西南航空 (LUV) 2003 Q2 法說會逐字稿

Good morning, everyone, welcome to today's AirTran Holdings Incorporated second 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 to Arne Haak, Director of Investor Relations.

Please go ahead, sir.

Good morning, everyone.

I want to thank you for joining us today for AirTran Holdings second quarter 2003 earnings call.

Joining us today is Bob Fornaro, our President and COO, Stan Gadek, our CFO and by conference call, Joe Leonard, our Chairman and CEO.

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 and capacity growth, cost estimates, fleet plans and expectations about our future profitability.

These comments are not historical facts.

Instead you should consider them as time-sensitive, forward-looking statements that are accurate only as of July 29, 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 the forward-looking statements they can be found on our form 10K filings for the year ending December 31, 2002.

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 expressed 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 second quarter of 2003 representing our fifth consecutive quarter of profitability.

We are proud of the hard work and dedication of our employees and thank our loyal and growing numbers of customers who make this success possible.

As in previous quarters, AirTran is on the move and continues to open new markets bringing service to new cities in response to customer demand.

During the second quarter we initiated service from our hub in Atlanta to Los Angeles, Las Vegas and Denver.

The commencement of trans-continental service was a milestone for our company and customers now have a new travel alternative through Atlanta.

Customer response in these markets has been overwhelmingly favorable to our low fares, great service, friendly employees and new airplanes.

In fact, traffic on these routes is well ahead of our initial projections.

As we move forward into the second half of 2003, we can already see the results of our westward expansion and future bookings.

This reinforces and validates our decision to acquire up to 100 new Boeing 737 next generation aircraft which will add new capacity and provide us with the range to fly to any destination in North America or the Caribbean.

We look forward to continued growth of our business bringing low fares and great service to our customers and profitability for our shareholders.

Now, I would like to talk about our statistics.

Beginning with our fleet, we currently operate sixty-four 717s and expect to take nine more by year-end bringing the total 717 fleet to seventy-three.

As in prior quarters, we continue to retire the DC-9s and the last aircraft will be out of the flight schedule by October 1st.

During the second quarter of 2003, AirTran recorded a 17% increase in capacity, as measured in available seat miles.

Capacity growth resulted from the addition of twenty-six 717 aircrafts, combined with a 4.5% increase in stage length to 591 miles.

Traffic or revenue passenger miles increased 20.1% resulting in a 1.9 percentage point increase in load factor to 73.2%.

During the second quarter, AirTran served all-time record number of customers up nearly 15% year-over-year and boarded more than 1 million passengers in the months of June alone.

Unit revenue or passenger revenue per available seat mile increased 4.5% to 9.3 cents as result of a 1.7% increase in yield to 12.7 cents and the increased load factor.

This represents the third consecutive quarter of unit revenue improvement in otherwise weak revenue environment.

Unit cost or cost per available seat mile declined 2.7% to 8.3 cents, from 8.5 cents in second quarter of '02.

This is significant given the fact the cost of fuel during second quarter of '03 was 91.2 cents per gallon including all taxes and fees, compared to 88.7 cents per gallon in the year-earlier period.

On a non-fuel basis unit costs declined slightly more than 1 half of a percent to 6.6 cents per mile, this represents the 6th consecutive quarter of year-over-year unit cost reductions on a non-fuel CASM basis.

As in prior periods, the continued improvement in unit costs primarily reflects the benefits of the new Boeing 717 aircraft, along with the higher productivity of workforce and cost discipline throughout the company.

Average daily utilization declined slightly during the second quarter of '03 to 10.8 hours from 11 hours in the year earlier period.

The lower utilization reflects some minor schedule adjustments which were put into place following commencement of facilities in Iraq.

The schedule cuts have since been restored and utilization is back to planned levels.

During the second quarter, AirTran's completion factor averaged 99.4%,.On-time arrivals were 81.1%, and mishandled baggage claims 2.64 per thousand passengers.

Our second quarter operating performance was very good, given the impact of numerous thunderstorms on our operation in Atlanta.

