西南航空 (LUV) 2003 Q1 法說會逐字稿

Good morning everyone.

Welcome to today's Airtran Holdings Incorporated First Quarter 2003 Earnings Release Conference Call.

Just a reminder, this call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over Ame Haak, Director of Investor Relations.

Please go ahead sir.

Good morning everyone.

I want to thank you for joining us today for Airtran Holdings First Quarter 2003 Earnings Call.

Joining us today is Joe Leonard, our Chairman and CEO, Bob Fonaro, 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, costs, estimates, (inaudible) factors, (inaudible) plans and expectations about our future possibilities.

These comments are not historical facts, instead, you should consider them as time sensitive, forward-looking statements that are accurate only as of April 22,2003.

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 a competitive environment.

If you'd like additional information concerning factors that could cause our actual results to vary from those in the forward-looking statements, they can be found in our form 10-K filings, for the year-ended December 31st 2002.

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

Any redistribution, retransmission of re-broadcasting 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 Stan Gadek, our Chief Financial Officer.

Thank you Arney and good morning everyone.

Once again, AirTran Holdings is pleased to announce net income for the First Quarter of 2003.

This represents the fourth consecutive quarter of profitability in an economic environment characterized by weak passenger demand, high fuel prices and intense competition.

As in prior quarters, AirTran continues to enter new markets and take aircraft deliveries.

Recent independent customer survey data, supports the growing acceptance of our brand and validates our strategy of entering new markets while the rest of the industry reduces service.

This same customer data, confirms that AirTran's success and growing revenues and load factor, is not the result of lessening competitive pressure or holiday travel period, but reflects increasing demand for our product.

AirTran has created a unique brand, which symbolizes low fares and excellent service.

This is what our customers want and this is what we're dedicated to providing them.

We believe that the proof of this statement lies in the growing numbers of new and repeat passengers who now choose AirTran over the competition.

And now I would like to talk about our key metrics.

In the first quarter of 2003, AirTran recorded a 28.5% increase in capacity, as measured in available feet miles; resulting from the addition of new Aircraft, a 7.5% increase in stage length to 589 miles and an 8.9% increase in daily utilization, to 11 hours.

Traffic or revenue passenger miles increased to 31.3%, resulting in a 1.5 percentage point increase in load factor, to 67.8%.

Our traffic and load factor improvements are significant, given that last year's first quarter included the Easter holiday.

Unit revenue, or passenger revenue per available seat mile, increased 1% to 8.73 cents as a result of a 1.5 percentage point improvement in load factor, partially offset by 1% reduction in yield, to 1.29 cents on a year-over-year basis.

This illustrates our ability to drive demand in a challenging economic environment, while growing capacity nearly 29%.

Unit cost, or cost per available seat mile, declined to 8.63 cents, a 4.3% reduction over the year earlier period.

This is the seventh consecutive quarter in which we have achieved a year-over-year unit cost reduction.

This is noteworthy, given that the cost of fuel reached a $1--7.5 cents per gallon, representing a 23.1% increase over the cost of fuel in the first quarter of 2002.

The continued improvement in unit costs, primarily reflects the benefits of the benefits of the new 717 Aircraft, as well as cost disciplines throughout all areas of the company.

Average daily utilization increased 8.9% to an all-time record, 11.0 hrs, compared to 10.1 hrs in the first quarter of 2002.

The improvement in aircraft utilization results from a more efficient use of flight crews, as well as the increased reliability of the fleet.

We anticipate that our full year of fleet utilization will remain at or above eleven hours.

During the first quarter we served 2.6m customers, up over 20%; representing an all time first quarter record for Airtran Airways.

We currently operate 57, 717's and expect to take 16 more by year-end, bringing our fleet to 73 aircrafts.

In addition, by the end of the third quarter all remaining DC 9's will be retired.

During the first quarter, Airtran's completion factor averaged 98.2%, on time arrivals were 76.2% and bad claims were 3.36 claims per thousand passengers.

First quarter operating performance was affected by winter storms on the East Coast and adverse weather in the South East.

And now I'll just talk about our financial performance.

For the first quarter of 2003, Airtran earned $2.0m or 3 cents per diluted share, compared to a loss of $3m or 4 cents per share in the first quarter of 2002.

We did not record any income tax in the first quarter of 2003 due to a zero affected tax rate.

However, we anticipate that the tax rate for fiscal year 2003 will be in a range 5-10%.

Operating margin was 4%, compared to negative 1.8% in the first quarter of 2002.

Passenger revenue grew nearly 30% to $201.9m# and a 7.7% increase in average fares to 78.86 and a 20.4% increase in passengers.

Total revenue increased 30.6% to 208m.

The revenue and passenger gains were achieved, even though last year's first quarter included the Easter holiday travel period.

Looking at the individual expense line items on a unit cost basis, salaries, wages and benefits declined 6.3%, from 2.52 cents to 2.36 cents per ASM.

The decline in unit costs reflects the 28.5% growth in ASM's and more efficient use of our staff.

Aircraft fuel expense on a unit cost basis increased 8.5%, from 1.88 cents to 2.04 cents.

During the first quarter of 2003, the cost of fuel, including all taxes and fees, was 107.5 per gallon, compared to 87.4 in the first quarter of 2002.

Offset in the increase in fuel costs, was a 7.8% improvement in fuel burn per block hour, declining from 732 gallon per block hour in 2002, to 675 gallons per block hour in 2003.

This reflects the greater number of fuel efficient 717 in the airfleet as well as fuel conservation efforts by our pilots.

As a result of the improvement in fuel burn rate, the company saved approximately 3.7m gallons of fuel, compared to the first quarter of 2002, for a savings of $4m in the first quarter of 2003.

Aircraft rent on a unit cost basis, increased 50% from 0.76 cents to 1.14 cents.

This is a direct result of the operating lease financing associated with 24 additional 717 aircraft delivered since the first quarter of 2002.

Partially offsetting the increase was a negotiated reduction in aircraft lease payments associated with 60 C-9's, which are leased through December of 2003.

