西南航空 (LUV) 2002 Q4 法說會逐字稿

Good day, everyone.

And welcome to today’s AirTran Holdings, Incorporated fourth 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. Arne Haak;

Director of Investor Relations.

Please go ahead, sir.

Good morning, everyone.

I want to thank you for joining us today for AirTran Holding’s fourth 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 would like to remind you that many of our comments today are related to our outlook for AirTran’s future earnings, revenue capacity growth, cost estimates, load factors, fleet plans and expectations about 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 January 28, 2003.

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 results to vary from those in the forward-looking statement, it can be found in our form 10-K filing 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 net income for the fourth quarter in the full year of 2002.

As in the previous quarters of this year, the competitive marketplace remains challenging.

However, we believe that the worst is now behind us.

Throughout this period, AirTran has continued to grow by entering new markets and taking delivery of aircraft.

This strategy has proven successful as we have gained market share and improved profitability during a time when the higher cost carriers are reducing service.

We believe AirTran’s success comes from offering low fares with great service.

Today’s customers want value and they are avoiding the high-ticket prices of the old-line carriers.

Yet, we believe that a customer deserves the best service we can provide; regardless of the price of their ticket.

AirTran can offer low fares, because we keep our costs low.

And at AirTran, we provide better service, because everyone on the team is motivated by the knowledge that our company is growing, thriving and earning money during the worst downturn in aviation history.

AirTran is a low fare airline with a difference.

We not only offer the low fares that customers want, we offer a superior product and great customer service.

We believe our 2002 financial performance demonstrates this and we look forward to serving our customers throughout 2003.

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

During the fourth quarter, AirTran’s operating performance continued to improve in all areas.

Our completion factor was 98.9 percent.

Our baggage numbers were 3.1 claims per 1000 passengers and our on-time arrivals averaged 75.4 percent.

Throughout the year, our operational performance has steadily improved as we retired DC9 aircraft and introduced additional new Boeing 717 aircraft into the system.

At year-end 2002, our fleet consisted of 50 - 717s and 15 DC9s.

During 2003, we will continue to take an additional 23 - 717s and will have retired all remaining DC9s by October.

By the end of this week, we will have added three additional 717 aircraft since the first of the year, bringing the total 717 fleet to 53 aircraft.

During the fourth quarter of 2002, AirTran reported a 39.3 percent increase in capacity, as measured in available seat miles, that was driven by the increased numbers of aircraft, as well as a 7.9 percent increase in average stage length of 582 miles.

Traffic or revenue passenger miles increased 44.6 percent, resulting in a load factor of 66.2 percent, or an improvement of 2.4 percentage points over the fourth quarter of ’01.

While traffic in the prior year was impacted by industry conditions, the year-over-year improvement in load factor is significant, given that we added seven Boeing 717s, while retiring four DC9s.

Load factor for the full year declined slightly by 1.3 points to 67.6 percent.

Passenger yield increased 2.3 percent in the fourth quarter of ’02, aided by strong performance over the Thanksgiving and Christmas holidays.

When combined with the changes in load factor, fourth quarter unit revenue improved 6.3 percent to 8.8 cents.

Unit revenue for the full year declined to 8.6 cents.

During the quarter, AirTran served a record number of customers, up over 35 percent, compared to the prior year.

On a full-year basis, AirTran served 9.7 million customers; another all-time record, resulting in an increase of 16.3 percent over ’01.

Unit costs, or operating cost per available seat mile declined 4.8 percent, to 8.4 cents for the fourth quarter and 8.8 percent, to 8.5 cents for the full year.

While the average cost of fuel was down by approximately 3.5 cents per gallon for the full year, the cost of fuel in the fourth quarter of ’02 was 6.8 cents per gallon higher than in the fourth quarter of ’01.

The improvement in unit costs clearly demonstrate the benefits of the new Boeing 717 aircraft.

However, it is important to note that cost savings were achieved in all areas of the company through the efforts of everyone at AirTran to keep our cost structure low.

Our success in reducing total costs is even more remarkable, given the fact that all of our 2002 aircraft deliveries were lease-financed, resulting in increased aircraft rent expense.

Average daily aircraft utilization increased 18.7 percent to 10.8 hours in the fourth quarter and 7.8 percent to 10.7 hours for the full year.

As in prior quarters, AirTran’s daily utilization continues to improve, because of the greater numbers of 717 qualified flight crews, which allows us to operate the aircraft on our longer stage lengths.

We expect continued improvement in our daily utilization for 2003 and anticipate that we will exceed 11 hours per day for the full year.

And now I’d like to discuss our financial performance.

For the fourth quarter of ’02, AirTran earned 7.5 million or 10 cents per diluted share, compared to a loss of 14.2 million or 20 cents per share in the fourth quarter of ’01.