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

For the second quarter, AirTran earned $57.2 million or 74 cents per diluted share.

Included in these numbers is the receipt of 38.1 million from the U.S. government under the provisions of the Emergency Wartime Supplemental Appropriations Act and a non-cash charge of $1.8 million related to conversion of remaining portion of convertible note by Boeing Capital Loan Corporation.

These two adjustments are recorded in other income and expense section of unaudited consolidated statement of operations.

Excluding special adjustments, AirTran earned $21.9 million or 28 cents per diluted share.

This compares to earnings of $5.1 million or 7 cents per share in the second quarter of 2002.

Operating margin in the second quarter of this year was $13.1%, and represents the best quarterly operating profit margin since the second quarter of 2001.

Passenger revenue grew over 22% to 226.9 million on 6.3% increase in average fare to $76.59 and a 14.9% increase in passengers.

Total revenue increased 22.7% over the year earlier period, reflecting a 47.2% increase in other revenue, primarily from our AirTran Airways Visa credit card and other miscellaneous fees.

Now looking at the individual expense line items unit cost basis, salaries, wages and benefits declined 3.3% from 2.43 cents to 2.35 cents per ASM.

The reduction in unit costs reflects 17% growth in ASMs and more efficient use of our staff.

On a year-to-date basis, salaries and wages decreased 4.5% to 2.36 cents.

Aircraft fuel expense on unit cost basis decreased 10.2% from 1.87 cents to 1.68 cents per mile.

While the price of fuel in the second quarter of 2003 increased 2.7% to 91.2 cents per gallon, our fuel burn per block hour decreased 7.5% to 674 gallons per block hour.

This compares to a burn rate of 729 gallons per block hour in the second quarter of 2002.

The reduced fuel burn results from greater numbers of fuel efficient 717 aircraft, as well as fuel conservation efforts by our pilots.

As a result, the company saved approximately $3.7 million gallons of fuel compared with the second quarter of 2002, for a savings of $3.3 million.

Since the first of the year, the improvement in fuel burn has resulted in the savings of over $7.3 million gallons of fuel at a dollar savings of $7.3 million.

Aircraft rent on a unit cost basis during the second quarter of 2003 increased 56.4% to 1.22 cents per mile, compared to .78 cents per mile in the year earlier period.

As in prior periods, the increased aircraft rent was result of operating lease financing associated with twenty-six additional 717 aircrafts.

On a year-to-date basis, aircraft rent increased 53.2% to 1.18 cents per mile.

Distribution expense in second quarter of '03 on a unit cost basis declined 18.3% to .49 cents from .60 cents in the second quarter of '02.

The reduction in distribution expense resulted primarily from a 5percentage point increase in Internet revenue of 49% in the second quarter of '03, compared to 44% in 2002, and the elimination of the 5% base commission for travel agency sales in June 2002.

Total Internet bookings, including other providers was approximately 60% in the second quarter of 2003, versus 56% in the second quarter 2002.

On a year-to-date basis, distribution expense decreased 20% to 0.48 cents per mile.

Maintenance, materials and repairs decreased 11.1% from .72 cents per ASM to .64 cents.

The reduction in maintenance unit costs primarily reflects the fewer numbers of DC-9 aircraft in the fleet.

On a cost per block hour basis, maintenance expense decreased from approximately 250 dollars per hour in the second quarter of 2002, to approximately $233 per hour in the second quarter of 2003.

On a year-to-date basis, maintenance expense decreased 3% to .64 cents per mile.

Year-to-date block hour costs for '03 were $233 per block hour.

Landing fees and other rent unit costs increased from .51 cents to .54 cents year-over-year.

The increased costs reflect new cities opened since last year and slightly higher rates charged by airports.

On a year-to-date basis, landing fees decreased 1.9% to .52 cents per mile.

Aircraft insurance and security unit costs declined 53.1% from .32 cents per mile to .15 cents per mile.

