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price. CORPORATE CLOSE-UP;FOR VALUJET, SMALL IS BEAUTIFUL--SO FAR;BUT AIRLINE FACES FLORIDA THREAT BY SOUTHWEST

By Published on .

ValuJet Airlines, not yet 2 years old, is microscopic compared with airlines such as its established Atlanta-based neighbor Delta Air Lines. But smallness can be a virtue if it allows you to react quickly.

Up in the air is whether ValuJet is nimble enough to survive the unforgiving and rapidly evolving airline business climate.

So far, ValuJet has certainly been moving quickly. It just reported its seventh consecutive quarter of record profits. Year to date, net income is up 260% to $25.9 million; revenues are up 206% to $147.7 million. But ValuJet has also taken some lumps. In June, flight attendants voted to unionize, which might lead to higher labor costs. Last month, ValuJet discontinued a high-profile but unprofitable international route.

And to top it all, Dallas-based Southwest Airlines has announced plans to enter Florida early next year, which may effectively shut off growth for ValuJet in that lucrative market.

For now, however, ValuJet's management and shareholders, like the late Liberace, can cry themselves all the way to the bank.

"We admire what they've accomplished," Dave Ridley, Southwest's VP-marketing and sales, said of ValuJet. "Somebody's doing something right over there."

ValuJet and Southwest present an instructive comparison. Southwest, which began flying in 1971, took eight years to reach net income of more than $20 million and 10 years to build its fleet to 28 jets. ValuJet has managed both already, with expansion of its fleet to 32 planes last month.

Creative for ValuJet's advertising is handled by an in-house, virtual agency consisting of a handful of staffers who work out of their homes linked via modem and fax in addition to performing other jobs at ValuJet.

ValuJet recently named Mike Tyre director of advertising and promotion, but VP-Sales and Marketing Ponder Harrison said he doesn't foresee an agency in the carrier's future.

ValuJet's marketing budget this year will be about $15 million, with the bulk spent on radio and newspapers. Beginning early this year, the company started using spot TV when it entered larger markets such as Washington, Boston and Detroit. Media is placed by Linder Media, Atlanta.

ValuJet's message is extremely simple: Price is king. Copy points include "good times-great prices" and "low fares every day, everywhere we fly."

The airline targets the ultimate in price-sensitive market niches, "visiting friends and relatives," Mr. Harrison said, and uses price to stimulate incremental demand. Without prices such as a $59 one-way fare from Atlanta to Newport News, Va., ValuJet's customers would drive to their destinations or simply not take the trip.

ValuJet makes no secret of the fact it lifted its playful, easy-going approach straight out of the Southwest play book. "We felt fun and friendly was lacking in the business," Mr. Harrison said. "Customers' airline experiences were generic and lacking; our image is not one of military precision."

Indeed, ValuJet locates brightly colored children's play sets in boarding areas and encourages informally clad flight crews to interact with passengers, telling jokes and holding impromptu contests during flights.

Mr. Harrison said that ValuJet's niche-market strategy rules out competing for share. "We define the game as market co-existence," he said, citing the example of Atlanta, where ValuJet has thrived with 9.5% of airport traffic against Delta's 70%.

To remain profitable, ValuJet must continue to keep costs low. Some analysts say that makes it vulnerable in several areas, such as labor relations. Flight attendants vote to join the Association of Flight Attendants "shows that the kind of love-fest between labor and management that exists at Southwest is not replicated at ValuJet," said Tim Sieber, VP-research at analyst Aviation Systems Research Corp., Golden, Colo.

Some analysts also are not sanguine about the company's fleet. Since most of the aircraft are at least 25 years old, they are less fuel-efficient than newer fleets, making ValuJet more vulnerable to fuel-cost hikes. And an aging fleet requires more extensive, costly maintenance.

In addition, the supply of the used planes ValuJet flies appears to be tightening. The company paid twice the price for its second round of DC-9-32s that it paid for its first aircraft, said Steve Lewins, a transportation analyst with Gruntal & Co., New York.

"I see 8 cents per seat mile costs developing for ValuJet as soon as growth slows," added Mr. Lewins. For comparison, Delta and American Airlines typically incur operation costs of up to 14 cents per seat mile; Southwest and ValuJet report costs of 7 cents per seat mile.

But ValuJet also has factors working in its favor. Using only one type of aircraft cuts costs for spare parts and mechanic training. Its ticketless reservation system saves about $2 million in annual operating costs.

And ValuJet's top management are airline industry veterans unafraid to admit a mistake quickly and cut their losses, Mr. Harrison said, as with last month's cancellation of service between Washington and Montreal following four unprofitable months.

ValuJet will need all the flexibility and experience it can muster with Southwest heading for Florida, even though only 3% of ValuJet's routes will be directly competitive with Southwest's initial service. Analysts say ValuJet was considering Orlando for another minibase and expanding Florida service but now will be forced to re-evaluate those plans.

"In the short term, both can co-exist in the Southeast," Mr. Sieber said. "There will be a cold war with lots of unstated tension between the two .... It all depends on what Southwest decides to do in Florida."

===============================================================

CORPORATE CLOSE-UP

Headquarters: Atlanta

Leadership: Robert L. Priddy, chairman and chief executive officer; Lewis

H. Jordan, president and chief operating officer.

Operating revenues: $133.9 million for 1994

Advertising/marketing spending: $15 million

Agencies: Creative handled in-house; media placed by Linder Media, Atlanta.

Recent successes: Became consistently profitable in second month of

operation and maintains one of the industry's lowest cost structures at 6.77 cents per mile.

Challenges: Keeping a lid on costs with an aging fleet and flight

attendants' vote to unionize. Facing the entry of Southwest Airlines into Florida in early 1996.

Source: Advertising Age and company reports

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