Flying the Private Skies
American Trans Air's CEO plans to take the discount airline charter company off the Nasdaq. His chief complaint: Investors and analysts who demand higher income every quarter
J. George Mikelsons joined the IPO parade in 1993. The founder and chairman of American Trans Air (AMTR ), Mikelsons sold a minority stake in the airline with an initial public offering in ATA's parent, Amtran, at $16 a share eight years ago. Now, Mikelsons is reversing course. Later this September, shareholders are expected to endorse his bid to buy back the 28% interest in Amtran he does not own, taking the Indianapolis-based discount and charter carrier private again at $23 a share.
Why the about-face? Being a publicly traded company, Mikelsons has concluded, simply isn't worth all the bother. His chief complaint: Investors and analysts are on his back unless ATA reports higher income every quarter, and that is something virtually no airline can achieve. Even in good times, airlines typically do not post huge profits, because of the high cost of union labor and outsized capital-spending requirements for new aircraft and facilities. But these are not good times for the industry. High-fare business travel, which is the biggest moneymaker at most carriers, has been way off since late last year. As a result, the industry is forecast to lose as much as $3.4 billion this year, its first aggregate loss since 1993.
ATA is still profitable. Indeed, thanks to its cheap fares out of Chicago's Midway Airport, it has been siphoning away business traffic from United Airlines and other major carriers. But the $1.3 billion company is getting stretched. It's replacing its entire fleet of aged Boeing 727s with 49 brand new Boeing 737s and 757s, a purchase that will cost $2.9 billion. Moreover, fuel prices remain high, and ATA is spending heavily on expanding at its hub in Chicago, where it is building a training facility and terminal. The expenses -- and Wall Street's dim view of airlines in general -- are a millstone around Amtran's stock. Its shares, which traded above $25 as recently as middle of 1999, had fallen to less than $10 in April before leaping in May when Mikelsons announced his bid. It closed at $22.50 on Sept. 7.
Don't count on the 64-year-old chairman becoming a latter-day Pied Piper. This might seem to be a wonderful time for insiders to take companies private. After all, shares of many firms are dirt cheap. Mikelsons, for one, says he had no problem lining up $175 million in credit from Citigroup to swing his deal. Meanwhile, earnings have been plunging, making banks and other financial institutions reluctant to lend to executives proposing buyouts because they fear borrowers may not bring in enough money to repay debts.
Mikelsons, who became an airline captain in 1964 and still flies occasionally, recently talked about his change in heart with BusinessWeek correspondent Michael Arndt. An edited transcript of their conversation follows:
Q: Let me ask you to elaborate on your criticism of Wall Street and its tendency to ask, "What have you done for me lately?" If you were advising other companies, do you think that Wall Street's short-term focus is a compelling reason to try to go private? A:
Q: Let me ask you to elaborate on your criticism of Wall Street and its tendency to ask, "What have you done for me lately?" If you were advising other companies, do you think that Wall Street's short-term focus is a compelling reason to try to go private?
A:I've seen managements do so much damage to companies because they saw situations where, "Gee, we're going to have a couple of down quarters. We can't afford to have a couple of negative quarters. Wall Street is going to absolutely take us to the cleaners." So they eat the seed corn or burn the furniture. Instead of buying heating oil, they burn the furniture and do a tremendous amount of damage just to be able to produce a black number for one or two quarters.
The company and its shareholders actually pay for that sometimes for years to come. But nobody sees that. They've accomplished their short-term mission. They've managed to turn a red quarter into a black quarter. But at what expense? If these same management folks were running a private company where the owners were not insisting on stock returns, they would never, ever, ever do that. I ask you: Which is healthier?
Q: Why is it better for you to be a private company than a public company? What advantages do you pick up by being private? A:
Q: Why is it better for you to be a private company than a public company? What advantages do you pick up by being private?
A:The advantages are that I don't have to concentrate on quarter-by-quarter earnings. Wall Street is interested in "What have you done for me this quarter?" It really doesn't care much about what you're doing that's going to result in good fruit a year, or two years, down the road. That's very damaging and shortsighted for ATA. We're rolling over our entire fleet in less than 24 months. This is a monstrous job. To my knowledge, no major carrier has ever done that. So we need to concentrate on that. We need to concentrate on our hub at Midway. We need to close some of the technology gaps between ourselves and some of our competitors in terms of selling tickets on the Internet.
Q: So you're doing many things in the next year or two that will cost a whole lot of money and that, in turn, will depress quarterly earnings and hurt the stock price? A:
Q: So you're doing many things in the next year or two that will cost a whole lot of money and that, in turn, will depress quarterly earnings and hurt the stock price?
A:That's right. And that's not fair to the minority stockholders. I don't need my stock to do anything. I'm happy as a clam. My risk goes from 72% to 100%. So what? But for these people who have actually gone out there and purchased stock, it's a whole different story. They expect the stock to do something. But it's healthier for the airline if their stock does nothing. So I thought it would be only fair to buy the stock back. Then I can do what's in the best interest [for] the airline.
Q: Do you lose anything by being a private company? It seems that one of the advantages of being public is that you have easier access to capital. A:
Q: Do you lose anything by being a private company? It seems that one of the advantages of being public is that you have easier access to capital.
A:Certainly, you have easier access to capital. But after having spent upwards of $2.5 billion for new airplanes, it's going to be a cold day in hell before we need to go out and search for more capital. If I saw a significant need for capital in the next year or two, that would be a different story. I'm not advocating this course of action for everybody. But we don't need to tap the capital markets.
Q: Do you see a time when it might make sense to go public again? A:
Q: Do you see a time when it might make sense to go public again?
A:Whatever opportunities I see for ATA, I would absolutely embrace. So if the market conditions were such that it would be healthier for ATA to go public again, of course I would do that. But short-term, I don't see that at all. My conviction is that short-term, we're better off going in the opposite direction.
Q: This is an industry that has been hard-pressed to earn money, isn't it? A:
Q: This is an industry that has been hard-pressed to earn money, isn't it?
A:It's a horrible industry from the standpoint of investors. It's only people who have a love and a passion for this industry who should invest in it. Between 1990 and 1994, this industry lost more than $13 billion. That's more than it had made since the Wright brothers. And look at what's going to happen this year and possibly next year. It's going to be a tough, tough 2001, and I think 2002 is going to be very tough, too. So what the heck is the poor investor going to get out of this? Not very much.
Q: What are you seeing in terms of business and leisure travel today? Getting better? Getting worse? A:
Q: What are you seeing in terms of business and leisure travel today? Getting better? Getting worse?
A:I don't think it's getting better. It's still on the way down. But I think there's going to be a fairly profound change. The Internet has educated an awful lot of people that there is such a huge disparity in fares, especially in business fares. The average business guy maybe 10 years ago would just call his travel agent and say, "Book me a seat." But today, you hit the Internet, and you see fares anywhere from $300 to $2,300. Even when the economy returns to a more robust level, I don't think you're going to see as many of those high fares.
Edited by Douglas Harbrecht
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