The reduction primarily reflects lower insurance rates in 2003, as well as payment the of invoices for security services provided by AirTran.

On a year-to-date basis, insurance and security decreased 48.6% to .19 cents per mile.

Marketing and advertising declined slightly from .26 cents per ASM to .24 cents per ASM.

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

On year-to-date basis marketing and advertising decreased 6.9% to .27 cents per mile.

Depreciation expense further declined in the second quarter of '03 to .13 cents from .02 cents in the prior year reflecting retirement of the DC-9 aircraft.

For the remainder of the year, we expect depreciation to remain at these levels consisting primarily of property, plant and equipment, aircraft spare parts and eight owned 717s.

On a year-to-date basis, depreciation declined 36.4% to 1.4 cents per ASM.

Other operating expense on a unit cost basis increased slightly from .84 cents per mile to .86 cents per mile.

On a year-to-date basis, other operating expense declined 15.5% to .82 cents from .97 cents.

Overall, AirTran's unit costs including fuel declined 2.7% to 8.3 cents per ASM.

Excluding fuel, our unit cost decreased over half a percent to 6.6 cents per mile in second quarter of 2003.

Year-to-date unit costs decreased 3.3% to 8.46 cents with fuel and 3.9% to 6.6 cents without fuel.

Turning to the balance sheet, during the second quarter of 2003, the company continued to improve its balance sheet.

AirTran finished the second quarter of 2003 with $343.5 million dollars in total cash, compared to $168.1 million at March 31, 2003.

The primary reason for the increased cash balance were completion of a $125 million convertible debt offering, proceeds of $38.1 million from the U.S. government and cash from operations.

Working capital at June 30, '03 was approximately $181 million compared to a working capital deficit of $48 million at June 30, 2002.

Total debt net of discount at June 30, '03 was $321.3 million compared to $245.5 million at June 30, '02.

Finally, stockholders' equity increased to $119.6 million at June 30, versus $40.4 million at June 30, 2002.

I would now like to provide guidance for the second half of 2003.

Excluding the plane to Las Vegas and Los Angeles, which is currently performed under a wet lease arrangement with another operator, our capacity growth for the third and fourth quarters of 2003 is projected to be 21%, producing an annualized capacity growth of 22%.

For informational purposes, LA/ Las Vegas flying equates to approximately 7% additional capacity.

Regarding fuel, we are projecting the fuel prices for second half of '03 will range from 90 cents to 95 cents per gallon, including all taxes and fees.

In the third quarter of 2003, we are hedged for 49% of our needs at a raw price per gallon of approximately 71 cents or 84 cents, including all taxes and fees.

For the fourth quarter, we are hedged 30% at 72 cents per gallon or 85 cents all in.

We continue to monitor the market and will adjust our hedge positions as opportunities arise.

Non-fuel unit costs for the balance of the year are projected to be flat to down 1% on a year-over-year basis.

Non-aircraft related capital expenditures during the second quarter were $5.2 million.

We project that our non-aircraft cap ex will be less than $20 million for the full year of '03.

Capital expenditures for pre-delivery deposits associated with the new 737 and 717 order, are estimated to be $41 million in the third quarter and $3 million in fourth quarter of 2003.

We believe that cash flow from operations and existing cash balances will be adequate to support the schedule of aircraft payments.

Regarding long-term debt, we will pay off the remaining principal balance of $10.3 million, related to a 13% note with Boeing Capital during the third quarter of 2003 in accordance with the terms of the debt agreement, with repayment of this note and the conversion by Boeing of the remaining balance of a convertible note during the second quarter, the total outstanding balance of Boeing debt will be down to approximately $100 million.

Finally, our effective tax rate for the remainder of 2003 is projected to be approximately 5%.

In conclusion, we would like to thank our customers for their business and continued support, our employees for their friendly and professional service, and our shareholders who believe as we do in the exciting future which lies ahead.

AirTran has come a long way in its history and there is more to be written.

With deliveries up to 110 new 737 and 717 aircraft over the next four years, our company will more than double its size.

