西南航空 (LUV) 2002 Q3 法說會逐字稿

Good day, everyone.

And welcome to today’s AirTran Holdings Incorporated third quarter 2002 earnings release conference call.

Just a reminder, today’s conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Haak;

Director of Investment Relations.

Please go ahead, sir.

Good morning, everyone.

I want to thank you for joining us today for AirTran Holdings third quarter 2002 earnings call.

Joining us today is Joe Leonard, our Chairman and CEO, Bob Fornaro; our President and Chief Operating Officer, and Stan Gadek; our Chief Financial Officer.

Before we begin, I’d like to remind you that many of our comments today are related to our outlook for AirTran’s future earnings revenue and capacity growth, cost estimates, load factors, fleet plans and expectations about our future profitability.

Our comments are not historical facts and instead, you should consider them as time sensitive, forward-looking statements that are accurate only as of October 23, 2002.

These statements are subject to a number of risks that could cause our future results to vary materially from our expectations.

These risks include, but are not limited to general economic conditions, commodity prices, regulatory matters and the competitive environment.

If you would like additional information concerning factors that could cause our actual results to vary from these, in the forward-looking statements they can be found in our form 10-K filings for the year ended December 31, 2001.

Finally, I’d like to remind you that this conference call is the property of AirTran Holdings.

Any redistribution, retransmission or rebroadcast of this call in any form, without the express written consent of the company is strictly prohibited.

At this point I’d like to turn the call over to Stan Gadek, our Chief Financial Officer.

Thank you, Arne, and good morning, everyone.

Today, AirTran Holdings is pleased to announce its second consecutive quarter of profitability following the events of last year.

The current competitive environment has been very challenging from both a revenue and a cost perspective.

Yet, due to the hard work of our employees the benefits from a new aircraft fleet and the growing numbers of loyal AirTran customers, we have, once again, been able to generate profit for our shareholders.

Continuing our strategy of growth during this difficult economic period, AirTran began service to Kansas City and announced new service to West Palm Beach.

In addition, AirTran announced the creation of a new regional jet product called AirTran JetConnect.

This service will commence on November 15th and will initially operate the Greensboro, Savannah and Pensacola with Bombardier CRJ Aircraft.

The creation of AirTran JetConnect will allow us to realize the utility of a smaller aircraft within the framework of a low fare system.

With JetConnect we will be able to protect our short-haul markets by tailoring the aircraft gauge to meet demand.

We will also be able to flow additional traffic over our Atlanta hub, provide better scheduling choices and higher frequencies in small markets and deploy the larger, Boeing 717 to longer haul markets where the demand is stronger.

As a result, the introduction of regional jets will accelerate our overall growth rate.

We are excited about the prospects for JetConnect and the opportunity to brand a new product operating by Air Wisconsin; a highly respected and quality operator of regional jets.

By the end of 2003 we expect to be flying up to 10 CRJs to various cities throughout the AirTran airways route system.

In addition, we are streamlining the check-in process with a new web-based passenger check-in feature at AirTran.com.

This function which will be implemented in the very near future, allows passengers to check-in for their flights, make seat selections, and print boarding passes from the convenience of their home or office.

Web check-in is yet another example of how AirTran is improving customer service and providing greater value to the customer.

It also appears that customer demand for our product is growing, as we see more and more return customers who tell us they fly AirTran.

We attribute this to the pleasant and comfortable experience of flying the new Boeing 717 as well as the improved operating performance, which comes from a new fleet of aircraft.

In addition, our customers tell us that they appreciate the friendliness and courtesy of our cabin, flight and ground staff.

Indeed, we believe that our people make the difference.

And the pride they exhibit comes from knowing that their company is profitable during these turbulent times.

We appreciate the loyalty of our customers and thank them for their continued support.

We also thank our employees for their hard work and dedication to customer service.

AirTran is achieving success, one day at a time.

And as we look forward to the future, we believe that we are building the foundation for continued success and profitability in the quarters to come.

And now I’d like to talk about some of our key metrics.

From an operating standpoint, AirTran ran one of its best operations ever.

Our completion factor was 99 percent.

Our baggage numbers were 3.0 and our percent of on-time arrivals consistently averages 80 percent.

This performance is significant and reflects a sustainable trend of improvement that we are experiencing on an ongoing basis.

Improved operating efficiency translates into improved customer service and lower costs.

During the third quarter, AirTran reported a 28.8 percent year-over-year increase in traffic as measured in revenue passenger miles.

The third quarter of 2001 was adversely affected when the US Air Traffic Control System was shut down for several days in September.

Capacity increased 29.9 percent as a result of the increased numbers of Boeing 717s in the fleet.

And a 4.3 percent increase in average stage length to 573 miles.