Included in the fourth quarter ’01 results was an adjustment of 1.3 million or 2 cents per share, representing a reduction to payments received under the government grant program.

There were no special adjustments in the fourth quarter of ’02.

For the full year, 2002, AirTran earned 10.7 million or 15 cents per diluted share, compared to a profit of 21.7 million for 2001, excluding one-time adjustments related to 9-11 and accumulative effects of the change in accounting principle.

Including all adjustments for 2001, AirTran reported a net loss of 2.8 million or 4 cents per share.

Included in our full year 2002 earnings is a credit adjustment for $600,000, related to a final payment in the first quarter of this year for the government grant program.

Operating margins for the fourth quarter and full year of ’02 were 7.2 percent and 4.2 percent respectively.

Passenger revenue for the fourth quarter increased 48.1 percent to 194.3 million, compared to 131.3 million in the year earlier period.

Full year 2002 passenger revenue increased to 713.7 million from 648.5 million in ’01, or 10.1 percent.

The average passenger fare increased 9.4 percent to $77.45 in the fourth quarter, helped by the strength of our holiday performance, while showing a decline of 5.4 percent to $73.93 for the full year.

The year-over-year reduction in average fares reflects the change in mix of our flown revenue.

Looking at the individual expense line items; salaries, wages and benefits increased 39.5 percent for the quarter and 27.9 percent for the full year, on a year-over-year basis.

The increases resulted from flight crews and ground staff hired to operate and support the additional aircraft and new stations.

Also reflected, our contractual wage increases and increases in the costs of benefits.

As a footnote, AirTran does not have any defined benefit retirement plans that would give rise to an adjustment for under-funded pension liability.

Aircraft fuel expense increased 36.5 percent in the fourth quarter and 10.8 percent for 2002, on a year-over-year comparison.

Our fourth quarter fuel price averaged 92.5 cents, versus 85.9 cents on a 27.7 percent increase in usage.

For the full year, 2002, fuel prices averaged 90.4 cents, versus 93.9 cents and an increase in consumption of 15.3 percent.

Fuel burned per block hour declined 7.1 percent in the fourth quarter and 7.0 percent for the full year, 2002, due to the greater numbers of new aircraft and the retirement of the DC9s.

The improvement in fuel burn rate generated a savings to fuel expense of $3.1 million for the quarter and $11.8 million for the full year.

Maintenance, materials and repairs expense was essentially flat in the fourth quarter, compared to last year.

However, on a cost per block hour basis, maintenance declined from $267 to $195 per block hour.

For the full year, maintenance expense declined 31.1 percent year-over-year and on a block hour basis, from $360 to $200 per block hour.

The significant improvement in maintenance costs primarily reflects the retirement of the DC9 aircraft.

In addition, we have entered into a number of power-by-the-hour agreements, with additional vendors on the 717, which should stabilize maintenance costs going forward.

Distribution expense in the fourth quarter of ’02 increased approximately $1 million year-over-year, but declined on a full-year basis by 5 percent or $2.3 million due to the elimination of base commissions in the second quarter of ’02.

Total Internet bookings in the fourth quarter of this year were 56 percent, compared to 54 percent in the fourth quarter of ’01.

During the fourth quarter of ’02, AirTran implemented web-based check in and will soon roll out a web based frequent flyer program.

We believe that both of these enhancements will attract additional customers to AirTran.com.

Aircraft rent expense increased 91.2 percent to 22.9 million in the fourth quarter and 105.6 percent to $72.7 million for the full year.

The increase in aircraft rent was driven entirely by the lease financing for the 20 additional 717 aircraft delivered during ’02.

Aircraft insurance and security services increased 80 percent in the fourth quarter to 7.5 million and 134.4 percent, to 29.3 million for the full year of ’02.

The increases reflect the higher hull values associated with the new 717s, increased liability insurance due to the higher passenger counts, the $1.25 war risk insurance premium, and the additional security costs required in the current environment.

Depreciation expense declined 17.1 percent to 4.4 million in the fourth quarter and 39.4 percent to 17.1 million for the full year.

The reduction in depreciation expense for the quarter and the year reflects the ongoing retirement of the DC9 aircraft.

All remaining DC9s will be fully depreciated and retired by October of this year.

Other operating expenses increased 10.7 percent to 17.1 million, compared to the fourth quarter of 2001, and 7.4 percent to 72.2 million for the full year.

The increases were primarily driven by costs associated with the record numbers of passengers as well as costs related to the maintenance of the company’s automation systems.

On a unit cost basis, fourth quarter other operating expenses declined from 1.0 cents to 0.8 cents, and for the full year, from 1.0 cents to 0.9 cents.