With this growth will come new markets and the opportunity to attract and retain new customers.

We believe that the airline industry is evolving and carriers with low costs are in the lead.

As we move forward with our growth plan, the new Boeing 737s will help to reduce unit costs and improve productivity.

This in turn will allow us to continue bringing low fares and value to markets which suffer from high prices.

AirTran is one of the leaders among the low-cost carriers and we are excited about the opportunities in the market place.

As the competitive environment stabilizes, we believe AirTran will be positioned to benefit from improving economic conditions with lower costs, new capacity, and a highly dedicate motivated workforce.

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

Operator, I would like to open the call for questions.

At this time, if you would like to register for a question, press * 1 on your touchtone phone.

To withdraw a question, press the pound sign.

Again if you would like to register a question, press * 1.

We will take our first question from Jim Parker with Raymond James.

Good morning, guys.

Just a couple questions.

One regarding your east coast flights.

You're indicating, I believe, they are profitable.

Can you give us any idea what average fare might be and then also, we in the strong season, and so when we hit fall and winter will we expect to drop back into loss on those flights?

What can you tell us about that?

Jim, I think first of all, we will not give out route deals, we never have done that and we don't plan to, except I can tell you for the first two months of services our load factors are about 87 to 88%, which is better than we thought.

And in the routes are slightly profitable.

Normal seasonality would weaken the routes, but at the same time, I think capacity by Jet Blue will diminish in September, so, we actually think the roots will be better later in the year.

But, again, we feel pretty good about it.

The thing that we know is again, we have probably more staying power in that route than any of the three airlines.

Jet Blue has dropped back.

Delta doubled capacity, which means they are taking big losses on that route because they have very, very low yield, as well.

So, I think it is nice to have two flights and to have them full.

And we have a lot of connecting business on our flights.

Again, we think actually the numbers can improve a little bit.

Loads may go down, we think yields may get better as we move later into the third quarter.

Question for Stan.

Stan regarding the Boeing debt, you say it will be down to hundred million?

That is correct.

Is average interest rate on that about 11%?

What about the refinancing since you guys opted to go with the Boeing aircraft?

Uh, the remaining components of the debt will be approximately $70 million of the senior secured note, which is at $11.27% and approximately then approximately $30 million of the c-traunch of the double etc which carries coupon of 1142.

You can calculate the weighted average of those two pieces.

Are they going to be refinanced?

No, they will not.

They won't be?

Okay.

Thanks.

We'll take our next question from Ray Neidl with Blaylock and Partners.

Now, good morning and congratulations.

Now, just two questions.

The first one a general question.

Looks like Atlanta Coast may become a competitor of AirTran and some of the other low-cost carriers in the east.

I'm just wondering, what is your viewpoint on additional low-cost competitors entering this crowded market?

Could they possibly end up becoming an ally of yours?

Is there any marketing arrangement you can do with them to cover more border territory?

Ray, I don't know how 15 cents a seat mile is categorized as a low-cost carrier.

You know, if ACA decides to go out there on their own, we'ld love to go ahead-to-head with them on our 717 cost per seat mile?

Ok, so you don't think that is going to work with the RJ's then.

Not at 15 cent per seat mile.

Yeah, and the other question Stan is what is your tax rate going to be for 2004.

Do you become a full tax payer then?

Yeah, we do.

It looks like we will be full up on our tax rate probably by the second half of '04.

That would be what, 38%?

That would be 38%.

So, we are looking at composite tax rate of 25-35% for the full year.

I will give further guidance as we get further into the end of the year here.

Ok, for the first two quarters, it will be down about 18-20% or so?

It depends how quickly we burn off our NOLs.

It will be lower than statutory rate for sure.

Great, and the restricted cash, Stan, what composes that?

That's primarily credit card holdbacks with our credit card processor.

Thank you very much.

Thank you Ray.

We'll take our next question from Jamie Baker with JP Morgan.

Good morning, Stan.

With the exception of the recent westward routes, much of your growth in the past couple of years has over flown Atlanta.