During the quarter, AirTran took delivery of five new 717s and retired six DC9s.

Passenger load factor declined less than 1 percentage point, to 66.5 percent, even given a temporary drop-off in demand that airlines experienced this year, during the first half of September.

During the quarter, AirTran served a record number of customers; up nearly 20 percent over the prior year.

Year-to-date, AirTran’s passenger count has increased 10.8 percent, to 7.1 million passengers.

Consistent with the weak revenue environment throughout the industry, AirTran’s yield declined 5.8 percent to 12.5 cents.

Unit revenue, or passenger revenue per seat mile, declined 6.6 percent to 8.3 cents, compared to the third quarter of last year.

Unit cost, or cost per available seat mile, dropped 8.8 percent to 8.2 cents in the third quarter of 2002.

On a sequential basis, unit costs decreased 3.5 percent from 8.5 cents in the second quarter of ’02.

Excluding the effects of fuel, unit costs decreased 8.4 percent to 6.3 cents year-over-year and nearly 6 percent, compared tot he second quarter of 2002.

The reductions in both operating and non-fuel unit costs are significant in that they include substantial increases in the cost of insurance and security that were more than offset by the economic benefits in the Boeing 717 aircraft.

In fact, adjusting for the year-over-year increases to the cost of the new insurance and security requirements, AirTran’s unit cost would have been 6.1 cents, excluding fuel.

Clearly, the reductions in operating expenses throughout the company have been the determining factor in achieving profitability in the third quarter.

Average daily aircraft utilization continue to increase 9.2 percent, to 10.7 hours per day, compared to the third quarter of 2001.

AirTran’s aircraft utilization has been steadily improving because of the greater numbers of Boeing 717 qualified flight crews, which allow us to schedule the aircraft on longer segments.

And now, I would like to talk about our financial performance.

First, I would like to point out that AirTran has been profitable every month since March of this year, with the sole exception of September.

In addition, the third quarter is typically one of our weakest quarters on a seasonal basis, as opposed to the rest of the industry.

For the third quarter of 2002, AirTran earned $1.2 million or 2 cents per diluted share, compared to a loss of 10.6 million or 15 cents per share in ’01.

Included in the third quarter of ’02 net income is a credit of .6 million or a penny a share, representing an adjustment to amounts received under a government grant program.

The third quarter of 2001 included special items of non-recurring charges, net of tax, of 4.5 million or 6 cents per share.

Operating margin for the third quarter 2002 was 3.8 percent before the credit and compares to an operating margin of 1.3 percent in the prior year before adjustments.

Passenger operating revenue was 178 million, compared to 146.8 million, or a 21.2 percent increase over the third quarter of 2001.

Year-to-date passenger revenue was approximately a half a percent higher than passenger revenue for the first nine months of 2001.

Average fairs increased 1 percent, $72.91, quarter-over-quarter and approximately 1.2 percent on a sequential basis.

Looking at the individual line item operating expenses, salaries, wages and benefits increased 34.7 percent to 51.7 million, compared to 38.4 million in the third quarter of 2001.

The increase in the expense results from the greater number of employees hired to operate the additional new aircraft and to staff the new stations.

However, on a unit cost basis, salaries, wages and benefits increased only 3.7 percent year-over-year.

The increase reflects the salary reductions in the third quarter of last year, contractual increases in the current period, and the higher number of staff.

Aircraft fuel expense increased 17 percent over the third quarter of 2001 due to an increase of total fuel usage of 15.6 percent and a .9 percent increase in the cost of fuel.

Fuel burned in the third quarter of 2002 improved to 722 gallons per block hour, compared to 792 gallons per block hour in the third quarter of 2001, and 729 gallons per block hour in the second quarter of this year.

The continued improvement in fuel burn on both a year-over-year and sequential basis reflects the greater fuel efficiency in greater numbers of Boeing 717 aircraft in the fleet.

The savings from the improved fuel burn amounted to approximately $3.9 million in the third quarter and $8.6 million on a year-to-date basis.

Maintenance, materials and repairs decreased 38.1 percent to 9.4 million, compared to 15.3 million in the third quarter of last year.

On a year-to-date basis, maintenance expense decreased from 56.5 million to 35.1 million.

At September 30, 2002, AirTran operated 43 Boeing 717s and 19 DC9s, compared to 25 - 717s and 32 DC9s at September 30th, 2001.

Maintenance cost per block hour in the current quarter was approximately $155 per hour, compared to $319 per hour in the third quarter of last year.

The reduction in maintenance, materials and repairs reflects the increased numbers of Boeing 717 aircraft in the fleet and a reduction in heavy maintenance events due to timing and the fewer number of DC9s.

