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AirTran Feels the Heat

The Wall Street darling has been hit by concerns over growth in revenue per available seat mile.
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Wall Street not only dislikes badly performing airlines. Sometimes it dislikes the industry's best performers as well.

AirTran Holdings

(AAI)

, a market darling for much of the past year, learned that lesson last week. The low-fare carrier's stock was the industry's worst performer on Thursday and Friday after the company

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reported first-quarter results roughly equivalent to last year's loss of $8 million, or 9 cents a share. AirTran said it lost $4.6 million, or 5 cents a share, in the quarter, including an accounting credit of $4.2 million, or 5 cents a share, due to a prior fuel-charge miscalculation.

AirTran shares closed Friday at $13.98, down about 10% from Wednesday's close of $15.60. The shares recently were down another 3.4% Monday to $13.50.

Analysts said they were disappointed by the year-over-year income and EPS comparisons, which were below expectations, and by the comparison between AirTran's revenue per available seat mile growth of 11.1% and the industry average gain of about 14%. On a conference call, they repeatedly questioned AirTran President Bob Fornaro about RASM growth over the next few months.

In an interview, Fornaro said that AirTran's double-digit RASM growth will continue into the foreseeable future. Meanwhile, nonfuel cost per available seat mile, already among the industry's lowest, has declined for eight consecutive years and is projected to be flat to down this year. AirTran reported nonfuel CASM of 6.51 cents, compared with 6.43 cents at rival

Southwest Airlines

(LUV) - Get Report

.

"(CEO Joe Leonard) and I are in our eighth year here now, and for the most part our calls have been upbeat," Fornaro says. "This one was flat; most of the questions had more of a challenge to them. But when you step away from all that, our growth prospects are good. We have good momentum. We are one of the lowest-cost producers, down there with Southwest. If fuel prices stay high, more capacity will come out. Not many airlines can make money with $70 oil, but we can."

Meanwhile, summer is approaching, representing the most profitable season for airlines. "We are moving into the meat of the year, and profitability will get better," Fornaro says. He noted that yield per revenue passenger mile is expected to rise, because strong bookings indicate that load factors will be high and ticket prices have gone up.

On the conference call, Fornaro acknowledged that other airlines may have shown stronger year-over-year RASM growth because they have shrunk domestic capacity and eliminated their worst-performing routes. "Compare AirTran to carriers that lost money or were in bankruptcy," he said. "I'm glad we didn't lose $50 million last year, but (if we did) our numbers would look better."

AirTran forecast second-quarter RASM growth of 12% to 14%. Fornaro said the April figure will climb 20% because Easter was celebrated in March last year and in April this year. But some analysts questioned why growth projections aren't higher for May and June.

Helene Becker of Benchmark Capital says that AirTran's RASM growth should have been higher because several airlines reduced capacity in AirTran's Eastern markets. The carriers included

Delta Airlines

and

US Airways

(LCC)

, as well as Independence Air, which shut down in January.

"AirTran RASM growth was equal to the low end of the industry," Becker says. "It's because their fares are very low, they are in very competitive markets, and Chicago has a lot of capacity increase and will not be profitable for at least a year."

AirTran stock has risen rapidly, she notes. "Now it's time to take money off the table and wait and see what happens." Benchmark has no financial relationship with AirTran.

Meanwhile, Merrill Lynch analyst Mike Linenberg said in a research report Friday that he expects AirTran to have a strong second quarter. He maintained a buy rating on the stock.

"Although the March-quarter results left much more to be desired, the revenue environment for AirTran continues to look positive and we forecast a double-digit unit revenue increase for the June quarter," Linenberg wrote. "We think that revenue trends will be strong for at least the next two quarters." Merrill Lynch acts as a market maker for AirTran and may provide investment-banking services.

Aviation consultant Robert Mann says the generally negative reaction to AirTran's first quarter is symptomatic of Wall Street's short-term obsession. "The only reason the rest of the industry RASM is going up is because a lot of airlines are chopping capacity," he says. "They are achieving RASM growth, not revenue growth. But it makes for a disconnect between Street expectations and guys like Fornaro who think they did the right thing for their company."

Mann, a former consultant and executive at the now-defunct Tower Air, said he saw the same problems when Tower went public in 1993. "It was the dumbest thing we ever did," he said. "All of a sudden you had everybody in your face."