What sort of balance should we expect between Atlanta and point-to-point going forward, particularly with seven 3s coming online?

Jamie, this is Bob here.

Hey Bob.

Good morning.

Go back to 1989, about a hundred percent of our activity was through Atlanta.

And today it stands about 72 -75% of our departures and capacity are in Atlanta and about 25 outside of Atlanta.

We really haven't set a target.

I think when w had the Atlanta West Coast flight that may initially distort capacity growth because it is a handful of flights, but a lot of ASMs.

But I would say perhaps what we would like to see is 40% of Atlanta growth, 60% other.

Any guidance, Bob, on how RASMs compare to local Atlanta RASMs?

FORNARO

They are all different.

By definition, a rasim or non-stop to Florida would be lower, but the costs are much lower.

For Florida all the flights typically have much lower costs, lower RASMs and have pretty good margins.

Generally speaking, I think Baltimore is probably comparable to what we are experiencing in Atlanta right now.

Again, I think so far, I mean, for the most part, most of the stuff we are doing outside Atlanta is working quite well.

Uh-huh.

And secondly the AirTran product is falling -- I guess just ever so marginally behind that of other discounters in terms of leg room and IFE.

Should we assume service enhancements or brand enhancements when the 737s start coming online?

One area I would disagree is we've got a business class and I would say AirTran is much more business friendly than some other carriers out there.

You know, the business class obviously works very well.

There are low-cost carriers who don't have seat assignment.

I guess referring to IFE.

We have no plans right now to put IFE in.

We can always add that down the road.

But, you know, we're really not going to really in any rush right now.

We are pretty comfortable with keeping it simple.

And I'm not sure there is much to gain by us trying to follow everybody out there.

So, I think we will try to stick to our current game plan.

This technology changes rapidly.

Who knows what's going to be available two years down the road.

Okay.

Finally, if I may--rare that I ask a third question.

I apologize.

Your predecessor company had a mini-hub of sorts at Washington Dulles.

Given the gyrations there, can I ask if Baltimore is living up to your expectations?

Jamie, Baltimore is actually doing better than we thought.

Again, there was a lot of traffic from Metro Jet.

We were able to step right in.

I think we hold up pretty well against Southwest.

Southwest is bigger and certainly will be the largest carrier there.

But, we fly to Boston, which works pretty well.

We've held up well in Florida.

I think as you know, we are trying to get into DCA.

We are in Dulles.

We like to be in all three Washington airports.

And I think depending on what happens at Dulles, that is a candidate for AirTran expansion as well.

It is a big metropolitan marketplace.

And I think there's advantages to being at all the airports.

Ok.

Thank you very much Bob.

Appreciate your taking the time.

We'll take our next question from Helane Becker with Benchmark.

Thank you very much, operator.

Hi, gentlemen.

Hi Helane.

Okay, two things.

One, just following up on national, I thought the airport authority there said that the airlines operating at the airport were misusing some of their slots because I think they were complaining that the number of seats haven't really changed in the past year.

Or actually, seats have been down and departures have been down.

I guess the FAA is going to allocate more slots on Thursday.

Have they given you indication of whether you can get in there?

No, I guess to give you a little background.

We have been awarded - actually we were awarded couple of months ago, something called air 21 slots.

They can be used only from certain markets.

We have until October 28th to use those four slots.

But we sort of said we are not going to go into Washington National with just two round-trips.

What is up for grabs now is the former America West slots.

And also within a week the FAA is going to have a lottery.

And so I think the odds are pretty good we will get at least four round-trips.

If not, we'll to reassess our plans.

Clearly, if you go back to July of 2001, I guess, the metropolitan Washington Airport authority put out a note actually the other day, seats are down I believe 6 -7% and passengers are down 16-18%.

So, a lot of slots that used to be operated with jets are now being operated with RJs.

So, I think in essence they are supporting some low cost activity there.

Yeah, you know, this thing should sort itself out over the next two weeks.