Looking at the balance sheet at December 31, 2002, AirTran finished the year with total cash of $138.3 million, compared to 130 million at December 31 of ’01.

Now, the year earlier ending cash balance included approximately $16 million in deferred federal transportation taxes, which were paid in January of ’02.

AirTran did not have any deferred taxes due in January of ’03.

Unlike other airlines, AirTran’s balance sheet continued to improve, as we finished the year with approximately $22.1 million of positive working capital, compared to negative working capital in the year earlier period.

Total long-term debt at December 31 of ’02 was $199.7 million, compared to $254.8 million at December 31 of ’01.

And finally, total shareholder’s equity increased from 33.4 million to 51.9 million at the end of the year.

I would now like to provide some guidance for 2003.

ASM growth in 2003, excluding RJs will be approximately 22 percent, as we take delivery of 23 additional 717s and retire the remaining DC9 aircraft.

ASM growth by quarter is projected to be 29 percent, 19 percent, 20 percent, and 21 percent.

We are estimating the price of fuel to be in a range of between 85 cents and 90 cents per gallon, including all taxes and fees, assuming that there are no adverse international developments.

Our fuel hedge positions for 2003 consist of approximately 60 percent of our needs in the first quarter at 86 cents a gallon, all in; 45 percent in the second quarter; 35 percent in the third; and 20 percent in the fourth quarter.

The second, third and fourth quarters have a price of 82 cents per gallon, all in.

Aircraft insurance and security costs are projected to decline approximately 8-10 percent due to lower insurance renewal rates, offset by increased numbers of passengers.

Unit costs are projected to improve an additional 2-3 percent, assuming no changes to our fuel cost guidance.

Non-aircraft capital expenditures for 2003 is projected to be approximately $20 million.

And the effective tax rate for 2003 is estimated to be approximately 10-15 percent.

In conclusion, we would like to thank our customers for their support and their business.

We believe that the worst is behind us and the opportunities for AirTran are greater now than they have ever been.

The industry is undergoing a fundamental change that favors those airlines which are efficient and have the cost structure to grow profitably.

AirTran is unique, because we offer low fares, great service, and a superior product.

We believe the proof of this statement lies in the growing numbers of repeat customers who fly AirTran everyday.

We are excited about our future.

We believe that we can succeed in this environment and we look forward to a prosperous and profitable 2003.

We thank you for your interest in AirTran and we would now like to open the call for questions.

Thank you, gentlemen.

The question and answer session will be conducted electronically.

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

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

You are asked to please limit your queue time to one question and one follow-up.

If you have additional questions, please re-queue to allow everyone an opportunity to pose their questions.

We’ll pause just a moment to assemble our roster.

We’ll begin with Jim Parker, from Raymond James.

Good morning, guys.

Joe, would y’all talk about the yield improvement.

Look pretty good relative to what we were looking for?

And was that just the holiday traffic or did we see it smoothed over the quarter?

How did that progress?

Jim, Bob speaking.

I think, again, the yields have been, I guess, strengthening really for, basically, every month in the quarter and we’re beginning to see improvement.

And again, we had a good December.

And we also had quite a strong November as well.

So certainly, what we’ve seen is the sale fares are a couple of dollars higher than they were a year ago, which really is important.

The mix is improving, but you know, business travelers are paying less than they were two years ago.

But we think the mix is improving.

And again, we’re making sure the sale fares are several dollars higher than they were.

We’re making very conscious efforts to boost the fares $2 to $3 to $4.

And that makes a difference to us on our overall revenues.

Yes.

Bob, so how’s it progressing here, looking out into the first quarter?

From a booking perspective, we’re looking at the best bookings for AirTran that we’ve seen in 18 months.

And again, we’ve seen trends improving since late summer.

Again, they obviously had nice improvements in the fourth quarter.

And it looks like the first three or four months look very strong – obviously, very strong, versus last year.

I think we’re going to be helped by a late Easter next year.

Great.

Sounds good.

Thanks.

Moving on, we’ll hear from Michael Linenberg, with Merrill Lynch.

Yes, hi.

Good morning.

I guess two quick questions here.

You talked about, you know, lots of opportunities as you look out into the future and you gave us the capacity numbers.

If we were to break that down and looked at, you know, how does that split between new opportunities in Atlanta that you’re planning for ’03, versus markets outside of Atlanta, and should we see several new cities, or is it going to be more connecting the dots of your current system?

I think you’ll see a number of things.

We’ll continue to strengthen the Atlanta hub.

We’ve added a lot of cities.

We’ve added six cities last year.

Most recent was Denver.

We’ll probably add a couple more cities this year.

But, you’ll see strengthening of Atlanta.

You’ll see a lot more connecting of the current dots and you’ll see us moving toward more of an East/West flow;

Denver, Wichita, Kansas City, all meet that strategy.

