.

This time, ValuJet passed the tests. On Aug. 29, the Atlanta-based carrier received tentative approval from the FAA and Transportation Dept. to begin operating again. For ValuJet President Lewis H. Jordan and Chief Executive Mfficer Robert L. Priddy, it was a welcome moment in their tough battle to rebuild the airline. But while ValuJet hopes to be in the air by Sept. 16, the turbulence isn't over. "Our world has changed forever," says Jordan.

GRUELING. Before Flight 592 nose-dived into the Florida Everglades, ValuJet was an industry darling. Started in October, 1993, it saw revenue soar to $368 million by 1995, as net income hit $68 million. ValuJet went public in June, 1994, and its split-adjusted stock rose more than tenfold to peak at 34 1/2 in late 1995.

But in announcing the carrier's grounding, FAA administrator David R. Hinson cited "serious deficiencies" in ValuJet's operations, and "multiple shortcomings in quality control." Before allowing the carrier to fly again, the FAA demanded many changes. ValuJet had to trim its use of outside contractors and restructure its maintenance, quality assurance, and engineering operations. It even had to show the FAA the resumes of all maintenance executives.

Leading the charge for ValuJet was retired Air Force General James B. Davis, whom Jordan recruited after the crash to identify weaknesses in the carrier's safety practices. The overhaul required was so extensive that he rebuilt operations virtually from scratch. First, Davis brought all maintenance in-house. He also set uniform quality-assurance procedures, launched a program to analyze potential hazards, and recommended new training procedures for everyone.

It was a grueling time for all. "There's nothing that I've ever been through that could have prepared me for this," says Jordan. Teams of FAA inspectors swarmed through ValuJet's executive offices and hangars, causing frayed nerves. Although Jordan predicted publicly that the carrier would be in the air on July 17, it didn't happen, and investors soon soured. "There was a sense of optimism that was not realistic," says W. Whitfield Gardner of Gardner Lewis Asset Management in Chadds Ford, Pa. He sold the last of his 1.5 million shares in August.

TENSIONS. Immediately after the shutdown, Jordan furloughed 3,600 workers, leaving only a skeleton crew of 400. To boost morale, Jordan held town-hall-style meetings to update furloughed workers on the prospects for a restart. The meetings brought Jordan much needed support from below. At one August gathering, a mechanic who worked on Flight 592 the morning of the crash told Jordan he would still let his family fly ValuJet.

But not all went along. Tensions had already been high between management and some workers who felt exploited by ValuJet's low-cost strategy. So when ValuJet submitted its reorganization plans, the newly organized Association of Flight Attendants (AFA) opposed it in a filing with the Transportation Dept. The union charged that Jordan and Priddy had emphasized growth over safety and must be removed. The executives dispute the charges. In late August, the FAA endorsed the two, a move that was heatedly criticized by AFA president Patricia Friend in a Sept. 4 letter calling for a review of the recertification process by the Transportation Dept.'s inspector general. With the union still openly challenging Jordan, his internal management problems are not over.

An even bigger problem for ValuJet, though, is its image. Soon after the crash, M. Ponder Harrison, vice-president for sales and marketing, began polling people, most of whom said they were still willing to fly ValuJet. Barbara Douglas, an executive recruiter from Norcross, Ga., says she would fly "in a heartbeat." Still, not everyone will jump aboard quickly. "I usually fly whatever is cheapest," says Marc Williams, 23, a New York bank employee. "But after the crash, ValuJet has turned me off." ValuJet is planning some introductory fare discounts, and new ads out this month will stress employees' dedication and experience. That had better be enough: "If 10% or 15% of ValuJet's customers stay away, it could kill the airline," says Michael Boyd, president of Aviation Systems Research in Golden, Colo.

Keeping ValuJet's finances in order is another challenge. The airline has spent more than $60 million to keep gates open, park planes, and pay salaries. While some $208 million in cash remained as of June 30, Priddy has told analysts that ValuJet burns $6 million every month it's idle. The pressures are intense: By Sept. 30, ValuJet must renegotiate $162.4 million in debt or face default. It's also trying to unload 15 used planes.

"AT ZERO." The changes have also hurt on Wall Street. Although ValuJet's stock has risen to about 13 from its low of 6 1/2, many of the growth investors who fueled ValuJet's rise have bailed out. Yet it has attracted bottom-fishers. "They've got a lot of growth ahead, because they're at zero," says J. Gary Craven, a portfolio manager at Invista Capital Management Inc. in Des Moines. He bought 420,000 shares at 7 and sold about half at 12.

ValuJet still faces plenty of other troubles. A federal criminal investigation into the Flight 592 crash continues, as do several shareholder lawsuits alleging misleading statements by ValuJet. ValuJet denies the claims. The airline can now serve only 17 cities, down from 31, and must apply for FAA permission to fly more than 15 aircraft. It has given up gates at several airports, including New York's LaGuardia. The shift to in-house maintenance--and the higher compensation it must pay for more experienced employees--will increase overhead. Competition has grown tougher, too. Delta Air Lines Inc. has lowered its costs and launched a discount service targeting ValuJet's key Florida market.

The company also remains on a tight regulatory leash. The FAA has permanent computer access to nearly every bit of ValuJet's operations, from maintenance records to flight crews' schedules. That may be enough to keep ValuJet from accelerating too quickly. But with a bumpy ride ahead, Jordan had better keep that seat belt fastened.