You know, we're modestly confident that we'll be in there with four or five roundtrips, but we just can't guarantee it.

Yeah, well that report you were alluding to I saw yesterday, which is why I asked the question.

Then, just very quickly with respect to your average fare, I thought you said it was up around 6% Stan.

Is that right, in the quarter?

As you add more West Coast flying, doesn't that increase more?

You know well, the average fare, again, we've only been doing west coast flying for about a month, a month in the quarter.

So, it hasn't had as much impact yet.

Ok.

So what you will see is the average fare should be going up as the stage length goes up.

But obviously the yield will drop, as well.

Because clearly, we are going to have lower average yields in the routes.

It's just a matter of the way the math works.

When you fly long haul, the unit costs go down and you typically dampening on unit revenues, as well.

Right, ok.

Average fare should increase over time.

Did you say anything about bookings in the current quarter in your guidance?

I hadn't.

I guess it's probably not a bad time to talk about bookings.

I would say in terms of again the environment, we see again certainly fares holding steady on a year-over-year basis to up slightly.

But from an absolute volume perspective, you know, we have the strongest advanced bookings we have ever seen, at least in my 4.5 years at AirTran.

Obviously July was very strong.

We have a lot of strength in August.

September bookings look very, very good, although September is always a wild card for a purely domestic only airline.

But I'll say again, from a volume perspective, looks very, very good.

Great.

Thank you so much for your help.

We'll take our next question from James Higgins with Credit Suisse First Boston.

Your revenues look quite strong especially as we compare them to domestic only carriers.

Can you give us any thoughts on where you see the relative strength?

Is it in Atlanta-based flying, is it in your more point-to-point flying, are there any pockets of strength that you can comment on?

Jim, I will take a crack at it.

Again, I can certainly tell you that although the numbers were good, we certainly had impact of the Gulf War.

April was hit pretty hard because of, you know, the actual war.

You know, May was a little weaker than normal because some of the booking issues you might have had around the world impacted future bookings.

All in, it started to come on pretty strong once May hit.

You know, I think generally speaking there really is nothing that stands out as really being exceptional or being poor.

I mean, the whole system has improved.

I will tell you our Denver start-up, which is three 717s is probably the best new start-up we've had in years.

And again, probably the timing is right, the summer market for us.

So, that happened and that turned on pretty well.

But, I think we're seeing strength in Florida and strength in the North East.

And, I just have to say everywhere.

Jim, let me just add to that.

We have been very patient to build an integrated workout, really a leg at a time.

Our network today is really quite strong.

I think the network strength plus the fact we are running a really good airline.

Our completion factor is very good, our bag numbers are second best in the industry for last year.

We got the same trend going this year.

Our people are friendly.

We're seeing a lot more business flyers who are choosing us as their first alternative or as their first choice than we have ever seen before.

So I think it's just a culmination, we've finally got it all clicking and it is a culmination of the work we've put together over the past four years.

Great.

Thanks very much.

We'll take our next question from Ken Green with Boston American Asset.

Yes, near the east-west flights, the 737, when were you going to start flying those yourself?

When you get delivery of the 737s, I assume?

Our first deliveries of 737s are in June of '04.

So, probably not until July of '04.

And then a specific question on Pittsburgh.

Is your plan to Pittsburgh to increase departures out of there?

Would you create some point to areas particularly in the midwest?

You know, certainly our strategy, just to stop for a second, is generally to look for high fares.

So, Pittsburgh is always on the radar screen because of the high fare environment.

And it is also a relatively high-cost airport so you have to be careful about the cost there.

But, I would say Pittsburgh is one option.

But, you know, we're kind of going to hold our cards close to our vest.

We do believe there is going to be further restructuring for the high-cost carriers.

Some of these secondary hubs I believe are going to get smaller, rather than bigger.

So, that means we're going to have opportunities in several of these smaller hub markets, including Pittsburgh.

Thank you.

We'll take our next question from William Greene with Morgan Stanley.

Good morning.

I just have a quick question for Stan on insurance and security.