Distribution expense in the third quarter of 2002 declined 2.1 percent, from 9.9 million to 9.7 million, primarily due to the increased number of Internet bookings and a reduction in travel agency commission.

During the third quarter of 2002, total bookings over the Internet were 53 percent, with 43 percent coming from AirTran.com and 10 percent from third parties.

On a year-to-date basis, distribution expense decreased 9.1 percent, to 32.9 million, compared to 36.2 million in the year earlier period.

With the new functionality of our web-based online check-in, more customers will be attracted to the Internet and our distribution expenses should continue to decline.

Aircraft rent increased over 111 percent during the third quarter of 2002, versus the prior year.

And nearly 113 percent for the year-to-date period compared to 2001.

The increase in aircraft rent was driven entirely by the lease financing for 18 Boeing 717 aircraft, delivered since September of last year.

Aircraft insurance and security services increased over 179 percent for the third quarter of 2002, compared to last year, and almost 162 percent for the year-to-date period, year-over-year.

The increases primarily reflect the higher haul values associated with the new aircraft, increased liability insurance, reflective of the increased number of passengers, the $1.25 war risk insurance premium, and the additional security costs required under the current environment.

The costs for the purely new security and insurance requirements in the third quarter of 2002, were $4.2 million.

Depreciation expense continues to drop, reflecting the retirement of DC9 aircraft.

During the third quarter of 2002, depreciation decreased 38.6 percent to $4 million.

For the year-to-date period, depreciation expense decreased 44.6 percent, to $12.7 million.

We anticipate that all DC9 aircraft will be fully depreciated and retired by the end of 2003.

Other operating expenses decreased 4.8 percent during the third quarter of 2002 and increased 6.4 percent, year-to-date.

On a unit cost basis, other operating expenses declined 27.3 percent to .8 cents in the third quarter and declined 10 percent to .9 cents for the nine months ending September 30th.

The increased dollars of expense resulted from costs associated with the higher numbers of passengers and the costs to maintain the company’s automation systems.

Looking at the balance sheet as of September 30th, 2002, AirTran had total cash of $117.2 million, compared to 109.4 million as of June 30th of this year.

Total debt at September 30th, 2002 was $233.8 million and total shareholders’ equity was $43.2 million.

I would now like to provide some guidance for the current quarter and fleet planning information for 2003.

Available seat miles will continue to grow approximately 30-35 percent during the fourth quarter.

The capacity increases will result from the deliveries of seven additional Boeing 717 aircraft; three of which we’ve already taken in October, offset by the retirement of up to six additional DC9s.

At year-end, AirTran’s fleet will consist of 50 Boeing 717 aircraft and 14 DC9s.

Regarding revenue; we continue to see a weak environment, characterized by low fares and continued excess capacity.

While the recent capacity reductions announced by some of the major carriers will reduce the excess capacity in part, we do not believe it will be sufficient to support significant increases in airfares.

Regardless, AirTran’s low-cost structure will allow it to continue growing, in contrast to industry trends.

For the fourth quarter of 2002 we anticipate that our non-fuel unit costs will range between 6.5 cents and 6.8 cents.

Regarding fuel, we are currently hedged for approximately 40 percent of our needs in the fourth quarter of this year and the first quarter of next year, with fixed forward pricing agreements at an average cost of approximately 72 cents per gallon, delivered.

For the fourth quarter of 2002 we are projecting an average fuel price, full up, of between 90 cents and $1.00 per gallon.

Of course, any adverse developments on the international scene could significantly impact this assumption.

Our income tax rate is projected to remain, essentially, zero for the remainder of the year, based on our projection of full-year pre-tax income and accrued taxes to date.

At this time, we expect to be profitable in the fourth quarter and for the full year.

And finally, we are pleased to announce that we have reached agreement with Boeing for the delivery of 22 used and one new 717 aircraft in fiscal year 2003, for a total of 23 aircraft.

All of the deliveries will be financed through Boeing Capital Corporation.

Included in this agreement are the return of aircraft deposits and restrictions regarding additional debt.

Further details related to this agreement will be provided in our 10-Q filing for the third quarter of 2002.

With these additional aircraft, our current fleet age will drop from approximately 12 years at the current time, to nine years by the end of the year and three years by the end of 2003.

In conclusion, we would like to again thank our loyal customers who continue to support our business model of low fares and quality service.

Today’s competitive environment is about as challenging as it can be.

Yet, we continue to reduce our costs without sacrificing service and have recorded another profitable quarter.

Low costs are AirTran’s competitive advantage.

Low costs allow us to sustain and grow, while other carriers are cutting back.

And low costs will allow us to continue bringing value to our customers and generating profits for our shareholders.

We thank you for your interest in AirTran and at this time I would like to open the call for questions.

