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When AirTran Airways began shopping around for a fleet of new airplanes last winter, Chairman and CEO Joe Leonard had specific — and in his industry, unusual — ideas about how the deal should get done. The deal was a large one for all involved. AirTran ended up agreeing to take on up to 114 new airplanes, worth up to $4.5 billion. Despite the deal’s size, Leonard wanted the negotiations done in record time. They ended up taking about a month, instead of the usual eight months. He also wanted the deal structured so that his company maintained all of its bargaining power in each segment of the deal right up until the paperwork was signed, according to the Orlando, Fla.-based company’s general counsel, Richard P. Magurno. To do that, Magurno said, the three aspects of the deal — purchasing or leasing the airframes; negotiating engine, maintenance and parts contracts; setting up financing and leasing — had to be integrated. Also, the companies competing for AirTran’s business — Chicago-based Boeing Co. and Toulouse, France-based Airbus as well as various engine manufacturers and financial entities — needed to be in the same place at the same time. That meant three financing groups — GECAS, International Lease Finance Corp. and Lombard, a subsidiary of the Royal Bank of Scotland — and their lawyers, plus two engine manufacturers — General Electric and International Aeroengines — and their lawyers, as well as Boeing and Airbus and their lawyers and negotiators all met in Orlando in June to compete and, for the winner, hammer out an agreement with AirTran. The competitors initially resisted the arrangement AirTran wanted. They claimed it couldn’t be done so quickly and that in many ways it broke the usual process for such deals. But in the end, they did it AirTran’s way. “That’s not the way it’s usually done,” said Richard Aboulafia, vice president of the Teal Group Corp., an aerospace and defense consulting firm in Fairfax, Va. But, he said, the poor economy, which has driven some airlines to bankruptcy and pounded profits at others, gave AirTran a lot of leverage. “There’s no question it’s a buyer’s market, but it’s been that way for some time. … The reality is that manufacturers fell all over themselves to offer planes at very favorable terms.” Even so, according to Magurno, price was the main sticking point. His company’s attitude: “Look, there’s going to be a deal at this price, or no deal,” he said. “We could easily have turned around and said ‘we can lease airplanes, we don’t need to buy any.’” And after several weeks of preparation and a dozen sleepless, intense 22-hour days of negotiations, shouting matches and clandestine attempts at side deals, after the d�j� vu of room service’s seafood cobb salads and French onion soup and frequent trips between AirTran headquarters and conference rooms at the Orlando Airport Marriott, AirTran and Boeing inked the largest deal of its kind in the industry so far this year. Announced at AirTran’s hub, Hartsfield Atlanta International Airport, on July 1 and signed two days later, AirTran agreed to buy, lease or take options on up to 114 new Boeing 737-700 and -800 series aircraft, as well as 717s. Depending on how many planes AirTran ultimately takes, the deal’s value is between $3.5 billion and $4.5 billion, according to Howard E. Turner, AirTran’s lead outside lawyer and a partner at Smith, Gambrell & Russell. That price represents negotiated discounts from list price, he said. Published reports have placed the aircrafts’ list price as high as $7 billion. MAXIMIZING BARGAINING POWER Completing a deal of this magnitude and involving this many players with about a month of prep work and negotiations is roughly equivalent to reaching the speed of sound in a prop plane. It just isn’t done. Normally, negotiations with Airbus and Boeing would have been handled separately and would have taken about eight months, according to Turner. Then once that agreement was settled, the airline would negotiate other deals for financing, leasing, engine manufacturing, parts and maintenance. But AirTran wanted to do all the deals at once, to edge up its bargaining power. “Our CEO, Joe Leonard, said from the beginning that he did not want to have an environment that we sign an MOU [memorandum of understanding], announce it and then find that the documents did not reflect what we wanted,” Magurno said. “You lose leverage when you try to refine the MOU into detailed contract terms.” So Magurno and the company’s team of outside lawyers at Smith Gambrell — Turner and partners Ronald W. Wells and John D. Saunders, plus associates Nick F. Ivezaj and Peter B. Barlow — figured out how to make it happen. Smith Gambrell has a long history of representing airlines, going back to its first industry client in the 1920s, the now-defunct Eastern Airlines. According to Wells, the firm also represents Avianca, a Colombian airline; Mesa Airlines, based in Phoenix; and the Panamanian airline AIRES. Smith Gambrell also does some work for Delta Air Lines and Frontier Airlines. “I had not appreciated how totally unusual it was ’til we started the process. I think universally the parties said, ‘You don’t do it this way,’” Magurno said. Deals usually aren’t done this way because of the complexity, and the expense of getting all the competitors in the same place at the same time. One reason AirTran wanted all the competitors together was to save time. The company, which made its name as a discount airline, is leanly staffed. It has 11 officers, five of whom were involved in the negotiations. “You can’t do that for a long time and successfully run the company, so we needed a shortened