It dropped a lot sequentially as well as year-over-year.

Is this a run rate we should assume going forward, 3.7 or can it keep dropping?

I think, Bill, we had some accruals that were reversed in the quarter here.

So, I would use a different run rate.

We can give you some guidance on that later.

Ok.

Fair enough.

And then the second question is, can you comment on the flight attendants, is this something to worry about that they rejected this contract?

Will it mean higher costs on the labor line going forward?

Yeah, obviously we are disappointed that this thing didn't get passed because it was strongly supported by both the local union as well as the national AFA.

We were all surprised, quite frankly, that it didn't pass.

We are not overly concerned about it.

The relations are amicable.

We're going to sit back and let the union do some spade work on what they think went wrong and we will readdress it again.

I think the relations are still excellent at both the local and national level with the unions and with our employees.

So, that remains unchanged.

I think if you remember a couple of years ago, the first time we voted our pilots' agreement, that didn't get ratified the first time around.

I think that is sort of becoming a trend in the industry that you automatically vote down the first one to see what you can get on the second go around.

While we're disappointed, but not overly concerned.

Do you know what the sticking points were?

Don't really know yet.

The union is out doing some polling right now to see what they think we need to do.

We will sit back down and try to work through it.

A lot of work went into the contract on both the union's part and our part.

So, we'll refigure it somehow and take it back out at the appropriate time.

: Ok.

Thanks for your help.

We'll take our next question from Dan Morton with Daniel Morton and Company.

Hello all, how are you?

Stan, in the past you and I have been discussing the accounting treatment for the revenue and expenses of the west coast flights.

I recollect that you are netting the revenue and expenses into one number and showing that in passenger revenue?

That is correct, Dan.

The reason we do that, is that statistics are reported by the other operator.

And this is consistent with the accounting for these types of operations according to our auditors.

So, then going back to the question that was asked earlier about average fares.

I presume that we don't see the average fare at all of the west coast operations in your data?

That would be true.

And going beyond that---

Stan is that right?

Yeah, that's right Joe.

So as we go further, I have already expressed my concern and I won't do it anymore, but it tends to confuse numbers a lot being done this way, particularly as you expand the operations through sometime next year.

But, regardless, you of course, as you have said, had only a small portion of a quarter impacted by those operations.

Now, we've got a 4% yield for the quarter, but 4% increase -- but would I be correct in assuming that of course you had no impact of the west coast net in April and very little really to speak of in May.

So all of that really was in one month, June?

That's right.

And consequently what we as an impact on the yield for the full quarter is not the kind of thing we would be carrying forward into the future.

In other words, it would be much better.

Assuming that is as I am that you are going to be profitable out there.

In general, I guess you could come to that conclusion.

I think I would temper it by saying in the longer haul, typically yields are going to be less than in the shorter haul flying.

Right.

But as I understand it, we're netting revenue and expense so that impact doesn't show up.

That is true.

I would just say it is too soon to tell with one month of activity in the quarter.

We will see how that develops.

Well, thank you very much and congratulations.

You really shot the lights out.

This is just great.

Thanks Dan.

Dan, I'm with you, you know we really debated how to account for this west coast flying.

I would rather show the revenue and the expense, but this is what the auditors tell us is the standard way of doing this.

We also do this with the Jet Connect, as well.

I understand, I just wish it could be netted out in other revenue, instead of passenger revenue.

I see your point.

Thank you.

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

Hi, guys.

Congratulations on the quarter.

Hi Gary

Just a couple quick questions for you as clean-up.

Judging by the difference between ASM growth and block hour growth, I mean I -- in seeing what happened your average length of haul, I assume your stage length was up.

Is there any way for you to tell us what it was this year and last year?

And was there anything else?

It seems like it would be more than stage length, the difference in growth between your ASMs and block hours system is pretty significant, any other color there?

Well the stage length has gone up from 567 to 590, which is a pretty good move.

You get 10 more seats on 717 than you get on a DC-9.

Okay.