Thank you.

The question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touch-tone telephone.

If you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us and will take as many questions as time permits.

Once again, please press star one on your touch-tone telephone to ask a question.

And we’ll pause for just one moment.

And our first question will come from Jim Parker, with Raymond James.

Good morning, guys.

Would you just elaborate a little bit further on the 717s that you have coming next year -- the 22 used and one new.

Are those the American/TWA aircraft?

And what's the capacity growth gonna be in ’03 under this scenario?

Yes, Jim.

The airplanes are coming to us from Boeing and Boeing is completely reconfiguring the former American Airlines aircraft to the AirTran specification at no cost to AirTran.

In addition, we’re getting extension of warranties and other benefits; bridging of maintenance, etcetera.

The capacity growth for next year, we’re projecting currently, to be around 25 percent.

Keep in mind that we’re going to have a larger base of aircraft and we’ll end this year with 50 units and end next year with 73 units and that will be net of the DC9 retirements.

In addition to the maintenance bridging, Boeing is also going to basically zero-time any of the events, including C checks and other items.

So, we’re getting a very fresh aircraft and in some cases, these airplanes are virtually brand new and were never flown.

So, it’s a good deal for AirTran.

Right.

Okay, second question.

You’ve entered into an agreement with Air Wisconsin for them to operate RJs for AirTran and just a little bit of traditional thinking, perhaps, is that low fares in RJs don’t work.

Can you give us a little bit of logic there on how RJ is going to be profitable under your fare structure?

Yes, Jim.

Again, I think it’s a couple of things.

We don’t expect to be operating hundreds of RJs.

And we view it as complimentary and not a major strategic shift.

But, if you look at what’s happened since 9-11; maybe look at any Department of Transportation data, traffic in the 200 mile range and the 400 mile stage on it is down 30/35 percent, depending on how you want to count it.

And so, in our [indecipherable] area around Atlanta, we’ve seen a shift to cars -- the higher taxes have made some of the short-haul prices more expensive because they’re considered head taxes.

So, we want to maintain our presence in the southeast.

And this will help us do that.

It will be very, very complimentary.

And at the same time, I think what we’ve seen in our system is that some of our competitors have added a lot of service in our markets.

This gives us the ability to do the same at very, very low expense.

The one thing we’re sure of, is we can operate an RJ lower than any other airline in the United States.

We’ve got a very low cost.

And with our [whole brand] so low, our costs will be far lower than what any of the current RJ operators can provide.

Okay.

Thanks.

Our next question will come from Brian Harris, with Salomon Smith Barney.

Hi.

I was wondering if you could give some detail regarding geographic performance of your markets when you entered into Milwaukee, I guess last quarter.

How Florida markets, BWI, etcetera are performing.

Yes, Brian.

I think if you look at our system then seasonally, Florida is weaker.

So, again, the third quarter is typically the weakest quarter.

And September, obviously, the very weak month for Florida.

So, typically Florida under-performed in third quarter.

We saw that again this year.

You know, again, the short-haul markets in the southeast really were way down, versus last year.

And again, it’s either customers decided to drive or just not go.

I’m not sure.

But at the same time, we certainly saw the route, the 800 miles, do fairly well.

And we’re fairly strong to the northeast; fairly strong to the Midwest.

Regarding the new services; we entered Milwaukee end of summer.

And we normally see these routes taking about anywhere from six to nine months to get to where we want them.

So, I would say it’s pretty much on track.

I think as we move into the fourth quarter our numbers will get better, because of our route structure to Florida, will be very, very favorable.

So again, at this point, the new routes -- and actually the new routes even in Baltimore actually have done fairly well.

The new routes aren’t really the issue.

Again, some of the historical routes, like again, particularly the short-haul routes are what has pulled down our revenues.

Okay.

And then the maintenance came in a good deal lower than we were anticipating.

You gave some reasons for that, but regarding the timing of heavy maintenance and so forth, which seem particularly light this quarter, can you give some forward run-rate or what to expect for that line item?

Well, Brian.

I think that in the fourth quarter I was guiding 6.5-6.8 cents on unit costs.

As we’re phasing out the DC9, we’re trying to maximize the yield on these aircraft with respect to the maintenance checks.

And while you’d like to run everyone out to its end date, the fact is, we’re going to have to do some maintenance checks on some of these DC9s.

And so we have some timing that fell favorably in the third quarter.

And we’ll probably have some DC9 maintenance events that occur in the fourth quarter.

But going forward, I think that we’re probably going to be around that 6.5-6.8 cent range, although we’d like to improve on that.

One thing, Brian, I’ll add is that Steve Kolsky and his gang have done an excellent job of managing the maintenance life out of these airplanes.