Maintenance materials and repairs increased 10.2%, from 0.59 cents to 0.65 cents on the unit cost basis.

The year-over-year increase in unit maintenance costs, reflect the higher level of flying, the occurrence of schedule maintenance checks on the growing 717 fleet, and an engine fleet hour maintenance agreement.

On a block hour basis, maintenance materials and repairs were $232 per block hour in 2003, compared $200 for block hour in '02.

Landing fees and other rent unit cost decline 10.7% to 0.5 cents from 0.56 cents in the first quarter of 2002.

On a departure basis, landing fees and other rents were unchanged year-over-year.

Aircraft insurance and security unit costs declined 44.2% from 0.43 cents to 2.4 cents.

The reduction primarily reflects the lower insurance renewal rates that the company obtained in the 2003 policy year.

Marketing and advertising declined slightly on a unit cost basis from 0.32 cents to 0.31 cents or 3.1%.

The company continues to utilize advertising on a cost effective basis and focuses on its primary markets and new service cities.

Depreciation continued to decline, reflecting the on going retirement of the DC-9 Aircraft.

Depreciation going forward will consist predominantly of property platinum equipment, spare parts and 8 owned 717.

Other operating expense declined at 30% on a unit cost basis to 0.79 cents from 1.13 cents in the first quarter of 2002.

Last year's other operating expenses included higher pilot training expense and the costs associated with the aircraft sub-service.

Overall, Airtran's unit cost included fuel, declined 4.3% to 8.63 cents.

Excluding fuel, our unit cost decreased 7.6% to 6.6 cents in the first quarter of '03.

Looking at the balance sheet, unlike many of the other airlines in the industry, Airtran balance sheet continues to improve.

Airtran finished the first quarter of 2003 with $168.1m in total cash compared to 138.3m at 12-31-02, proceeds from advanced ticket sales, contributed to the increase in cash.

Working capital of March 31, 2003, was 20.7m, compared to a working capital deficit of 50.1 m at March 31, 2002.

Long-term debt, at March 31, 2003, was $210.2m, versus $259.8m at March 31, 2002.

The current portion of debt at the end of the first quarter of '03 was $10.5m.

Finally, total shareholders equity increased to $55.5m as of March 31, 2003 compared to $32.9m at the end of the first quarter of '02.

I would now like to provide some guidance for remainder of 2003.

Our new service to Los Angeles and Las Vegas will commence on June 4th and June 11th respectively and will be initially operated by Ryan International Airlines under a wet lease agreement.

As is typical under such agreements, the capacity and traffic statistics will be reported by the operator.

Excluding the West Coast operation, we're projecting capacity growth for the remainder of 2003 by quarter to be approximately 18%, 20% and 21% for an annualized capacity growth of approximately 22%.

For informational purposes, the West Coast flying will equate to an increase in capacity of approximately 7.5%.

Regarding fuel, we're projecting that fuel prices will moderate and our full-up cost per gallon will average approximately 90 cents for 2003.

We will revise this projection as necessary as fuel price is stabilized.

In the second quarter of 2003, we're hedged or 58% of our needs at a raw price per gallon of 73 cents or 86 cents a gallon including all taxes and fees.

For the third quarter, we're hedged 39% at 70 cents a gallon raw, or 83 cents all in, and for the fourth quarter, we're hedged at 19% at 70 cents raw, or 83 cents all in.

We anticipate adding additional hedge protection as opportunities arise.

Non-fuel unit costs are projected to be flat to down 1% for the rest of the year as a remaining DC-9 Aircraft leave the fleet.

Non-aircraft related capital expenditures during the first quarter of 2003, for $5m.

We project that our total non-aircraft CapEx for 2003, will come in below $20m.

And finally, as I said earlier in the presentations, the effected tax rate for 2003 is anticipated to be in a rage of between 5 & 10%.

In conclusion, we would like to thank our customers for their continuing and growing support, our employees for their hard work in providing an excellent product and our shareholders who believe in what we're doing and in the success of our business model.

As we all know, the airline industry is undergoing significant and far reaching change.

Those airlines, which have a low cost structure, will thrive, those, which do not will fall behind.

We believe that the economic recovery that other airlines are counting on has for all intensive purposes already arrived.

AirTran has the strength to compete in the current environment.

We will not only survive under these challenging conditions, we will go on to grow the company and bring value to new markets, which suffer from high fares.

We thank you for your interest in AirTran and look forward to bringing you further updates in the months ahead.

Operator at this time I would like to open the call for questions.

At this time if you'd like to register your site for a question, please press the star and one on your touch-tone phone at this time.

You may withdraw that question at any time by pressing the pound key.

Once again to register your site for a question please press the star and one on your touchtone phone at this time and we ask that everyone has a chance to ask a question that we limit your question to one plus a follow-up.

We'll take our first question from the side of Jim Parker, with Raymond James go ahead please.

Good morning, guys.

Just regarding the relative market strength of the various areas of your market coverage, can you comment on which areas might be stronger than others and any particular areas of weakness?

Yes Jim, I think probably the strongest right now is Florida.

It was a very good Florida season, yet not quite the same as you might have seen in '99 or 2000 but relatively strong.

You know short markets are weaker as a opposed to 9/11 phenomenon and I think they are much slower to return than in the longer whole route.

So I just think Florida is pretty good and short whole routes tend to be soft, which is why we're trying to increase the stage life.

Right, okay, is there a way to measure or do you have any statistics on repeat customer flying and one way might be growth in a frequent flier program relative to overall passenger growth, can you give us some indication of return repeat customers?

Now Jim, we just finished the research project in February, we hadn't spent any money on research since 9/11 and decided to run a fairly extensive project with the third party independent company.

They have you at 300 of our customers and 90% said they were (inaudible), 10% said they were likely to re fly us, 80% said they were extremely likely to re fly us, 68% of those customers said they were either satisfied or extremely satisfied with their last experience on AirTran.

So really sort of knocking your eyes out type of numbers that we got.

Is your frequent flier program membership growing faster than the passenger volume?

Yes one of the things about the FP, we're just going from a low tech to a high tech system.