negotiation period,” Magurno said. Also, he added, this economy presented a rare window of opportunity, because most other airlines are too cash-strapped to buy planes right now. Unlike its larger competitors, AirTran had 2002 profits of $10.7 million and a profit of $2 million in the first quarter of 2003. Delta Air Lines, by comparison, recorded a 2002 net loss of $1.3 billion and a 2003 first quarter loss of $466 million. American Airlines posted a net loss of $3.5 billion in 2002 and a loss of $1.04 billion in the first quarter of this year. And United Airlines had a $3.2 billion loss in 2002 and a loss of $1.3 billion in the first quarter of 2003. Not only is AirTran’s business profitable, the company is cash rich thanks to a convertible notes offering, which closed in May, that raised $125 million. “We wanted to act while … the negotiating environment was favorable to us, in a fashion that reflected our need to complete the negotiations quickly,” Magurno said. Though Magurno said he heard lots of complaining about the negotiation structure from the competitors, he insisted that AirTran get to work on airframe, engine and financing contracts more or less simultaneously, to keep competition lively. As Turner explains it, if the airline had taken the traditional route of negotiating everything separately, “All of the benefits you imagined might be there disappear, or they get clawed back by the [airframe] manufacturer. You’ve lost your bargaining power once one side knows they’ve won.” Magurno said AirTran’s lawyers also edged up bargaining power by delving through Securities and Exchange Commission filings on past Boeing and Airbus deals with other carriers. Those filings tend to be shell documents, later modified by side letters that change their terms, but, said Magurno, “While we don’t know the actual scope or details of anybody else’s purchase contracts … we were able to see what we liked and ask for it. … We could use that not as a chit to be granted, but as form — something they’ve given to somebody else.” AirTran also ratcheted up its leverage by demanding control of the contract documents and drafting them at the hotel. Normally, the manufacturers — in this case, Boeing and Airbus — would control the documents, Magurno said. When the deal finally was signed, on July 3, he recalled, “Boeing was apoplectic over the fact that we were running the documents, and it took them … forever to respond.” But, he explained, it was more a clash over the deal’s unusual procedures than the contract’s substance. Boeing’s general counsel, Chicago-based Douglas G. Bain, could not be reached for comment by press time. The company’s Seattle-based contract negotiator, John McGarvey declined comment on the deal’s structure through a Boeing spokeswoman. BOEING’S ACE IN THE HOLE According to analyst Aboulafia, there aren’t likely to be any long-term consequences from the AirTran methods that made Boeing representatives so angry — even if the market for aircraft purchases goes gangbusters in the future. “The people who are at each other’s throats one minute will be the best of friends the next,” he said. “You make money when you can. … There’s no loyalty in this industry. Loyalty comes from the barrel of a gun and an eight percent equity stake.” Aboulafia is referring to money AirTran owes Boeing. Boeing owns about 8 percent of AirTran’s equity and refinanced part of the airline’s debt in 2000. AirTran would have had to repay about $120 million in debt early if it bought aircraft from another manufacturer. That type of tie must have undercut the competition between Boeing and Airbus, according to Aboulafia. Not so, said Turner. He contended that competition stayed high because Airbus had worked out alternate financing for AirTran if Boeing called its loan. Also, Magurno said, thanks to the note offering, his company could have paid off the Boeing loan if it chose Airbus, and probably refinanced at better rates. “There was always a contest,” Magurno said. That contest ended at about 4:30 p.m. on June 30, when Boeing and AirTran struck a deal. Turner said he remembers closing the deal while sitting in an uncomfortable chair in the Marriott’s brightly carpeted Maple Room after endless cups of coffee. He described the moment as “Euphoria — the feeling of great success after a long, long period.” ‘EXPLOSIVE’ NEGOTIATIONS The days leading up to striking the deal didn’t always go smoothly. The negotiations were so intense, according to Smith Gambrell partner Wells, that with the exception of a fire alarm that evacuated the site briefly, “Some of the team never went outside the building for 12 days.” With two large bidders such as Boeing and Airbus, Turner said, conflict comes because each fears it is not getting equal treatment. “One of the big problems was controlling back-channel negotiations,” he added, explaining that the competitors tried to talk with CEO Leonard directly and offer him benefits if their company won the contract. There were “many attempts” at such sidebar conferences, he said, adding that the competitors would show up at the CEO’s office seeking an audience. “We knew, and the airline knew, that wouldn’t work,” said Turner, adding that Leonard refused to talk to the competitors’ emissaries outside of the negotiations. But the negotiations were intense enough, according to the Smith Gambrell team. “It was explosive at times, no question,” said Turner. “There was theater,” said Ivezaj. “There was some screaming,” said Barlow. Though Turner pointed out that human beings can act with grace under pressure, Wells interrupted him, saying, “Sometimes, grace was working on another deal.”

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