Taking off Featured

6:37am EDT May 25, 2004
J. George Mikelsons ran ATA Airlines Inc. for 25 years with a firm, hands-on approach until he stepped down to take a much-needed break, retaining only the position of board chairman.

In 2002, five years after relinquishing the top spot, a variety of factors led Mikelsons to decide it was time to retake control of the airline he founded in 1972.

"Our costs had gone up quite significantly," says Mikelsons, who two years ago added the title of CEO to founder and chairman.

As chief executive, Mikelsons didn't waste any time. He instituted measures aimed not only at getting costs under control but also at dramatically slashing them. His efforts led ATA, the 10th largest airline in the nation, to reduce costs more than any other U.S. airline in 2003, and resulted in its first year of profitability since 1999. Along the way, the 7,200-employee company has become quite different from the one Mikelsons founded with just one plane.

"I didn't envision this," he says. "I did it because I have a passion for doing it, and I had a double motive -- my own job security."

Mikelsons says that in the early 1970s, he saw many airlines folding or laying off pilots, and he felt having his own plane was the smartest way to stay in the air.

"I happily flew one plane, and after a few years, the passengers were clamoring for more," he says.

ATA saw the most significant growth in its history after deregulation of the airline industry began in 1978. A few years later, in 1981 the airline became certified to fly the general public. Prior to certification, the airline was run as a travel club.

By 1993, after adding several planes and flights, the company completed its initial public offering and, in 1999, reported $1 billion in revenue.

But rising costs, especially fuel costs, combined with excess industry capacity and less demand for flights, resulted in a financial struggle for ATA, hence Mikelsons' return as CEO. He was determined to return his company to profitability, and he has.

Today, other major airline executives are watching Mikelsons' methods and considering whether similar measures will help trim their own costs. But what makes Mikelsons' methods unique is that he reduced expenditures without sacrificing customer service or hampering employee morale.

A skillful surgeon or a pilot?
Mikelsons was not afraid to start from scratch when it came to the company's budget.

"A lot of our costs you can't control to any extent," he says.

Among these hard costs are the prices of plane
s, fuel and labor. So Mikelsons sharpened his knife and went to work on all the variable expenses that wouldn't affect safety or customer service.

"We cut costs fastidiously and with a vengeance," Mikelsons says.

They also applied Six Sigma principles, which Mikelsons says makes you think "right to left."

"Instead of looking at a department with 300 people and asking, 'How we can cut costs by 5 percent?' you get out a blank sheet of paper and ask, 'If I had to do it all over again, what should we be able to do with 225 people?'" says Mikelsons.

After the surgery, ATA had cut more than 600 jobs. And Mikelsons and his executive management team carefully analyzed how efficiently the remaining resources were being deployed.

"A lot of our cost savings were realized utilizing our crews and aircraft significantly more," by the airline adding more late evening and early morning flights, Mikelsons says.

But even after the company completed the cutting process in every department, it wasn't truly over.

"Once we went through everything from stem to stern, we started at the top again," he says. "We'll never stop that process," because there will always be inefficiencies to find and correct. "We need to find the inefficiencies and processes that we can automate or outsource. If you're afraid to find ways to do that, you're coddling inefficiency. Some people feel you can't get the same results outsourcing, but not outsourcing can be the wrong thing to do. You might save a few jobs but lose the company."

The results of his efforts have been staggering. ATA reduced its 2003 cost-per-available-seat-mile (the ratio of operating expenses to the number of seat miles flown) 16.5 percent to 6.82 cents per seat mile. The only major airline close to that is Tempe, Ariz.-based American West Airlines, which cut its CASM 7.7 percent to 7.57 per mile.

Meanwhile, most of the major airlines still report CASMs of between 10 cents and 12 cents per available seat mile.

 A loaf of bread or an airline ticket?
Another factor in ATA's success is its pricing strategy. Mikelsons believes airline service is a commodity and should be priced as such.