If you've been involved with our frequent flier program you’ve in effect been clipping coupons for several years and we have just started to roll out or launched an automated an FT system which will give a lot more control over the numbers that are data based.

I will tell you that we do keep track of is, is our web-based group or Net escapes group which is well over a million, we don't have all the data of it like on the FT program but very shortly, we'll (inaudible) really at right now, I'm very, very automated high tech system that will dramatically improve what the customers are getting.

Right, well your first quarter performance is just terrific with what is going on in the industry.

Thank you Jim.

We'll take our next question from the side of Michael Linenberg with Merrill-Lynch go ahead please.

Yeah, hi and good morning gentlemen.

Few questions, I guess you know there were some comments on the call and also in the press release about the outstanding productivity and you also talked about more efficient use of your flight crew, can you talk through some of the productivity measures that you look at, maybe just give us some examples of the improvement?

Yeah Michael, I think one of the things that we try to do is get the utilization of the airplanes up, we're up from about 10.1# to 11, actually a little over 11, we see that going up to about 11.5 by the end of the year, so better utilization of the airplane.

I think the other thing that we've been focused on is our average departures per non-Atlanta station and in 2001 we were averaging 5.5, in 2002 we were averaging 6.3 and in April of 2003 we were averaging 7.2 flights per station outside of Atlanta we think we can get that up around between 8 and 9 but as you well know, a lot of flying comes free because you already got the gate, you already got the people, you already got the equipment so to the extent that we can get more, and this really come from point to point flying.

So let's say you fly an airplane from Atlanta to Philly, then turn that airplane from Philly right down Orlando, Fort Lauderdale, so you keep the airplane moving and you get more flights per gate so those are two big elements, but obviously fuel burn improvement on the 717’s 24% better than DC-9 so you get big fuel productivity there.

Then you get ten more seats on a 717 than you get on a DC-9, you pick up productivity there and then we're kind of through the pilot training bubble that we've been pushing for couple years now, we've now got a sort of caught up and we've got a sort of a steady state training environment now, rather than pre-positioning pilots for the new airplanes as they come in.

Okay, and then -- my second question.

When you look at your start of service in the Atlanta, Los Angeles market, I mean its - it's a new long haul market for you, but its coming at the same time that you are going see a lot of capacity added in the market, both form Delta as well as a new competitor.

When you look at Airtran's strengths, you know, what's the focus, what passenger segment are you going to be most focused on in this market; is it more local or are you going to focus more on connecting traffic?

Just given the amount of capacity, which makes the entry into that market a little bit challenging.

I guess - - I mean obviously, you tend to focus on traffic wherever you can get it.

Clearly - - I think, the reaction in the Atlanta, L.A. market - - again pretty severe - a dramatically increase the capacity.

I would tell you that's the kind of thing we have seen everywhere and to be honest with you, I think the other [inaudible] competitor in Atlanta is going to be hurt.

I mean certainly this is going to be slow.

But we have 26 gates in Atlanta, and all along over the years, no matter where we have seen the competition and we have a lot of sources of traffic.

So, certainly we have got flow markets.

We have 26-30 different connecting markets, which we can break traffic in; we have always relied on that.

We've got a business class.

You know, I think with limited flight frequency, I think we are probably better positioned in L.A.

I think it clearly draws from a greater area of the L.A. basin.

So again, what our expectation is, it was always going to be tough, but we will persevere just like we have before.

We have got a lot of sources of traffic.

[Inaudible] Las Vegas as you all well know, most of the traffic from Vegas originates elsewhere, and that is ideally suited for Airtran;

I mean that would be much easier historically because we get local traffic from Atlanta and again the connection base.

So, I think -- overtime we have proven that we can operate point-to-point.

And we can operate a low cost hub -- which gets all the revenue benefits but without all the high cost.

Okay, thank you very much and good quarter.

Thank you Michael.

We will take our next question from the side of William Greene, Morgan Stanley.

Go ahead please.

Yeah, good morning.

I am wondering if you can give us an update on a new aircraft order, specifically, timing of one.

Yeah, well are in the process, I would say that we have, in recent weeks, have changed from a sort of data collection to data analysis mode.

We have proposals from all the leasing companies as well the manufacturers.

We had power by the hour arrangements from the engine guys, proposals from them.

We are in the process of evaluating BLV [ph] proposals.

I was in Seattle last week looking at chairs, various chairs and various pitches.

We are going down tomorrow to an interior's expo in Fort Lauderdale to look at equipment.

And so, we are right now, we are tentatively looking at a mid summer decision point, although we are not in any hurry and we are under no pressure to make that decision at any arbitrary date.

I would just say based on initial input, this is a pretty darn good time to be buying airplanes; the pricing out of the box looks pretty good.

And, as our predecessors did in the early 90s, when they placed the order for 717, buying at the trough is a whole lot better than buying at the peak or mid way up the peak, which a lot of carriers have done historically over the past 30 years.

So, the point being we have already got rates negotiated with our pilots for whatever airplane we get -- so we are not constrained there and we are certainly not constrained by our sub-service with Ryan International.

So, I would say that the process is moving along.

It is a high priority with us now, and we will move it along in and then make a decision when we think the timing is right.

Are you still considering various manufacturers?

We have got proposals from Air Bus and Boeing, and we have asked Boeing for both for 737 and 717 proposals and we have those in hand.

Okay.

Can I also ask then, in terms of the second quarter, how are the trends shaping up thus far?

We heard from South West yesterday that maybe the second quarter would not be quite as good as last year’s second.

How do you feel about your second quarter?

[inaudible] Seasonally, in last year's second quarter, we had earnings but they weren't that good.

Seasonally, our second quarter is stronger than the first and is our strongest and we're going to see the same thing.

So, we have seasonal strength against some of the flaws, pretty good; typically a fairly strong time for South East business travel, which tends to peak in this period of time.

So, you know what, I say you know, our bookings look, they look pretty good.

By standards against 2000, tough standards, but certainly off the bottom of the doldrums that we saw from the Gulf war.

Looking at the next two or three weeks are very critical.

This is the time of year when you begin to build your traffic base for June and beyond.