For instance, we don’t believe we’ll ever overhaul another JT8 engine, because they’ve been managing that -- they’ve been working on that for the last year.

Also, cargo doors, landing gears, APUs, all of those components that have value -- it’s about $2.5 million of overhaul value on those components.

And what we’re trying to do as to the extent that we park an airplane-take it out of service-we’ve got all of those components run down to zero.

And they’ve done a real good job of managing that.

Okay, thank you.

Next we’ll hear from James Higgins, with Credit Suisse First Boston.

Yes, hi.

Nice job, guys.

Can you give, maybe a little bit of labor on your RJ costs versus your 717s?

I don’t know if you want to look at it on a plane mile cost or a seat mile cost?

But just try to get a sense.

I mean, I would expect that seat GAAP to be lower than it is with most airlines with airlines; comparable size to comparable size.

But, can you give us a sense of that?

I don’t have the exact number in front of me, Jim, but obviously, from -- again, certain short [holders], low load factor routes, plane miles a driver.

And obviously, the longer the routes; stage length is more relevant.

From a seat miles cost perspective I just don’t really want to guess.

But from a block hour basis, maybe it’s a third lower.

And again, one of the things that some people have made an issue of, AirTran getting RJs.

We found Delta continually puts RJs in our routes.

I’m not sure how well they’re doing.

But, we will be putting RJs in, perhaps, higher fare routes.

We can enter a route that’s got $300 fares.

And that creates an opportunity for us to really expand our base.

So, I think it gives us a much better opportunity from our position.

Great.

And, excuse me, the new state of Georgia?

I don’t know if it’s an account, per se, but your designation as a preferred carrier, is that a meaningful deal for you?

It’s not really gonna move the needle, I guess.

It’s maybe $750 to $1 million a year.

Probably some of it we are already getting.

But, I think it’s definitely [indecipherable].

Because, where there’s choice, we come up a winner a lot.

And one of the good news is that the state of Georgia doesn’t pay overrides and other things.

So, when it’s fair play, we tend to come out on top, quite a bit.

Very good.

Thank you very much.

Next we’ll hear from Bill Green, with Morgan Stanley.

Yes, hi guys.

Congratulations on your profit.

When you think kind of big picture, looking at your chasm, you’ve had a phenomenal performance this year.

How low do you think it can go?

Could you actually, possibly get below 6 cents chasm ex fuel?

Probably not.

The biggest driver in the ex fuel chasm is ownership.

In our case, it’s aircraft rent.

And by far, the majority of our 717 aircraft will be lease financed and that will drive aircraft rent, which will in turn, drive chasm.

So, that wouldn’t be offset by the maintenance savings and the fuel savings?

I think you’ll see maintenance continue to come down a bit and the other thing is, as we put the RJs in some of these short-haul routes, what we intend to do is put the 717s in longer-haul routes.

So, we should see some cost reductions based on stage length.

And we should see some cost reductions based -- we believe we can get more hours per day out of the airplanes than we’re getting.

With scheduled airplanes right now we’re getting about 11-1.

We think we can get that up to about 11-3 pretty easily.

And then later on, get it up to 11-5 as we go further west.

This is actually one area that I would add, again, ignoring the Atlanta operation where we have about 150 departures.

Last August we had 5.5 flights per city and this October we have 6.2.

There’s a lot of opportunity for us to grow that number.

And again, in most of these stations, we could add one, two and three flights with virtually no additional staff, no additional ground equipment.

The only issue is additional landing fees.

So, that’s actually an area that we’re focused on.

Again, we’d like to fly two or three different city fares out of every city we serve.

And we’re beginning to do that.

So, in other words, you mean you’re going to start connecting more of the dots, rather than to and from the hub?

Well, yes.

Again, I think we have opportunities, again, like that.

I think an example; the city of Rochester.

We went in; we have five departures, but we’re going to six.

We had three to Baltimore, two to Atlanta and one to Orlando.

And we can see other cities where we will be doing the same kind of patterns of service.

Great.

Thank you very much.

I’d like to remind everyone that if you do have a question, please press star one.

And we’ll take our next question from Ray Neidle, with Laylock.

Yes, Stan, for the end of 2003, what did you say that the average age of the fleet’s going to be?

Was that seven years?

Three years.

Three years.

Wow, great.

And did you give a CapEx estimate for fourth quarter and for next year?

No, I didn’t.

I would say for the quarter we’re probably looking at about $2-3 million that we’ll develop in our capital plan for next year.

We’ll have further guidance in the next conference call.

Okay, good.

And basically, you’re getting your unit costs down.

That’s fantastic.

You’re doing very well in your little corner of the world.

I mean, how is AirTran, do you think, being successful, versus the big guys, which are losing record amounts of money?