"The high cost or legacy carriers are employing overly aggressive yield management," he says. "Sure, if you go out and buy a ticket from one of them on a Tuesday afternoon with a green sock on your left foot, you can get a ticket for $99. If you need a ticket for the same destination at the last minute, it's $2,002. What's the difference in the flight?"

Mikelsons says it was Southwest Airlines that first introduced the lower cost structure, and ATA followed suit by adding a pricing cap. He says that although it's important to offer promotional fares and sales, there should never be as big a difference in pricing as that between $99 and $2,002. He vows that at ATA, no passenger will pay more than $299 for a ticket, and no business class passenger will pay more than $399.

Mikelsons says this approach is spreading to other airlines.

"It's a new way of thinking, but the legacy carriers are starting to fall in line," he says. "The $2,002 fares are going away for good. "

And, he says, the pricing structure does something else -- it caters to those travelers who like getting to their destinations with more money to spend once they get there.

Despite the fact that Mikelsons relentlessly cut a significant number of jobs along with costs, he kept the employees in the communication loop to maintain morale.

"We have as many meetings as is humanly possible, and we ask a lot of questions, which is vitally important," he says. "Without a proper explanation of what we're doing, we can seem cruel and heartless. You'd be surprised how many terrible thoughts are conjured up in people's minds."

Mikelsons says at each meeting, senior management showed employees "how things work," then opened the floor to questions, allowing employees to speak their minds and voice concerns. The result, says Mikelsons, was employee buy-in.

"We do more than the average company," he says.

Mikelsons also takes a fearless approach when it comes to passengers. Once a month, a company officer participates in a Fly Day, boarding an ATA flight. Once the Fasten Seat Belts sign is off, the officer stands up and introduces him or herself to the passengers, who are invited to pass on comments -- positive or negative -- to the officer by the end of the flight.

"Some passengers have legitimate gripes," Mikelsons says. "But mostly we get compliments."

Mikelsons says it is important to confront the public to combat the hostility that has developed against the airline industry.

The officers also have a few hours before the return flight to talk to ATA employees at the Fly Day's destination terminal. This, Mikelsons says, provides them with a way to thank the employees for their good work, as well as an opportunity to reinforce the company's message of good service at a fair price.

"I never pass up an opportunity to sell," Mikelsons says. "We believe what we are doing is right, and we sell it with passion. Only by communicating with people can you get them to understand. Once they understand, generally, they are very supportive."

Still, Mikelsons is realistic about the company and the industry.

"It is a shameful fact that in the 100 years since we took to the skies -- in the entire 100 years -- the airline industry has lost more money than it ever made," he says, blaming the decision-makers at the top. "It's the fault of airline managements collectively. We pursued failing strategies, jacked up prices and didn't pay enough attention to costs. We've done a lousy job.

"The industry is a disaster, except when it comes to safety."

To that end, Mikelsons says the entire industry needs to re-evaluate itself, much as he has done with ATA.

"We need to find a way to serve passengers better," he says, "charge fairly and operate profitably." How to reach: ATA Airlines, (877) 834-0606 or www.flyata.com

The Mikelsons file

Born: Latvia, fled with parents to Germany during World War II, immigrated to Indianapolis in 1960

Education: High school diploma

First job: Running an air taxi service

Career moves: Chief pilot and director of operations for Voyager 1000 travel club

Boards: Air Transport Association, Indianapolis Convention and Visitors Association, Indianapolis Zoo

What was your greatest challenge in business, and how did you overcome it?
Communication with employees. I find that whenever it is possible to present the company's strategies and tactics to employees, and time permits to answer all questions, we win their hearts and minds as well as every battle we join.

The question remains; how do you do that with thousands of employees scattered to the four winds in the airline business?

Past or present, whom do you admire most in business and why?
I have the greatest admiration for Herb Kelleher, chairman of Southwest Airlines. He has doggedly stuck to a business model that relies on fair pricing of travel and not on aggressive yield management policies that include exorbitant, unconscionable fares to make up for "low-ball, come-on" fares.

What is the greatest lesson you've learned in business? 
Not much more than that which my parents taught me: Honesty and integrity will always create a winner in the long run -- in your business as well as personal life.