So, we're at really, a crossroads again, but I think generally speaking, it looked pretty good.

I would say Bill, that we also we saw a drop off in bookings when the war started.

Like everybody else, although it looks like our diminishment was less than most the folks we have talked to, but we have seen in fact a firmness, a gradual firmness since the war has ended and fortunately we went into this with pretty decent bookings.

Did those trends also apply to yields?

I think so, I think certainly.

What you didn't see in March and early April was that typically, you know, the last minute kind of push, where your people are just set off to your full life areas, you didn't see that kind of trend and that's ultimately when you can make your best money with cold-send (ph.) customers.

I think the long-term trends look pretty good.

And really just one last thing, because if you look at our numbers for the last three or four quarters, the margins are improving even though if necessarily the market is not improving.

And the thing is, is that our image is getting better every month, every quarter and that's something.

In the past we relied on customers primarily because of price, now it's because of price and loyalty and quality.

And that underlines fundamental change, which has given us a little bit more push every single quarter.

Great, thanks.

Thank you.

We'll go next to the side of Raymond Neidl with Blaylock & Partner.

Go ahead please.

Good morning.

Good morning Ray.

One thing we've had a little controversy the past couple of days at Delta and American with their executive compensation and I know the government before they're going to past their aid package was talking about putting restrictions on that, and smaller airlines like AirTran were a little upset, since the large portion of your executives get the compensation from performance bonuses.

Could you give us some update on what's happening there, and what your thoughts are in that area?

Well you know, obviously, I think we're pretty well happy that we side stepped the issue and to be honest, you know, AirTran basically from a senior officer position, our compensation is pretty much driven on the results that we produce, and if we don't have results, we don't get paid.

Certainly, the issue of relative performance is nothing that we talk about around here.

I mean, relative performance means nothing in an industry losing money, and we're based on our budget, perhaps operating metrics, keeping our cost down, those the are ways --- those are kind of goals that we're driven.

So we're very happy that we were able to, in effect, be exempted by these conditions because it would have had a big negative impact and ultimately it would kind of strip away the entrepreneurial spirit that we tend to run the company with.

Ray I'd like to add one thing to that.

You know, we met all of our objectives in 2002 including profit, cash generation, all of our operating metrics, literally a hundred percent of our goals that we committed to the board of directors at the beginning of the year.

As a result, they awarded 100% payout of bonuses, which Bob indicated as an important element for us because we depend more on bonuses than salary.

The management team arbitrarily decided to reduce that by 10% on the payouts, so we paid a 90% out from what the board approved in light of what's going on at some other places, we feel a little foolish right now but we did in fact do that.

Okay.

And Bob, the wet lease operations -- could you just tell us what your limitations are there and then for modeling purposes how we should book the revenues and expenses?

I'll ask Stan to help you out on the modeling.

Again, here's the limitations, again, we don't have any.

This was, I think its kind of an example where AirTran and its labor groups work together.

We have the ability to do wet leases, we've always had, for up to 10% of our capacity for six months.

And, right after the first of the year, we started having discussions because we believe we needed to diversify the route system and to be honest with you - you know, we just think, the world is changed enough that being focus on short-haul was not the right position to be in the long run.

So, we went to our pilot leadership and basically said we’d like to extend this exemption well beyond that, with no limitations.

We did not want to be in a situation where we had to cancel the flight for six months or we'll loose leverage in the labor negotiations.

And our pilot group agreed, I can also tell you, the flight attendants, they signed a waver as well.

So we can go indefinitely with these wet leases and actually do others.

And if you look at our agreement, it talks about San Francisco and Phoenix, and all the other long haul points, so we have the ability to add more, and - in terms (multiple speakers).

In terms of the modeling, Ray, Ryan International will report the RPMs and ASMs, since they're going to be operating the aircraft on their operating certificate.

At such time as we take over that operation and fly it, then we'll start reporting the stats.

The revenue and the costs associated with that operation will be netted and reported in revenue, that's in accordance with what our auditors are telling us we should do as long as a third part is operating that service.

Okay.

And can you give us any guidance of what that number might be for the second quarter?

I really don't have a data point for you right now.

Okay, good.

Thank you.

Thank you Ray.

We'll take our next question from the side of Brian Harris with Salomon Smith Barney.

Go ahead please.

Yeah.

I think, this is probably a question for Bob.

I think you mentioned that you're looking to increase you're productivity by increasing your flights per station, and at the same time you're adding three brand new cities and focusing more on long haul.

So I just want to get a sense of - you know, if you look at your growth plan over the next couple of years, are you planning on focusing more on adding new cities or more on increasing frequency between existing cities?

You know - Brian I don't think they're really independent.

I mean, geographically you know, we can't go in Atlanta or LA with five or six flights, in fact we had more wet leases than airplanes we operate.

But I think from a guess, my timing standpoint, if you look at our numbers historically we did very well in the second quarter and fourth quarter, we really can't wait, we really need to get moving with some kind of geographic diversification.

And I think certainly by the time we go into next summer, I think you'll see a very very strong third quarter.

So really - can I say, it really is independent; we can't wait and it doesn't make sense for us to operate eight flights at Atlanta-LA.

Again, at the same time, you're going to see us, again trying to operate, (inaudible) we start -- a couple years ago, we had four flights to Atlanta, now we fly to Orlando, we fly to New York, and we're looking at additional expansions, so that is -- I think the two strategies are independent, but again at the same time even with an LA with two flights, you're going to see it over time, our average number of flights per city increase.

So again, I just I would just try to separate, I really can't link them at this point.

Okay and then as you move to greater geographic diversification you're probably going to be having more overlap with your other carriers Frontier and Jet Blue, both of which have live TV and then I know SongAir (ph.) is primarily outside of Atlanta, but how do you distinguish your product verses these other low cost carriers?

Well, I think the key one is the business class, and that’s the primary difference, it's got very load factors, and it really has allowed us to carry, we think a good to substantial number of business travelers and really get in the door with corporations.

Again, we don't go out and give all the rides or give large reductions like the big carriers do, we'll allow them to get into the business class, and that's the way we have a tendency of doing it.

