Air Tran Holdings Inc. (AAI) Chief Executive Bob Fornano made headlines this week when he predicted that the discount airline would be profitable in every quarter this year. Investors cheered the news, boosting shares of the Orlando-based airline.
Airlines have suckered many an investor for years. Shares rise when fuel prices are low and fall when they are higher. Carriers buckle under from the rising fuel costs and file for Chapter 11 bankruptcy. It's the same pattern decade after decade. But experts say AirTran has got quite a bit going for it.
Like all airlines, AirTran hedges its exposure to fuel costs. If crude hits $60 in 2009, AirTran's fuel costs would be the equivalent of $66 per barrel for 35 percent of its fuel. Jet fuel prices are down 57 percent from last year as demand fell because of cuts in airline capacity. Demand for jet fuel hit its lowest level in years.
Government officials expect jet fuel prices to rebound next year. AirTran is well-protected against any changes in prices, according to experts.
After Midwest Express Inc. rejected, AirTran's hostile bid to buy the company, AirTran decided to expand to Midwest Express' home airport in Milwaukee. Since then Midwest's market share in Milwaukee has been slipping. Meanwhile, AirTran is adding employees there.
"They did their capacity cutting earlier than most," said airline consultant George Hamlin in an interview. "Management is very business-oriented with a huge attention to costs and it shows. They are lean, mean and efficient."
Shares of AirTran rose 55 cents, or 18 percent, to $3.58. Shares are down 44 percent this year. A company spokesman could not be reached for comment.
Why do investors make the decisions that they do?View Course »