And the reason to try and do that is to get more balance between the second and fourth quarters and the third quarter.

We dipped pretty significantly in the third quarter, unlike most of the other airlines and we’re working this year to start strengthening that.

Okay.

And Joe, you know, on your point about strengthening or enhancing your East/West flow, correct me if I’m wrong, but I think the 717s, the range may top out, maybe, around Denver.

Does this at all accelerate your move to consider maybe another aircraft type that has longer legs?

Well, we need to look at another aircraft type in any event.

The order that we have with Boeing, for 717 is coming, more or less, to an end.

But we still have some options, but they’re not in big numbers.

And we believe it’s important to continue our growth.

So, we’ve started discussions with both Boeing and Airbus.

We’ve talked to Boeing about 717 - 200s and 300s; assuming they would build a 300.

And we’ve talked to Boeing about 737 - 700s.

And we talked to Airbus about A319s.

Those conversations are preliminary.

We’ve just started in earnst.

But, we think, based on all the preliminary conversations we’ve had with the manufacturers and leasing companies, that this is an exceptionally good time to be buying airplanes.

In addition, we have a proposal from Boeing to put long-range tanks in the 717.

With four tanks, we can make LA and other points to the West with that airplane.

It’s not an ideal situation, but it is certainly something we could fall back on if we chose to do that.

We haven’t made a decision to do that yet, but we do have the proposal.

Okay.

Thank you.

Nice quarter.

Glen [Ingle], from Goldman Sachs, has our next question.

Morning.

It’s nice to listen to a call and not be depressed.

Congratulations.

And I guess, can you go through business mix.

I think at one point you were close to 60 percent of revenues.

I thought that bottom below 50.

Is that part of what drove the yields in the fourth quarter?

And where are you right now?

Yes, Glen.

You know, everyday gets harder and harder and harder to tell what that mix is.

But, it appears to be about, you know, business customers somewhere in the 44-45 percent range with the revenue being in the low 50s.

But, you know, two years ago it was much easier to tell really what those trends were.

But again, generally speaking, we think we’re carrying more business customers and they appear to be coming from the larger carriers.

The large carriers have done a lot of things over the last six months to poke their best customers in the eye.

They’re making it hard to change flights.

They’re making it harder for their frequent flyers to upgrade.

They’re basically gouging the customers, really at the margins.

And we’re seeing a lot of pushback.

And we have an advantage of, again, not doing that.

The last thing is, larger carriers gave away a lot of things in 2002; points, double miles, triple miles, to get customers.

What’s going to happen in ’03 is those customers are going to call for free seats and they’re not going to get what they want and they’re going to create even more frustration.

So, the not-positive things like that, if we just stick to our [knitting] [ph], then we think we’re going to see, you know, upward improvement in the business numbers.

You mentioned that you were raising the leisure sale fares up a couple of dollars.

Have the business fares stabilized yet and turned up or is that still weak?

Well, we took, I guess a couple of months ago, a $5 increase and we can raise fares anytime, generally.

When you have the lowest fares in the market, you generally know the competition will follow you.

But, one of our goals is to make sure there’s a lot of travel.

And we want to see these markets grow.

We want to see these markets robust.

And we’re comfortable with the fares where they are.

And if you go back about from the first half of 2001, our costs are down about 12 percent since June of 2001.

So we have really positioned ourselves to really stay in this mode here.

We’re keeping reasonable prices, with low costs.

And we think the competition--they can’t say here, unless they want to completely erode their balance sheets.

So we think it’s very favorable for us.

And we’re not really in favor of large price increases.

If fuel gets higher, we can always step up with surcharges.

And if it gets out of hand, we will step up with surcharges.

Can I assume that in the fourth quarter then that Delta pretty much made your pricing umbrella non-existent?

Well, yes, if you look in the marketplace, again, going on for about two years now, Delta and others have been basically matching all the fares on an unrestricted basis.

And I could also say that they’re fairly loose with their inventories.

I don’t like to admit this.

They undersell us a lot, which we don’t like.

But a lot of times, the high fare carriers do not restrict their buckets.

And, again, at some point, they’ve got to have cost to manage that way.

Thank you.

Thanks, Glen.

Credit Suisse First Boston’s Jim Higgins has our next question.

Yes, hi.

If you look at revenues, any observations on regional intra-East Coast versus East Coast to outside, to the extent that you do that?

Jim, I guess one of the things that we’re seeing, and we’ve seen it for about a year, is that in the real short haul, under 500 miles, has been hit hard.

It’s still pretty weak.

And I think that’s everywhere throughout the country, and certainly a big factor in the Southeast.

You’ve seen very little impact in the 1,000-mile range.