That really is the key, I think, we'll put our focus on an L.A. verses Long Beach.

I think with the kind of operation that we're going to have on the West Coast, you want to be in the primary place.

I think our hub in Atlanta is dramatically superior to anything that Jet Blue operates or Frontier or anybody else.

It's very, very productive.

And again, you know, a lot of people have asked this question over the last couple years -- what's Delta Airlines going to do to AirTran?

We keep getting stronger and they keep getting weaker.

So I think, you know, we're rolling out the kiosk now, you know, from an online perspective you can book -- we're doing a number of things, without adding a lot of cost.

Regarding the live TV, we don't have any plans of putting in live TV, but certainly there are opportunities or options out there particularly with a long-haul fleet that we're going to operate, so there may be some opportunities for us down the road.

And again we don't have any plans to add food, but there's certainly an ability to add these things we’re out putting kitchens, we're out putting ovens on airplane.

So I think the product is ongoing, but our key thing is business class and our home network.

Okay.

Thank you.

Congratulations on the quarter.

Thanks very much.

We'll take our next question from the site of Susan Donofrio with Deutsche Bank, go ahead please.

Yeah, most of my questions have been answered, but number 1, can I get an update on the status of your talks with your flight attendants?

Yeah.

I would say that we've been meeting sporadically with the flight attendants.

The talks are amicable.

We're making very good progress on a lot of the work rule issues, but quite frankly we really haven't got to the top economic issues yet.

But, so we're moving along at about a pace that I think we're both comfortable with.

Great and then I just wanted to circle back I think to the first question and that was the question on, you know, kind of geographically strengths verses weaknesses and you talked about short-haul being, you know, somewhat weaker, slower to return.

I'm just trying to contrast that with Southwest's conference call yesterday.

They actually said that their short-haul was showing some signs of strength, so can you kind of compare and contrast the two comments?

Well, again it's really all kind of matter or perspective.

We've taken, we made some permanent and fundamental changes in the way we serve the 250 mile routes.

We're doing them with a combination of jets and the jet connect or the regional jet operation.

So again our plan is not to be a big or regional jet operator, but to use it very, very tactilely and I think it actually has worked.

Again, I would say when we see the next Department of Transportation's statistics you're still going to see short-haul markets down well below long-hauls.

I think, again one thing I would say, Southwest has added a lot of a long-haul flights, so they ultimately believe that the long-haul is the place to be verses the short-haul.

And AirTran, again we've increased our stage length about 8 to 10% over the year, to put ourselves in the position where market conditions are better.

I think our bookings, we feel pretty good about our bookings.

As I said if we didn't have the war and these orange alerts we'd have unbelievable numbers, but we have to get through these times.

Great and just last -- you certainly have a lot in your plate with respect to your capacity growth.

Would there be any reason for you to increase that capacity growth.

I mean would you physically be able to as a company with infrastructure etc?

Or would you want to this year?

Well I - you know, we're about to grow.

When you put in the Ryan International operation, we're going to be growing close to 30%

Right.

You know, could we do more?

We probably could based on what we've seen so far, we've been filling the airplanes up at decent yield, certainly doing better on a Raslin (ph.) basis than the rest of the industry.

We sort of targeted 25% to 30% and so are the right level if we decided we want to go up, there's bookus (ph.) of airplanes around of every variety that you can get on long term, short term, fill in, you name it type basis.

So we really don't really see the need to.

We got a lot of airplanes coming, two a month for the rest of the year, it turns out that some of our DC9s are probably going to have some life left in them when we pull them out of the service, so we could stretch that out a little bit if we wanted to.

And hopefully by mid year we'll make a decision on airplanes and then we'll have - we've also got six options that are still sitting out there on the 717s, that we could possibly move up and when we make a decision on airplanes, we could if we needed it, get some interim lift, before we got the new airplanes coming in.

So, there's lots and lots and lots of flexibility here, but we think right now we're just sort of arbitrarily targeting 25% to 30% growth.

Great, well okay thank you very much, good quarter.

Thank you Susan.

We'll take our next question from the side of Jamie Baker with J.P.

Morgan, go ahead please.

Good morning gentlemen.

Bob, unless one has kids, I'd agree that business class trumps live TV every single time, is twelve seats up front too few?

I think on a longer haul, I think if I had my druthers, we'd like to have 16, but you got to reach a point about how much you want to give up to get that.

I think in the short haul on the North-South, the twelve seats we have on the 717 is the right number; in fact some of the DC9s had 16.

In fact, they did have 16 and again that was probably too much for us relative to the haul.

But we're probably going to go with 12 on the long haul, because the decision to stop losing extra rows would become uneconomic.

And do you, envision the long haul service being a full inclusive meal service type product?

Jamie, no.

One of things that we're going to have to look at is clearly on the longer hauls what snack service we will have in contrast to what we do on the short hauls.

But I don't see a scenario where -- we not going to put ovens on a new airplane, so we're going to stay away from the hot foods.

There are a lot of options right now.

Everyday you see another airline have a press release about the hands food service.

But there is a lot of potential for us to do things, at least in business class, if that's what we want to do.

In fact, the food service providers will take most of the risks, so we're looking at some of those things now.

We have about six weeks to decide.

But I think 5 hrs you need to have, certainly an enhanced snack pack, but we haven't really decided what we're going to do in business class yet.

I think it would be a lot more novel than selling food, if most airlines could actually produce profits.

And last question -- what's the duration of the Ryan Contract?

And I guess a question for Joe, are used aircrafts part of the analysis you're currently engaged in?

I'll answer the second part of that first.

No, we're looking at new airplanes.

We might, if we needed some interim lift, entertain used-airplanes on a temporary basis, but that's really not in the cards.

We think we can get a lot better deal on new airplanes, quite frankly, than we can get on used airplanes, particularly in regard to support for pilot training, spare parts, mechanic maintenance training, all those things that come along with an airplane whether it's new or used.

In regard to Ryan International, we have the 1-year contract that's renewable, and as Bob mentioned earlier, we don't have to shut this thing off at any particular date, which doesn't put pressure on us to accelerate an airplane decision and that sort of thing.

