Bankrupt Parent Sees Growth In Indianapolis

Chicago Express is still flying despite the Oct. 26 bankruptcy filing of its parent, ATA Holdings [ATAHQ].

Company officials insist that there are growth opportunities for the regional carrier, which flies into Chicago Midway Airport from smaller midwestern cities. As part of its new business plan, ATA, the company's low-fare carrier, is abandoning Midway and strengthening its original hub in Indianapolis. "As we go forward and develop Indianapolis and other cities, Chicago Express will fit in," said James Hlavacek, ATAH's vice chairman.

Chicago Express flies 17 Saab 340s from 12 cities in four nearby states into Midway. It does not provide similar service feeding into Indianapolis. "Chicago Express continues to be part of our plan as we reorganize. They are a very efficient and productive carrier," Hlavacek added.

However, the Chicago Express operations now depend upon ATAH's new partner, AirTran [AAI], and it is no sure bet that AirTran will be that partner once ATAH emerges from bankruptcy.

In a deal worked out before ATAH filed its Chapter 11 papers, ATA agreed to assign to AirTran its 14 gates at Midway as well as its Chicago routes, 19 take-off and landing slots at New York's LaGuardia Airport and eight slots at Reagan Washington National Airport. AirTran will pay ATA $87.6 million in installments as it gains control of the ATA assets.

Prior to its court filing, ATA talked with America West [AWAC] as well as AirTran. The largest Midway carrier, Southwest Airlines [LUV], is interested in acquiring more Midway gates. AirTran, America West and Southwest have different views on feeder carriers, such as Chicago Express. Thus the future for the regional carrier at Midway will depend on who wins the gates.

While it may take a year for AirTran to gain control of the Midway assets, ATA said it hopes that within 90 days AirTran will manage the Chicago operations. Until AirTran receives more Boeing [BA] 717s and 737s that it has on order, it will contract with ATA to fly the Chicago routes.

ATA's fleet is among the industry's youngest. It flies 175-passenger B737-800s, 200-passenger B757-200s and 247-passenger B757-300s. All have been obtained since 2000.

In the end, both airlines hope to work out a code-share arrangement and a joint marketing agreement. The ATA code, which is now on 344 daily flights, would then be on more than 800 ATA and AirTran flights, said ATAH CEO George Mikelsons.

ATA said the door is still open to other offers. American West confirmed that it is still interested in the Midway gates.

"We're looking at it. We may still be interested. We may continue to work on an offering. We think a potential America West proposal may be more desirable for [ATAH] creditors and employees," America West spokeswoman Janice Monahan said.

America West did not make a formal offer on the Midway gates. However, it has said it may be interested in buying more than just what was offered to AirTran.

A number of Wall Street analysts have suggested that Southwest would be the logical carrier to obtain the ATA gates since it already controls the majority of the gates. "The best case scenario would be to have Southwest emerge as a last-minute bidder for Midway. Southwest appears fully capable of running the competition out of Chicago regardless of how the planes are painted," said Jamie Baker, an analyst for JP Morgan.

However, such a move by Southwest would raise anti-trust issues since the move would effectively block other low-fare carriers from entering the Chicago market, said William Brandt Jr., a bankruptcy turnaround expert with the Chicago firm of Development Specialists.

AirTran currently does not use a regional carrier to feed its hub in Atlanta. In the wake of the Sept. 11, 2001, terrorist attacks, AirTran contracted with Air Wisconsin to provide both feeder service and point-to-point flying. Air Wisconsin was flying 70- passenger RJs on routes that AirTran has serviced with mainline jets. However, after about 18 months of service, AirTran decided those routes could be flown more efficiently with its new B717s.

Currently AirTran and Chicago Express offer flights from three common cities outside of Chicago - Milwaukee, Moline, Ill., and Dayton, Ohio. None of the AirTran flights connect to Chicago. The bulk of the flights from the three cities feed into Atlanta; however, several go direct to Florida vacation spots.

