AirTran: Catch It If You Can

Joe Leonard's low costs have AirTran outflying Delta

Joseph B. Leonard almost broke down in tears on his first day as CEO of AirTran Holdings Inc. (AAI ), in January, 1999. At a 6:30 a.m. meeting, he learned the low-cost carrier's cash had dwindled to $10 million, enough to keep it aloft only a few weeks. "If I'd done a proper job of due diligence, I would have never taken the job," says Leonard.

It's a strange admission from a man who has worked in the industry for nearly four decades, seen one employer (Eastern) go bankrupt, and helped save another (Northwest) from the same fate. It's especially odd since AirTran had been pretty much written off in 1996: Back then, it was known as ValuJet Airlines Inc., the airline whose poor maintenance was blamed for a crash in the Florida Everglades, killing all 110 on board. Leonard probably should have known better. But he was so excited about what AirTran could be that he didn't look closely enough at the ugly reality of what it was.

Now, it seems as if that was for the best. Starting with those first sleepless 48 hours as he combed the finances looking for ways to raise cash, Leonard has outsmarted rivals, outlasted the ValuJet stigma, and turned AirTran into the second-largest discounter, after Southwest Airlines Co. (LUV ). AirTran earned $11 million in 2002, one of only three profitable carriers last year, and ended the second quarter with $343 million in cash. In contrast, Delta Air Lines Inc. (DAL ), AirTran's main rival, lost $1.3 billion last year. Although AirTran offers less than one-tenth as many flights, its market cap is $1 billion, vs. $1.7 billion for Delta. "Leonard has built one of sharpest and most aggressive management teams in airlines," says Stuart A. Klaskin, a Coral Gables, Fla., airline consultant.

Today, Leonard is homing in even closer on Delta. No longer will he just cherry-pick underserved East Coast destinations such as Baltimore. In the next five years, he plans to double the number of AirTran flights, invading Delta's most profitable routes, including Los Angeles and cities in Mexico and the Caribbean. He is ordering up to 100 fuel-efficient 737s from Boeing Co. (BA ), which will enable AirTran to fly cross-country for the first time. "We can put airplanes anywhere we want, and there's nothing Delta can do about it because our cost structure is so much lower," he says.

While there's a bit of catch-me-if-you-can swagger to Leonard these days, success on his own terms has been a long time coming. As the enforcer for Northwest Airlines Corp.'s (NWAC ) former CEO Donald W. Nyrop and Eastern Air Lines' Frank Borman, he has laid off thousands, battled angry union workers, and often been more feared than loved. "Joe always had to do the dirty work, take the hit for others," says J. Randolph Babbitt, an airline consultant and former Eastern pilot.

But if anyone has jet fuel coursing through his veins, it's Leonard. He grew up next door to the airport in Augusta, Ga., in the years after World War II. By age 11, he was pumping gas in exchange for flying lessons. And by 1967, he had graduated from Auburn University with a degree in aerospace engineering. His first job out of college was evaluating planes at Boeing. To this day, says Lawrence A. Bossidy, retired chairman and CEO of Honeywell International Inc. (HON ) and a former boss, "Joe would rather check out a nearby aircraft plant than play golf."

After two years at Boeing, Leonard settled into Northwest, where he became a protégé of the flinty Nyrop, who demanded that any expenditure over $19.95 get his personal approval. The art of cost-cutting proved invaluable in his next assignment as senior vice-president of maintenance -- and later, CEO -- at Eastern. Borman, a former astronaut, had kept the struggling airline in business through sheer willpower. But the regal Borman didn't mingle with employees, and his unions were growing increasingly militant as Eastern asked for ever more wage and work-rule concessions. Borman assigned Leonard the task of winning those concessions from union leaders while keeping the peace.

It was an impossible mission. Eastern collapsed in 1991, and Leonard returned to Northwest, which was itself struggling to stay out of bankruptcy. CEO John H. Dasburg credited Leonard with keeping the airline flying. "He's the quintessential operations guy," says Dasburg. "He could have succeeded me." Leonard, though, had other ideas. Burnt out by the industry's bitter labor struggles, he left Northwest in 1993 for aerospace conglomerate AlliedSignal. AlliedSignal's Bossidy put him in charge of turning around the troubled Honeywell acquisition. "He took out a lot people without flinching," says Bossidy.

While Leonard may have thought he was done with airlines, the industry wasn't done with him. In 1994, soon after he joined AlliedSignal, personal friend Lewis H. Jordan approached him about running his new Atlanta-based discount carrier, ValuJet. Leonard rebuffed Jordan, who remains an AirTran director, until 1999. By then, the company was in desperate straits. After the 1996 crash, it had merged with Orlando-based AirTran and adopted its name, but it was poorly run, heavily in debt, and nowhere near making a profit. Leonard thought he saw a way out. AirTran had acquired Eastern's 18 gates at busy Hartsfield Atlanta International Airport. Delta, of course, also called Hartsfield home. The airline then was one of the world's most successful, but as a native Southerner, Leonard knew a dirty secret: Delta's customers, especially business travelers, had become increasingly disillusioned with mediocre service and high prices.

Leonard gambled on a strategy unlike any other that discounters had tried. They went after the leisure crowd; he would go after the business traveler. They flew directly city to city; he would operate AirTran on the hub system that major airlines used. Business fliers got the same amenities, such as roomy seats, available on, say, Delta, but at fares up to 60% cheaper. Leonard also let coach customers upgrade to first class at the gate for $20 (now $30). "Who doesn't have a $20 bill in his pocket?" he says.

To make a go of it, Leonard cut costs to the bone. Pilots help load luggage, and senior pilots earn about $100,000 less on average than those at Delta. Leonard turns off the air conditioning when he goes home at night. Such savings helped lower AirTran's costs to 8.5 cents per available passenger mile, vs. 11 cents at Delta. To keep up morale, Leonard invites conversation. "I find him very willing to talk if we have a disagreement," says AirTran pilot union President Patrick Sean Sullivan.

Delta isn't sitting idle on the tarmac. It has matched many of AirTran's fares, has moved into most of its routes, and is struggling to cut costs by some $2.5 billion in the next two years. That doesn't mean Delta is becoming another AirTran, says Delta President Frederick W. Reid: "We think we deserve some premium in fares, since we have the global reach." Leonard hopes Delta does keep that premium, but he's not too worried one way or another. He believes that he could win any fare war, since his costs are so much lower than Delta's. As they say in the South, Leonard is just going to keep hitting them where it hurts.

By Charles Haddad in Orlando

    Before it's here, it's on the Bloomberg Terminal.