Yes, that's obviously why I was asking, good job and thank you very much for taking my questions.

Thank you.

We'll take our next question from the side of James Higgin with CSFB go ahead please.

Yes, just a couple of detailed questions.

Your depreciation and amortization were down 25% I think from the fourth quarter, were there that many DC9s retired or was there something else going on there?

And what's a good run rate?

Jim, we did take out a number of DC9s.

We also had some final depreciation on DC9s spare parts, and I think in terms of a run-rate going forward, I think I would guide to maybe a range of about $10m to $15m for the year.

And then maintenance expense, if I heard correctly your Block Hour costs were up in the quarter, what is happening there?

What's the longer-term outlook there?

Well I think we're approaching a normal run-rate in the low 200s on maintenance cost for Block Hour, we've got now fifty seven 717’s in the fleet, seat checks are coming due on a 15 to 17 month interval.

We also have the tar by the hour rates, which kicked in, in the fourth quarter for the engines, and so I would anticipate that we'll probably see a little more increase in that Block Hour rate, maybe in the mid 200 and then that will plateau us as we get into a mature maintenance cost curve there.

And just finally, can you update us on your regional jet deployment?

And how those results are looking, I think Bob alluded to that earlier?

I think again that we have, and I'll have 7 by June, and we're starting to get into the better traffic periods.

We started in December /January, but the load factors are again, they’re small planes so the load factors are, I guess recent, in last couple of months been in the 80s, which is a little bit better than we thought.

I think what we're seeing again, we're seeing that perhaps a few more frequencies in the market is giving us a better traffic mix and whereas in some of these markets, we might have run only a handful of flights, we can now run five frequencies.

And it gave us a lot more - - even six frequencies - - it gives you a lot better coverage.

So I think we're pretty happy with that, and in some short haul markets, we may even mix jets and small planes.

So we're carrying, most markets we're carrying more people than we've carried before, and again, tactically it's working like we thought, we don't plan on running these airplanes twelve - thirteen hundred miles, I think we want to compete with RG operators who carry people twelve - thirteen hundred miles, I think that's wrong use of the airplanes.

And, you know, these things should be flown three or four hundred miles.

Great, thank you very much.

Thanks Jim.

We'll take our next question from the site of Gary Chase with Lehman Brothers.

Go ahead please.

Hey guys, just a couple broad questions, I guess first for Bob.

You know, there's a lot of talk about geographic diversification which is, you know, I guess could be accomplished in one of two ways.

One would be to get a more capable, i.e. longer-range aircraft.

Another might be to try to establish, you know, another Western city that might look something like what you've got in Atlanta now, you would be able to capture some of the efficiencies of perhaps even using the same aircraft, maybe you could, you know, think more seriously about that proposal to Boeing for 717's.

And I'm just curious what your thoughts are there, if you think that would be a way that you might potentially accomplish your objectives rather than, you know, say flying a 737 or an A-320?

Well, you know, I think all this stuff, really tied to (inaudible) - - I don't think a long-range airplane and a sort of a Western hub are mutually exclusive.

To be honest with you, I mean we would certainly like to push the airline west, not necessarily Los Angeles but, you know, certainly a Midwest hub, which would be very complimentary to what we're doing today.

Now if you look at the best cities, they're taken, and so you have to work (inaudible), so how do you get yourself in. and, you know, the fact of the matter is, you have to push your way, and it's really the way to do it, more if perhaps some big airline dramatically cuts capacity or someone fails, that could create a big opportunity.

And I think we would move very, very quickly if one of those things happened and it could happen.

So we spent a lot of time - - are spending time on both these things, and the airline needs, I think, to develop a route structure where we can carry our customers to the East, to the South and to the West, we also believe though that when you growing your airline you should be making money.

And so we don't want to be an airline making the speech that we're growing 30% and we have negative 7% margins, that's not we're going to do.

So we will grow the airline, but we have to produce positive margins and really keep the discipline.

Now I think, our push will be very slow, but it will be steady.

Okay, so - - should we read that you mean right now you think you'll - - it would be more profitable for you to expand, you know, through Atlanta with a better aircraft, and develop something else.

I mean it seems like, if you're going to expand from Atlanta to the West, you're going to have to push your way in there too, as you know, somebody was asking about before, so?

No, I think the good news is that we are now in L.A., we are now in Denver, we are now in Las Vegas - - in two months, with the primary services established.

Once we're in there with a permanent operating base, we can begin to head up flight from city X, Y or Z to Denver or Las Vegas, so I think you'll see that.

What we didn't want to do is pick a secondary market as our fist path into Los Angeles or Las Vegas, we always knew we would be flying Atlanta - we're going to establish that first, and then what you'll see is overtime, do some secondary markets into those cities.

I think the other thing Gary is, while we don't - - because we've been there it doesn't get noted as much.

Our departures in Atlanta are up 19% in the past 24 months.

Yeah.

Actually Joe just had one for you, one last one.

And that is, you know, you said something earlier on the call that I think sent shivers down everybody's spine here, which is the economical covery we've all been waiting for has arrived.

I mean as you look at your performance, it's obviously fantastic in relative context, but, you know, I doubt it's as good as you would like it to be on an absolute basis.

I mean what do you think is going to drive that going forward.

If there is no economic recovery here, what's the answer to get, you know, is it a revenue improvement.

You think branding will drive such revenue improvements that it will get you to the kind of margins you would want, is there a cost story, I mean how should we think about it?

Well I think the bottom line is there's got to be more capacity pulled out of the overall system, I think there's still way too much capacity in the system.

I find it kind of interesting that the ATA carriers are up in Washington complaining that revenues are down 21%, and they say what we've done to fix that is we've reduced capacity by 13%.

My needy - - immediate question is why the hell isn't capacity out 25% if revenues are down 21%, what are you waiting on.

And, you know - - hope there's possibility one or two of these carriers to fail, quite frankly I believe that would be good for the industry, but if they don't, there is some movement again - - remove some capacity this summer.