Is it simply because you’re a low cost carrier?

Or are you doing something else that they should be looking at to imitate you?

I think what we’ve done is we’ve been very patient in getting our airline positioned for rapid growth.

As you remember, Ray, we didn’t grow at all in ’99 or 2000.

We wanted to make sure we got our operational and financial act together -- and we did.

We are running a really good airline right now.

In fact, our completion factor and bag numbers are industry -- right at the top of the industry.

Arrivals are above industry averages and frequently up at the high end of the industry.

We are getting far more repeat customers than we used to get.

We are the carrier of choice by a lot of people.

Every single flight that I’ve been on in the last six months, I’ve had people come up to me and say, I used to fly the other guys and now I fly -- you are my carrier of choice.

I think our people are far more friendly than you’ll find on any other airline.

They really -- Captains and flight attendants bend over backwards to help people out when things go awry.

And so, I think we’ve got just the basics in place and I think when the ships start rising, we are in a much better position right now than we were this time last year to rise faster than the rest of the industry.

And I think we’re feeling pretty good about that.

So, I think it’s a whole bunch of things that are coming together all at the same time.

Obviously, the 717s are just a huge addition to our company.

The customers love them.

Pilots love them.

And we’ve not got enough pilots to fly them efficiently.

And so, I think it’s all those things coming together at the right time and we obviously, feel pretty good about the future.

Is the carrier anticipating maybe going to a second fleet type as you continue to expand this rapidly?

We don’t want to.

I can tell you that.

We would much prefer to have Boeing build a 717-300.

We have, in fact, gotten a quote to put long-range fuel tanks in the 717 that will permit that airplane to make the West Coast out of Atlanta.

We’re not sure that we’re going to do that yet.

But, it’s hard to pin Boeing down on what they’re going to do with the airplane.

So, one of the things -- we’re obviously, looking at alternatives in the event that we decide to go that way.

But right now, our choice is to fly 717s.

And by October of next year, we’ll have a single fleet type, single pilot type, which really adds to the efficiency of not having to cross-train pilots.

But, we’re looking at other options as well just as an alternative.

Okay.

And finally, how’s Delta treating you?

Are they being nice to you now?

Or are they still trying to beat you up?

Well, I think that’s one of the reasons we are so confident right now and feel so good.

We really are pretty pumped around here.

And it’s because Delta is doing everything they can possibly do to drive us out of business and they’re losing $325 million a quarter and we’re making money.

And with the RJs, we’ve got another offensive weapon that we can apply to them.

And so, they are applying maximum pressure and we’re still profitable at the bottom line.

What do you think they’re trying to do with putting in more direct flights from the northeast to Florida?

Is that going to have any effect on your operation at all or is that something that’s separate?

Ray, just to really even go back and just to add something to what Joe says first.

Again, a year ago we had six or seven monopoly cities of routes and Delta has gone into each one.

Good news is, they can’t hit us anymore.

So, there’s no more routes; there’s no more threats.

You know, regarding some of these other new operations, 757s.

If you look at some of our biggest routes -- let’s say Atlanta or Orlando, almost all of their seats -- 95 percent of their seats are 767, 777 or MD11s.

You go through our biggest markets -- they all have very, very big planes.

So at this point, you’re obviously always concerned about what your competitors do, but as far as I’m concerned -- they matched all the prices.

I don’t see how all-cost units is going to be very effective against us.

I think I’d rather compete with a low-cost unit than with a traditional service.

Because they matched all the prices.

There’s very little revenue management.

And again, typically, wherever we add service, they tend to add service.

So, we feel -- and I’ve seen all these things over the last two years.

And again, we feel good about the fact that in probably the worst 12 month period in the history of aviation, we’re standing stronger today than we were a year ago.

Okay.

Well, great.

Good job guys.

Next we’ll hear from Sam Buttrick, with UBS Warburg.

Good morning.

It appears increasingly likely that the TSA, perhaps within the next six months or so, may require an actual boarding pass or authority for a passenger to clear security for various reasons.

You mentioned your web-based check in program.

I don’t recall you being particularly evolved in the airport kiosk department.

Where are you there and what are your plans there?

Well, the same technology that we will use on the web-based -- that is required for us to then go to kiosk.

And we have kiosk design in work.

So, we now have the information technology to do that.

So, the second phase of that will be to rollout kiosks at our airport, using the same IS technology.

What’s the timetable for that, Joe?

I don’t know.

I just don’t know.

I mean, it’s not high on the priority list.

We wanted to get this web-based thing going first.

Because, as you know, Sam, we sell a lot of tickets on the internet and we think to the extent that we can get people using the check-in, they’ll be more inclined to buy the tickets on the internet as well.