In fact, for us, the 1,000-mile area has gotten better, because some carriers have withdrawn.

Right.

9/11 is creating opportunities.

What we’ve done is that when we finished the year, the last quarter, our stage only was about 595 miles, which is up about 50 miles from the previous year, because we think that the masses fly slightly longer stages, because the 200-mile segments are not going to be as good going forward as they were two or three years ago.

We also started our small commuter operation to stay in some of the markets that got hit pretty hard, Savannah/Tallahassee.

And we’re actually carrying more passengers now on the commuters than we were with the 717s in those markets.

How is that going relative to your expectations?

And what can you share in terms of your expected growth in that piece of the business?

I think, again, we have an agreement with [Aerostassin] [ph.] for 10 aircraft.

Our plan is to be up to 10 aircraft by the end of the year.

And we’re going slowly, and we’re very happy with the numbers.

And it really is a fairly tactical approach.

We don’t want to create a look-alike to the majors.

We think it makes sense that we’d be sticking with our strategy.

And we don’t want to be flying [R.J.’s] [ph.] 1,200 miles.

We want to be flying 120 C-planes in that range.

So we view this as tactfully to support the Southeast, and sometimes respond to the competition.

We don’t expect to be pulling out of any markets in the Southeast.

And we can go into a city very, very quickly.

We have the lowest [R.J.] cost of any airline flying.

And, again, we’ve got a low price from the contractor.

And our overhead is very, very low.

So we can use it to respond to other carriers and other carrier competitive actions, as well.

So, again, I view this as tactical.

The frequencies have helped us in the Southeast.

And so far, we’re very pleased, but we’ve only been doing it for a couple of months.

Sure, sure.

Great, well, thank you very much.

Thanks, Jim.

Moving on, we’ll hear from Brian Harris with Salomon Smith Barney.

Hi.

Kind of a follow-up to both Mike and Jim’s previous questions.

Just, I guess, Bob, if you could comment a little bit on what you’re seeing on the capacity up and down the East Coast, versus the East-West.

And I understand the seasonality argument, but looking at it another way, a lot more capacity has come out of the intra-East Coast, which is also your franchise.

And so that would argue that there would be a lot more opportunities in those markets, rather than striving for brand new markets like Denver, and so forth.

Again, you have to look at it, again, a couple of ways.

Again, in Atlanta, the capacity has come down, although in our markets--I think, if I’m correct--Delta’s frequencies may be up.

So they certainly have been very aggressive with us.

And as far as I’m concerned, they can keep doing what they’re doing.

We’re going to get our cost even lower.

But we certainly have seen--again, the pull-back from U.S.

Airways I believe is helping the carriers who will remain.

That’s been a big plus for us, but we’re working on it.

We are doing very well in the Northern cities.

And the reductions this far have been very positive for us.

We can fly form a small to mid-sized city to Florida and be profitable.

And, again, that helps us largely eight to nine months of the year, but when you have a lot of Florida traffic and you’re dependent upon Florida traffic, from August through October, you tend to have seasonal weakness.

And you’ve got to have capacity into places where customers want to go.

So we don’t plan on flying transatlantic, and so therefore for us East-West markets are much strong in that period of time than North-South routes.

And it’s just a matter of being able to shift capacity between regions on some basis.

And, again, we think, again, Denver would be great market for us.

And to be honest, markets like Los Angeles and Las Vegas, when we get there, will be naturals, because they’re very, very large.

And we think we can do very well when the time comes.

Okay, and can you just comment briefly on the BWI markets.

I mean, you guys were nimble in getting in quickly after 9/11.

And now Southwest has stepped up a lot of their capacity there.

How’s that dynamic shaking out?

I mean, I think Baltimore is a great is a great success story for us.

I think Joe said it this morning on TV.

We weren’t flying in Baltimore prior 9/11, and today we have 26 departures.

We overlap with Southwest to Ft. Lauderdale, Orlando, and Tampa.

We’ve been profitable in all those markets since we started.

We’ve also--we’re the only major jet carrier in Boston and in Rochester.

I can tell you, Boston/Baltimore is a fabulous route.

And it’s nice to fly to Manchester from Baltimore, but a lot of customers want to go to Boston.

It’s one of the largest cities in the country.

So the costs tend to be a little bit higher, but the tunnel is open, so we think that market is really going to come on for us.

So we have some of our own cities that are candidates for expansion, as well.

And certainly Southwest has got 135 to 140 departures.

They’ve got the dominant position, but it’s not a bad place for AirTran to fly 30 or 40 trips.

And we think we’ve got a product advantage on Southwest, as well.

Okay, thank you very much.

Congratulations on the quarter and the year.

Thanks, Brian.

Thank you, Brian.

Jimmy Baker from J.P.

Morgan has our next question.