It needs to be much more aggressive capacity reductions than there is today.

I think a lot of people still have - - we fundamentality believe what Stan said is that the recovery has already occurred, the $1000 ticket is gone forever, and I think management of some companies and unions and some companies are still having a very difficult time coming to grips with that.

We have not, we believe this is it, and you're right, we're disappointed with the absolute results, we're used to seeing 14% operating margins, and we're looking for the day that we get back to that.

We think that if the rest of the industry made money it would be the best thing in the world that could happen to AirTran, because when people quit comparing themselves to an incredibly poor base, we'll all be better off, than when people start comparing themselves to absolute financial performance, which by the way they do in almost every other industry except this one. we'll be better off.

Can I add one other thing Joe, I think are our statement is - - you know, we're - -we managed the company as if there will be no recovery.

I mean, you know, we think it's wrong to go out there and bank on improving the economic conditions.

They may improve, they probably will improve, but we can't take that into our assumptions, it's a really key operating assumption.

If there is no improvement a year from now, there'll be less capacity in the industry, so one way or the other we think the margins will be better next year than they are this year.

And, you know, we're just going to wait it out.

I apologize, one lightning quick last one.

Can you give the progression of RAS in monthly through the quarter so we can get a sense of, you know, sort of how things were affected by, you know, by the war obviously understanding the Easter shift in March.

Well I am just going to go off the top of my head here, but you know it was down and but we had two strong increases in January, February, and I think we were down about 3.5% in March.

It began so --- in March is a bigger month so it kind of averaged down the month.

Generally speaking, March pulled it down and I would say it's primarily orange alert and war.

I think March could have been flat if we didn't had the war.

Even with the Easter shift out, it could have been flat?

Yes, absolutely.

Thanks a lot you guys.

Anybody else?

We do have a question from the site of Sam Buttrick with Payne Webber.

Go ahead please.

Payne Webber, wow.

Good morning Sam.

Good morning.

Welcome to 1999.

The --- I just have one last thing here.

In terms of operational performance effective with 2003, you've reached the DOT reporting threshold for the various performance matrixes.

If we look for example at your on time performance in January and February, no doubt there are some weather factors involved.

You ranked ninth and somewhat below most of you primary competitors.

Now that we are going to be seeing this data, which of course you've had all along, what is a realistic --- what is your realistic objective?

Where should we expect to see you rank here?

Well I think realistically what we have targeted the airline for is be in the top third of the industry in completion factor, the top half in arrival performance.

Although I'll add quickly that we miscalculated that.

We targeted the airline at 78%, with all of the excess capacity that's in --- or excess resources that are in the industry today, that's a bit low.

We're running--- we now targeted it a little above 80, we are running 84 right now in April.

And our bag numbers we target to be in the top third.

So I think you need to be very, very suspicious of people that have outstanding arrival performance and bag mishandle ratios are in the 8:9:10 range.

I mean they are not running that airline with that kind of arrival performance without lousy bag performance.

And if you remember TWA used to have the best arrival performance in the industry and they went out of business.

So we think top half and we think we'll get there.

Bob's got some details on how we performed in the first quarter.

Yeah, again its shame again.

Our incompletion factor goal's about 99% and obviously we are below that because of February weather.

Our target for on time for the year is 80%, again we are 76 here.

Normally January is the worst month of the year.

It was the best month of the quarter --- we think we'll get to 80%.

And you know we will (inaudible) we don't really care whether someone else is at 86%.

I don't think the customer can tell the difference between 86 and 82 or 83.

Certainly those are making the bags and have pretty on time performance, we think the customer is seeing good performance.

I think the area where we focused a lot on, which is the biggest area improved for AirTran has been complaints and service recovery.

We used to have a --- we used to run a lot of delay --- long delays and we've eliminated a lot of the long delays.

We've dramatically cut down on the DOT complaints and internal complaints.

Our focus has really been across a wide matrix, to try to get the overall customer satisfaction index up.

So again we would have liked to had a little better on time performance, even now it --- again you know --- I'm not going to come out and tell you how we had can-heavy ground stop days in Atlanta.

That's what happens in the southeast in March.

And Delta had the same problem.

It really isn't an excuse, the weather is the weather.

And so hopefully --- what you need to do is when you have a good month you make it up.

We think we will.

So again I think we are really on track to hit 80% on time and have a bag ---lost bag number below three.

If we do that what the customer seeing will be very good.

Okay thank you.

Thanks.

Just want to add our bag numbers month to date in April are 2.52, which probably put us at the top of the industry,

Right.

We have a question from the site of Glenn Engel (ph.) with Goldman Sachs.

Go ahead please.

Good morning.

good morning Glenn.

Last time when you were forecasting unit cost for the year, I thought you were looking for down two or three and your first quarter was certainly down a lot.

Now you're looking for only flat to down one for the year is that correct?

Yes it is, Glenn.

You know we still have some DC-9s in the fleet.

If we can improve on that and beat it, obviously we will strive to do that, but we want to be sure at least we can at least deliver on what we are projecting.

And your first quarter, union labor costs were pretty impressive.

How much was productivity up in the quarter?

Or was it other factors that drove them flat?

Shows primarily the increase in ASMs and we have been hiring the people to do the extra flying on the year-over-year basis.

But obviously when you've got infrastructure in place you don't need to hire proportionally as many people.

A couple of stature on the utilization was up about 10%, the average airplane size is up to 110 to 115 and the number of flights per station was up about 10-12%.

So we had a lot of those kinds of things sort of building on each other and really offsetting contractual wage increases and things like that.

So there're couple of factors that really help station productivity.

Thank you very much.

Thank you Glenn.

We will go next to the site of Herb Cainer (ph.) with Cainer Capital Management.

Go ahead please.

Congratulations fellas on a brilliant quarter.

The last time I looked I think that you guys were in the airline business, given your numbers, its quite impressive.

Thank you Herb.

Joe, Bob, I would like to understand a little bit of history, the past quarter.

Without the fuel spike, without the orange alert, without the CNN effect, what in the world would have happened in that quarter reference to your earnings?

Kevin would have gotten a bonus.