So, that’s been our primary focus.

Well, I understand.

But, obviously, the reason that I ask is that if in fact, passengers are required to have a boarding pass to clear security, if you don’t have a kiosk and if a passenger hasn’t printed-out a pass on the web, then your forcing him to interact -- him or her, to stand in line and that’s what we all try to avoid.

Yes.

We’ll be ready when that requirement is a requirement.

I mean, we’ve been working on the kiosk design for quite a while.

So, it’s something that we could turn on fairly quickly.

Okay.

Thank you.

Our next question will come from Brian Harris, with Salomon Smith Barney.

Hi.

I’ve just got a conceptual question here.

Some of the newer low-cost carriers prefer to grow by adding frequencies.

Others tend to have lower frequency and more destinations.

Do you guys have a strategy on that?

And how have your average frequencies per day changed over the last year?

And then, related to that, would the increase in RJs change that?

Brian, I think I mentioned before, our average flights per station -- again, taking the [OITA] out of there, has gone up about 10 percent.

But yes, we would like to see 10 percent to about 6.2 flights a day.

And we’d like to see that at eight or nine, to be honest with you.

That’s where we would like to go.

In terms of the strategy, to some degree, you’ve got to play the hand that you were dealt.

And when we joined our company, again, most of us at [FreeNew] management team, we had a pretty big operation in Atlanta.

And I think in the long run that will serve us very, very well.

Initially, we had planned to be diversifying at a faster rate at this point in time.

But again, we found that with Delta pretty much going into some of our very small cities, we felt that we’re going to grow Atlanta a little bit more to make it stronger.

We believe Atlanta needs to be a little bit stronger than we believed, perhaps, two years ago.

So, we’re getting some additional gates.

We’re going to have more airplanes on the ground than we had.

So again, the game plan is we’re going to be able to put a lot of through-put through Atlanta.

So, if we get a lot of competition in the local markets, we’re going to be able to offset that with connecting business.

And that’s what we’ve been able to do this year.

So again, historically, again, we’ll only get bigger as a result of the competitive activity that we faced.

What’s your connectivity right now and what was that a year ago?

Well, it used to be about 50/50, it’s probably about 58/59 percent right now, connected.

I think that because the Atlanta economy is a little bit weak and the short-haul impact is a little bit stronger in Atlanta, rather than on the through business.

Alright.

Thanks very much and congratulations on the quarter.

Our next question comes from Michael Linenburg, with Merrill Lynch.

Hey.

Good morning, gentlemen.

Nice quarter.

I have two quick questions here.

First, I think, Stan, you talked about the 717 aircraft coming in next year, that that would free up some aircraft purchase deposits with Boeing.

How much cash should we expect coming back into the till next year?

In the fourth quarter of this year, we’ll be receiving anywhere from $15-20 million.

And in the first quarter of next year, we’ll receive approximately another $5 million.

We also had some outstanding items with Boeing, in terms of spare parts, that have been cleaned-up as well.

I would say net cash, about $25 million [indecipherable] into liquidity here.

Okay.

And then secondly, and maybe this is a question for Bob.

I know earlier this year you did make some changes to your fare structure and in fact, I think you lowered your highest walk-up.

And I was curious, given the environment, what you’ve seen, maybe as a result of that.

And maybe more importantly, with the price-sensitive business traveler, maybe taking their business from your competition and flying you guys -- what you’ve seen on the mix side?

Mike, it’s kind of hard to see all this, because we used to focus on tickets purchased within seven days as a proxy for a business customer.

And now, we think patterns are changing a little bit.

So, traditional measures are losing a little bit of traction here.

When we reduced the fares, we thought it was a good idea.

We also expected a little bit higher demand, going into the second quarter.

Second quarter -- months like May and June, I think were very weak from a business perspective.

It really is hard to tell whether it was a good idea or a bad idea or whether it had any impact or not.

Because there’s so many different factors, you know, again, that are going on here.

It really is hard to tell.

Because I don’t know how much the underlying demand has softened in the industry.

Again, having said that, I think -- although I don’t think there’s great opportunities to raise prices, there is opportunity that certain markets will take a few dollars here and there.

And I would also say if we really believed fuel prices would go up, I think there’s the opportunity for fuel surcharges as well.

I don’t see us sitting around and watching the cost go through the roof without doing anything.

This time around we have the capability in our [IAS] systems to do fuel charges if that was the path that we needed to go.

You know, it’s really very, very judgmental.

It really is hard to tell right now.

My own feeling is that the industry would probably be better with a little bit lower load factors.

Because I think we’re competing away, collectively, some revenue.

But, I think there will be some opportunity in the next six months to raise some fares.