Yes, good morning, gentlemen.

I apologize if you already went over this in the prepared comments.

What percentage of revenue in 2002 was generated under service guarantees?

And what level of expiration, if any, do you face in 2003?

Hang on just a second.

Thanks

Well, Jim, this is Stan.

Hi, Stan.

Approximately 3 percent of our total revenue is generated by the revenue guarantee programs.

Actually, it’s about 2 to 3 percent.

And with respect to programs that will be ending, a number of them have already ended in ’02.

And there’s a couple of tail-ons that end the first half of ’03.

So we’re basically getting out of that, and will be out of that in the near future.

Okay, excellent.

Thanks a lot.

Tallahassee we just renewed.

Okay.

And moving on, we’ll hear from William Green with Morgan Stanley.

Yes, hi, guys.

Congrats on a great quarter.

Hey, Bill.

Hey, Bill.

I just have a couple of quick housekeeping questions.

Stan, when do you guys think you’ll be a full taxpayer.

Oh, golly, I would say at this point probably second half of ’05.

Okay.

We’ve got a fair amount of tax NOL’s consume.

And with our anticipated profitability going forward in ’03 and ’04, I would say conservatively probably ’05 we’ll be full up.

Okay.

And the tax rate will gradually rise to an end point?

Yes, right.

Okay.

And then, how about ’03 CAPEX?

’03 CAPEX will be for non-aircraft $20m.

And aircraft?

Or is that all operating lease?

All operating lease in ’03.

All right.

So the cash number is $20m.

Correct.

Cool.

And then lastly just what about--do you have a forecast for debt to CAP for the year-end ’03, where you kind of want to see it?

Well, our current debt to total capital ratio--and that’s if we debt adjust the leases--is about 93 percent.

That will probably come down by about 1 to 2 percent by the end of this year.

Keep in mind that we’re going to be adding 23 aircraft on operating leases, and so when you adjust that for the debt equivalent, that works against it.

Right.

Okay, thanks very much.

Thank you.

Bill, I’d just add the Board has approved a $20m capital budget for the last three years, including 2003.

Historically, we’ve only spent about a little more than half of that, but we do have $20m approved for 2003.

Blaylock & Partners’ Ray [Nital] [ph.]has our next question.

Yes, Joe, a great quarter.

Are we going to get more of these?

Well, yes, we are.

Good.

I know you guys were pretty much against the Delta/Northwest/Continental partnership, and if you want to comment on that, that would be fine.

I’m just wondering are you thinking of any partnership of your own.

Is there anybody that would be a good fit for you to broaden your market territory?

Well, to answer the second part of that first, yes, I think there are some folks.

And we talk to people, all the likely candidates, from time to time.

And what we find is when people are scared, they want to talk, and when they get over being scared, they don’t.

So we continue looking at opportunities and talking with folks, both big and small, I would add.

And with the right time and the right circumstance, something may work out.

We’re not planning on it.

And we’re doing what we’ve done since we got here, which is plan our business that we’re not going to get any help from anybody other than ourselves.

And so that’s the road we’re on.

I think in regard to Northwest, Continental, and Delta, we--as you know, Ray--we’re very, very active in that I think we got a homerun ruling out of the DOT.

I think it was a major mistake by that alliance to sort of thumb their nose at DOT, and say, “we’re going to do what we want to do, regardless of what you say.” I think they’re putting themselves at significant risk, because they could be fined $10,000 a flight.

Some people have argued they could be fined $10,000 a customer on any of those flights.

And so the liability would be significant if the DOT does what they say they’re going to do.

And I believe they will, which is proceed with an enforcement action.

This document that was finally ruled on was not something that came out of a closet.

DOT had had conversations with Northwest, Delta, and Continental beforehand.

So in some aspects, this was a negotiated document.

And what DOT is telling us is they are not going to negotiate further.

But if there is any review of it, they will start a new proceeding, which would take a considerable amount of time to work through.

So we’ll have to see how that plays out.

Okay.

And, Stan, I know because of the pressure you’re getting and the tax situation for the foreseeable future, you’re going to leasing aircraft.

At what point do you see the Company maybe going to buying some of the aircraft?

When would that be an advantage to the Company?

Well, I think, Ray, that that would be in conjunction with potentially a new aircraft order.

We have the financing arranged for all the twenty-three 717s that we’re taking this year.

To the extent we exercise the remaining options, I think we’ll probably lease finance those.

But beyond that, I think the decision to go to the debt markets will be tying to a new aircraft order.

Okay, great.

Thanks, guys.

Thank you, Ray.

We’ll now hear from Stan [Butrik] [ph.]with UBS Warburg.

Yes, good morning.

With the TSA moving to boarding passes required to clear security by the end of February at most airports, could you update us on where you are in terms of boarding pass automation at the airports?