Pardon?

I said Kevin Healy would have gotten a bonus.

No we actually Herb, actually go on into the quarter.

If you go back to those second week of January we really thought we were going to blow the quarter away.

We went in and our business plan is built as Bob mentioned, around very conservative revenue plan, unit revenue, very modest increases, how we built the business plan.

But our --- going into the year bookings look like we could blow that away and have just an outstanding quarter.

Obviously the elements that you've just talked about cause, especially the orange alert, really evaporated some of those bookings.

We were fortunate that we went into the thing --- one of the things we did going into the quarter is we heavily hedged on fuel.

And we took more bookings going in than we normally would take at this time of year because, we looked back at the gulf war and people who booked tended to fly back in the gulf war.

And so we felt like the same thing would occur here, and in fact it did.

We had very few cancellations and to the extent that we had any at all.

Almost all of those to a credit show rather than cash refunds.

So we protected ourselves a little bit there, but we could have had a blow out quarter had it not been for all the things we talked about.

May I follow up?

Sure.

There has been a diminution in terms of the orange alert, fuel spike seems to have fallen.

Can you give us some guidance going into the second quarter the --environment seems to be positive.

And you have got an extraordinary June coming up.

I think the - (inaudible) normally you're, post Easter you begin to see what's going to happen from a business perspective.

And the vying of bookings is pretty good.

But, you know, I think the issue is corporate bookings or business bookings.

I mean I think that's what's been impacted more in March and that's really what we are really uncertain about.

I mean, the leisure customer, the person visiting their mother-in- law or friend, they seem to be booking.

But we don't really know what the business customers are going to do.

So I think - the next two weeks will tell, we got plenty of volume.

Now what we're focused on--- we would like to sell more tickets within seven days or within ten days.

Got you.

And that's what will drive business and it's really just too early to tell.

And the other thing Herb in that regard is the fuel is stubbornly hanging in at $29 per barrel.

I don't think--- nobody that we talked to is an expert in this area that believes the fuel should be that high, now that the war threat is over.

And I'm really a bit surprised that it hadn't drifted down to the 26, $27 range.

I think ultimately it ought to be in the 22 to $24 range.

But there could be some up side if in fact fuel softens up, which I think it should.

Thanks for a great quarter.

Thank you Herb.

We'll go next to follow up from Raymond Neidl with Blaylock & Partners.

Go ahead please.

Stan just a follow up on two of the costs that jumped up this quarter, the maintenance material and the marketing and advertising.

How are those two lines going to look going forward as you continue to aggressively grow and take on the new aircraft?

Well Ray on the maintenance and materials I think Jim Higgins asked the question on the block (inaudible) rate, we are seeing that, that's going to stabilize somewhere in the mid 200s.

We have a ten-year power by the hour agreement on engines which were now in as well as components on the aircrafts we already powered by the hour agreements as well, so that's going to stabilize.

DC9s will be gone, we'll get into mature costs on the maintenance side.

With respect to marketing and advertising we have entered a new number, we have entered a number of new markets, which of course we want to promote.

And in advertising, which we are doing and on the unit cost basis relative to our traffic, I think it's pretty well flat year-over-year.

I think in stronger economic times you would like to drive down that number.

But I think it's the wrong time not to be doing fare sales and promotions that they - so we had stuck with our game plan of trying to grow the markets and we will do that as long as the market place needs the help.

Okay good, thanks a lot.

Ray I just think I'll add one more comment to what Stan said.

I think it's important to understand our business and that today we have about 85% of the 717 maintenance cost locked into very long term agreements on a cost per flight hour basis.

Some others chosen to do it differently but we feel for the long term benefit of the company the sooner we sign these deals up, the better off we are going to be.

And most of these deals are either 5 or 10 years in duration.

The big one being engines is a 10 year deal.

So we have locked that cost in.

Okay good.

Thank you.

Thanks Ray.

We have no further questions.

I will turn it back over to management for concluding comments.

Okay thank you very much.

Let me just wrap up very briefly.

We are satisfied on a relative standpoint of how we performed.

But we are certainly not satisfied on an absolute basis of how we performed.

We really believe that this business model should be producing 12 to 14% operating margins and I think and we will return to those types of margins as soon as this business stabilizes a bit.

As Bob indicated we have put a conservative business plan together.

We don't assume that things are going to get any better.

If they do get better then we will have some up side to our business plan.

But we are certainly not hoping that it will and we are not building our business around hope.

We have had pretty significant productivity improvements in the first quarter.

We will continue to try to get more utilization out of the airplanes, which we think we can get up to about 11.5 hours a day.

We will continue to add additional flights per city, which will improve productivity.

And as the new airplanes come in we get productivity in the way of maintenance cost, in the way of fuel burn and in the way of additional seats per airplane.

So we think that we can keep our costs under control and we will continue to try to work it down.

And as we talked about IS technology is the key to our productivity as well.

Keyas (ph.) (we have three stations right now.

Development, that development program will finish in a couple of weeks and we will start rolling out Keyas technology to all of our stations in the very near future.

IS technologies is helping our frequent flyer program and improved the productivity there and also give us more data about our frequent flyers.

We already have the ability to check in online from home or office with technology, which will help us out as well.

We have gotten four additional gates in Atlanta; we've gone from 22 to 26 gates there.

We are consolidating our ticket counter space in Atlanta; right now we are running a split ticket counter operation.

By June 15th we should be all consolidated in a single location, which will help productivity.

So the revenue will be what it's going to be.

We will try to maximize that and I think Kevin and his guys have done a pretty good job of keeping our (inaudible) up to with significant growth.

But the real laser focus around here will remain on costs, 'cause that's something we can control and we will continue to try to work that down.

So all in all a decent first quarter.

We looked good forward to a good second quarter and we are working on balancing out the third.

We won't have fully done that this year.

But as we go into next year as Bob mentioned earlier, we should see our third quarter next year a lot stronger than we have seen in the past and for this year.

So with that I appreciate your time and attention and interest in our company.

Operator we are done.

Thank you this concludes today's conference call.

You may all disconnect at this time.