Bob, is there anything that you can do on the technology front, that may be capabilities that you have in place today -- where you can mind the data of your frequent travelers; people who may be part of your frequent flyer plan and track their travel trends?

Actually, if you look at our frequent flyer program and if you followed us, you would see that we have the customers collect the coupons.

We do not have an automated frequent flyer program.

However, some time within the next 60 days we will rollout that frequent flyer program, which we think is going to be very positive for us.

It’s going to be very, very enhanced.

So, we do not have some of the data as some of the competition has.

Again, we know something about our customers, but no where near to the same degree as you might experience at other airlines.

So, once again, in about two months, it will be a dramatic change for us.

So, I can give you a better answer, probably, three months from now.

Okay.

Sounds good.

Thank you very much.

Next we’ll hear from Herb Connor, with Connor Capital Management.

Good morning.

Congratulations, fellows, on a sensational quarter in light of your industry.

I sense, based on a question that was asked, that the attitudes at AirTran is changing to a degree.

I listened to many of your conference calls and we were always in a defensive position, reference Delta.

Can we expect that you’re going to become more aggressive, reference scheduling, pricing and promotional material?

A little bit of a swagger, Joe, as opposed to ducking?

Yes.

I think you’ve already seen some of it, Herb.

I mean clearly, the RJ program is both a defensive weapon, but also an offensive weapon.

We will be putting those airplanes in some markets that have very high fares.

In all likelihood, I think the East-West flow, trying to balance-out our system is very aggressive.

I mean the fact that we’ve opened, what is it, seven cities now in 22 markets since 9-11, says we’re on the attack rather than while everybody else is sort of retrenching.

We talked a few minutes about lowering our walk-up fare.

Part of our thinking behind that was we were making it too easy for Delta to match us.

So, take it down and cause some more pain there.

So, yes.

We have a much different attitude than we did 12 months ago and our employees -- you can certainly see it in our employees.

They are pumped.

Morale is extraordinarily high.

A lot of the pilots, for instance, that had opportunities to go to other airlines and didn’t go, are feeling pretty good now, because their friends that did are all on the street.

So, I think all in all, our employees feel very much like winners and you see it in their faces, you see it in their attitudes and you see it in their performance.

And you see it in the airline’s performance.

Thank you.

Thank you so much.

As a final reminder, that is star one if you do have a question.

And we’ll pause for just a moment.

Why don’t we take two or three more and wrap it up, Operator.

Okay.

Our next question will come from Will Wrightson, with Wellington Management.

Just a couple of quick revenue questions.

Could you talk about how your yield management systems work and whether they could be upgraded at some point?

And also, kind of on the same topic, one yield enhancement tool is obviously the up-sell to business class.

I was wondering if you could talk about whether you’re becoming more aggressive, kind of, at the counter as people check in, trying to get folks to upgrade to business and what the load factor in business is?

Well, just a couple of areas.

I think revenue management system, yes, we have the system.

We’re actually going to be adding a couple of people, which I think if the system works -- It’s gotten more complicated.

What I’ve seen is the competition doesn’t want to sell up.

Frequently, we try to close our lower [buckets] and sell up and the competition does not.

I see that very, very often.

Because the industry is too load factor conscious in my opinion.

So, I think there’s actually some opportunity there.

But, we don’t like being in the position of selling our fares higher than the competition, which as you may know, sometimes happens.

We’re not always the one who is leading the prices down.

Regarding the business class -- the business class has stabilized really in the mid 60s area.

Although we have created some incentives with our employees and we just launched them in the last couple of weeks.

And that’s really beginning to work really quite well.

Our goal would be to run it at about a 70 percent load factor.

And we think we can probably get there in about five or six months.

And somebody just pointed out, from a price standpoint, we did raise the price from a $25 upgrade to $35.

And we have not lost any traffic at all.

So, that’s been a positive.

Alright.

Thanks.

It appears there are no further questions at this time.

I’d like to turn the conference back over to you for any additional or closing remarks.

Okay, thank you, Vicky.

Just briefly, we’re very proud of our employees.

We obviously wish that our profit were 10 cents a share rather than 2 cents a share, but being in the black two consecutive quarters in this environment, which is the worst I’ve seen in 35 years -- far worse than the Gulf War -- with the industry losing $7 billion, is quite an accomplishment.

So, I do believe that we’re getting a lot more repeat customers.

I believe that we are the carrier of choice more and more.

And we’re very confident about being profitable in the fourth quarter, assuming there’s no war action.

And we’re very confident about being profitable for the year.

And we think we can hook three consecutive quarters here, by December 31st.

And look forward to the challenges in 2003.

So, with that, thank you very much for attending the conference this morning.

Vicky, thank you for your help.

And that concludes today’s teleconference.

Thank you and have a great day.