We have a design, which we’re going to review next week.

We’re down to three aesthetic designs.

And we will be picking one next week.

The software technology is available.

And the manufacture should be pretty rapid.

We’ve already got the Net Check-in, and we’re getting considerable use with that already.

So we think we’ll be in good shape with the kiosk technology that we’re selecting here.

And I guess, Bob, approximately what percentage of your flown revenue is connecting revenue these days?

Well, again, I think Atlanta is probably about 75 to 77 percent of the system now.

About connecting, it must be about 56 to 57 percent.

And local is about 43.

And, again, I think it’s two reasons.

Obviously, again, Atlanta, in general, is not immuned from what’s been going on in the nation.

Atlanta revenue is down, obviously, over two years ago.

What we’ve been able to do is offset that.

We’ve taken traffic from other carriers, and most likely, again, US Airways.

Of that 56 to 57 percent of your revenue that is connecting, can you break that down further into OA hubs?

I guess I could.

I couldn’t do it right now.

Yes, well, the reason I ask is because you said earlier you don’t have much of a price umbrella, but as we cast about the marketplace--and I was just shopping LaGuardia/Houston this morning--you do have continued major price advantages on most connecting itineraries into OA hubs, with some exceptions, clearly.

And that’s what I’m really trying to assess.

Maybe we could try to work on that, and get that out.

Again, I will tell you that even in those--and, again, sometimes these price advantages come and go--we carry less in those markets today, than we did eighteen months ago.

Right.

Because when the higher prices were out there, a lower middle-end was available to us.

Carriers have gotten more aggressive on a day-to-day basis, than they were eighteen months ago.

Right.

Well, we’ll work on it a bit.

Thanks.

Thanks.

We’ll now hear from Susan [DiNaffrio] [ph.] from Deutsche Bank.

Yes, just a question--actually a follow-up--on the service guarantees.

Are you getting, now that the majors are continuing to scale back, added interest to do that?

Or has it kind of abated?

I’d say it’s up slightly, although we’ve had a lot of demand for that all along.

We have about 100 airports a year that come down and talk to us.

And so we’ve always had some significant interest in it.

It’s up a bit, but I wouldn’t say astronomical amounts.

Are you aggressively pursuing that?

Or is that just expected to pretty much stay in the low single-digits?

Susan, I think you’ll see less of it in the future.

And we’ve made a few decisions, again, going forward.

And it’s pretty clear that, again, with some of the competitive responses, sometimes it’s difficult to share these small cities.

And sometimes they’re not big enough for two.

And so, therefore, we’re going to have a tendency to go into larger markets.

And, again, two years ago, we had focused on smaller markets, hoping to sort of co-exist with some of the big carriers.

I guess they didn’t like that proposition.

So now we’re going to go into the biggest markets.

There’s always demand in the large markets.

And if you’re a low cost provider, you can be profitable at prices that others can’t.

So the focus is going to generally be into bigger cities, because, I think, your success rate and the time to build those markets is much, much quicker.

Got it.

Okay, thank you.

Thanks, Susan.

Moving on, we’ll hear from Kent Green with Boston American Management.

Yes, my question pertains to a more centrally located East-West hub.

I know you’ve increased a little bit of traffic to Pittsburgh.

Is there any other candidates out there that you seem to think, where there’s a weaker East-West carrier?

Well, I don’t think there’s anything that stands out.

We do believe that as US Air works through their situation, they’ll create opportunities.

At the best of circumstances, United is going to be a smaller carrier than they are today.

And the worst of circumstances, it could be much smaller than it is today.

And we think those are going to create tremendous opportunities for us.

What we’ve demonstrated in the past is our ability to use our flexibility and speed to move quickly into these opportunities, as they present themselves.

And so we’re somewhat of a counter-puncher here, in that we react quickly to what our competitors are doing.

And the good news for us, we believe, is there are going to be lots of opportunities as some of these troubled carriers work through their problems.

Thank you.

As a reminder, that is star one if you’d like to ask a question.

We’ll now hear from Herb Connor with Connor Capital Management.

Congratulations, everybody.

It was a great quarter.

Thank you, Herb.

You’re very welcome, Joe.

I’m not an airlines guy.

And I’ve been listening attentively.

I’m a products guy.

And I’d like to know how much is the success that you fellows have been experiencing product?

And how much is it the demise of what was a fairly healthy industry?

And, going forward, how are we going to differentiate this product, reference the big carriers, etc.?

Herb, I think that a tremendous amount has to do with product.

I think for the first time, we believe we have product superiority.

And I’ll tell you why we say that.

First is we’re running a really good airline.

Our own time performance has come up.

Completion factor has always been at industry-leading levels.

Our baggage mishandle ratio is one of the best in the industry.