On the other hand, America West uses Mesa Air Group [MESA] for an extensive feeder network into its Phoenix and Las Vegas hubs. Big Sky Airlines, a turboprop unit of MAIR Holdings [MAIR], serves the upper Rocky Mountain states for America West. The low-fare carrier does offer non-stop service from two Chicago Express markets - Indianapolis and Milwaukee - to its hubs.

And then there is Southwest. The nation's most profitable airline does not have any feeder or code-share arrangements. Furthermore, it does not interline with other airlines. "There is a future for feeder service into Midway - I don't think that is an issue," said Clinton V. Oster Jr., an airline and public policy expert at the University of Indiana. "I don't think there is much doubt that there is a strong market for low-cost service out of Midway and that suggests there will be a strong feeder market."

While Chicago Express provides connecting service to ATA, it is unclear how many use the regional carrier to reach Midway's other tenant - Southwest.

In September, Chicago Express reported 85,483 enplanements - a 16 percent increase over the previous September (CRAN, Oct. 11). The carrier reported better overall operations in September than in any other month this year.

As AirTran takes over the Midway routes, it would be better off not tampering with what is working, Brandt, the bankruptcy expert, told CRAN. "Screwing around with their commuter airline and perhaps putting a hole in the schedule is the wrong thing to do. My suspicion is that they may want to renegotiate with Chicago Express. I assume everything will be fine in the early stages of the transaction until the buyer has had a chance to digest the company."

The bankruptcy filing was a key to the Midway deal. ATA leases the Midway gates from the city of Chicago. If it were leaving Midway as a normal course of business, the airport would be the one leasing the gates to other carriers. However, since the carrier is in bankruptcy the gates are treated as assets of the bankruptcy estate so the judge will supervise the disposal of the gates.

ATA's problems stem from expanding at the wrong time. Mikelsons noted that his new Boeing fleet lost almost $100 million in market value shortly after they were delivered because of Sept. 11. ATA leased the Boeing aircraft at the high point in the market. According to its Chapter 11 filing, it owes Boeing $722 million. As it restructures, Mikelsons said the company would attempt to renegotiate the terms of the leases; however, it does not plan on returning any planes.

"They expanded too rapidly. This rapid expansion opened them up for this kind of thing," said Anthony Pagano, a management professor at the University of Illinois at Chicago. "They seized the moment, but unfortunately it was the wrong moment."

All elements of the ATAH operation have been profitable, except for Midway, said Mikelsons. As part of the reorganization plan, in addition to keeping Chicago Express, the company will also retain its commercial and military charter divisions.

"From a long-term growth perspective, Midway would be a far superior choice for a hub," Pagano said. "However, they have more boarding in Indianapolis, which may be important in the short-term. By selling gates at Midway, ATA can probably get more than selling gates in Indianapolis."

Once AirTran can use its own planes on the Chicago routes, it should break even next year and post a profit in 2006, said CEO Joe Leonard as he briefed analysts on his unprofitable third quarter.

JP Morgan's Baker opposed the AirTran deal. He estimates that ATA had been losing $50 million a year on its Midway operations - and that's before the price of oil skyrocketed. AirTran will lose $25 million flying the larger ATA aircraft until it can substitute its own fleet. "ATA's willingness to flee to Indianapolis suggests the facility isn't worth fighting for."

"Entering a money-losing operation with the hopes of downguaging one's way to profitability is a decidedly un-LCC-like thing to do," Baker said, referring to the low-cost carriers. "AirTran is taking on legacy carrier characteristics and its earnings will suffer."

In the weeks prior to the bankruptcy filing, ATAH cut more than 300 from its payroll. Most of those were at ATA, Hlavacek said, but a few were from Chicago Express. ATA pilots and flight attendants have agreed to $70 million in wage concessions.

Mikelsons does not anticipate any additional furloughs. The 3,200 employees at Midway will be offered positions at AirTran as that carrier takes over the operations. However, there is no guarantee that AirTran will hire the ATA workers or as many ATA employees.

ATAH is entering bankruptcy like US Airways [UAIRQ] - without debtor financing arranged. And like US Airways, it has a $148.5 million loan guarantee from the Air Transportation Stabilization Board. The board has agreed to let ATAH tap into this cash for its current operations - again just like in the US Airways case.