And we’ve seen a 10X improvement in complaints over the last year and a half.

And also a 10X improvement in compliments.

So it’s not a fluke, when you’ve got complaints going down and compliments going up.

You’ve got verification that people like what you’re doing.

We have a dual class, versus single class, with Delta Express, JetBlue, and Southwest.

With our configuration, you have to have 83 percent of the seats filled before somebody sits next to you, because of our five abreast seating, versus our competitors with six.

We do have assigned seating.

We fly to the primary airports.

If you want to go to Boston, we’ll take you to Boston.

We’ll end up with the youngest fleet in the industry, or certainly darn near.

At the end of this year, our average fleet age will be less than three years old.

The 717 comes with fresh air, and our customers comment on that frequently.

We’ve got the wide-body bins, which give you the same cubic feet per passenger as a 747-400, to put your bags in.

And as a result, we’re retaining customers that we want.

And all of that is possible because we’ve got the best employees around.

And the morale in this company today is absolutely sky high.

The people, who had a chance to leave and didn’t, feel real smart right now.

And if you look at our research, and you look at our letters, we get lots and lots of letters talking about how young our people are, how flexible they are.

We don’t count golf clubs in the bag to make sure that people aren’t trying to get on board with more than fourteen.

And we aren’t doing a lot of the dumb things that a lot of the airlines are doing to make their best customers angry.

So I think all in all it’s got a tremendous amount to do with our success.

And we do believe we are attracting and retaining some of our competitors’ best customers.

Thank you.

Thank you, Herb.

Thanks so much.

Our final question in the queue comes from George Ireland with [Ring] [ph.] Partners LP.

My questions have been answered.

Thank you.

Thank you.

Mr. Leonard, there are no further questions in the queue.

I’ll turn the call back over to you for closing remarks.

Okay, thank you very much, Clay.

And thank you very much for all being on this morning.

Obviously, we feel pretty darn good about the whole situation for the fourth quarter.

As we moved through the year, we got stronger and stronger.

As Bob has already mentioned, the first quarter looks good.

Bookings are very strong through the first quarter and into the second quarter.

We’re seeing more of a normal pattern than we’ve seen in a very long time.

I will tell you that in our view we are past the worst.

And we say that because we’ve had three profitable consecutive quarters.

We look to be reasonably profitable in 2003.

We’ve got competition across the board from all of our competitors matching our prices, adding capacity, using the biggest airplanes, and we’re still making money.

There have been capacity at Baltimore and in Florida, which we’re benefiting from.

We have a stronger network today than we had a year ago--significantly stronger. [inaudible] excellence is helping us out.

Our morale is helping us.

So we’re in a position to grow.

We believe that we can grow profitably at 25 percent per year for the foreseeable future.

We’ll grow Atlanta.

We’ll grow new cities.

We’ll connect the dots.

And we’ll do some East-West stuff.

We think that with the growth at 25 percent, we can expand our margins, and get back closer.

We won’t get back in 2003, but we’ll make progress in toward getting back to 12 to 14 percent operating margins that we were used to, prior to September of 2001.

We have a heritage of profitability now.

We were profitable, setting aside unusual items, in 1999/2000.

Most importantly, we were profitable in 2001.

We were profitable now in 2002.

And we expect to be profitable in 2003.

We were working capital positive in 2002, which is almost unheard of in this industry.

And with all of this in place, we did this in the worst environment in aviation history.

There’s never been a period anywhere remotely close to what we have right now.

We’ve got the threat of a war.

We’ve got a weak overall economy.

We’ve got intense competition.

And we made money.

And we did that, in part, because we’ve have a 62 percent break-even load factor.

And it gets down to two things.

I’ve already talked about our employees.

I think they do a wonderful job for us.

They’re highly productive.

And we’ve focused on cost control.

We brought costs down almost 9 percent in 2002.

We’re going to bring it down another 3.5 percent in 2003.

We’re going to lower our break-even even below the 62 percent.

We’ve got productivity across the company.

Our utilization was up 7.8 percent in 2002.

We’re going to get another 5.6 percent out of that in 2003.

Fuel burn is 23 percent better.

Our maintenance costs are improving.

And like pilot reports--this is a figure that a lot of people are not aware of--a 717 has 64 percent less pilot reports per departure as a DC-9, so highly efficient in that regard, and helps maintain the 99 plus percent dispatch reliability.

So all in all, we’re pleased and congratulate our employees for the progress in the fourth quarter and the year 2002.

And we’re very, very bullish and confident about 2003 and beyond.

So with that, thank you very much.

And we’ll talk to all of you later.

Thank you.

That concludes today’s AirTran Holdings conference call.

We thank you for your participation and bid you a great day.

Thanks, Clay.