The I guess the other thing I wanted to ask you was about just in general as you look forward, your ability to get airport facilities, to meet your growth plan I am just wondering how those discussions are going?

Are you running into any issues there or are you finding that people are sort of welcoming you with open arms?

Let me take that.

Bob, we're having much less problems getting facilities even at airports than we used to have considerable problems.

Gate space is no longer a problem for us with the exception of Chicago.

O'Hare is still pretty much blocked up.

LaGuardia is very tight although we will get another gate in LaGuardia soon But other than that, we've been able to get additional gates other than WashingtonNational.

I think we've been working at this 4 and a half years.

I think we have got the best shot at getting slots at National than we have ever have had.

That doesn't mean we will get it, but we are certainly encouraged.

Gates are not a problem when we want them.

And airports are visiting us in record numbers trying to get us to come to almost every city in the country.

Okay.

Just one other question.

Operationally as you look forward into next year and the integration of the 737s, it will add some complexity to the operation.

You've obviously got the 717 inductions down.

Can you give us any color as to what you are doing to make sure there won't be a hiccup out there as you roll out that fleet type?

We have done a number of things.

If anyone wants to chime in, please do.

We've already got the flight manuals written for both the Airbus and the Boeing.

As soon as we started seriously down the road of considering this, we put a program manager for the 737 and one for the 831920.

Those manuals are already done.

So, we'll be moving to the FAA way, way ahead of schedule.

To do that we've gotten all the FAA material on what they look for in the development of a new airplane.

We are very, very close to naming a full-time program manager to oversee the overall program.

We've got -- we had 737s in our fleet before.

So we have a fair amount of experience with the 737s in-house.

A head of maintenance came from Canadian where they operated the 737s.

So, we have a good bit of know-how.

I was up with our flight operations people in Minneapolis the other day, looking at simulator trainers, these are stationary trainers, but state-of-the-art technology.

And Boeing and General Electric and others are going to give us significant support in getting this airplane ready.

So, we think we are way ahead of the power curve at this point.

But, you know, you got to keep your eye-your antenna up for things that can go wrong at the last minute.

Yes, I guess I'd like to add one other --as we have experience in this regard.

For 1999 to 2000, we actually operated three fleet types and have been operating two ever since.

So, we'll get to one for about six months and then we'll start going back up.

You know, we've historically operated in effect to more than one type of airplane.

And so we think we can go forward and do that in the future.

Okay.

Just one last clean-up one.

What was the business mix in the quarter, Bob, is there any way to articulate that?

Well now, the business mix, again, the business mix is tricky because it is hard to tell who is a business flyer and how tickets work.

Right now I would say tickets inside of seven days are roughly 30% of the customer and about 45-48% of the revenue.

One things we have seen over the last two years and I don't know whether it is permanent, I think there has been a fundamental shift in purchase patterns.

I think business travelers are booking further out.

You're seeing fewer close-in bookings because the customers see better opportunities by booking eight, nine days out.

So, it's -- maybe kind of apples and oranges now.

I think there are quite a few business travelers flying,.

They are just purchasing at further out intervals.

Is your zero to seven volume as a percentage of your overall business up year-over-year or flatish or -

On the -It's probably about flat.

Again, as you add a long-haul route to Florida, those people tend to book further out.

I mean, I'd say that if you look at Atlanta in general, it's probably flat.

Ok.

Thanks a lot, guys.

We'll take our next question from Michael Linenberg with Merrill Lynch.

Yeah, gentlemen, good morning.

Just one question.

When you look out into the fall and you look at some of the stuff that Delta is doing out of Atlanta, looks like they are ramping up RJ service into a lot of your markets like Wichita, Akron, Newport News, Pensacola.

As I recall, I think you committed to, I want to say, 10 RJs with Air Wisconsin.

Does that type of behavior by Delta, does it make you rethink the number of RJs you want to take from Air Wisconsin?

You know, how do you respond to these type of initiatives?

I am glad you asked the question because I think it is an important one.

You know, I think first of all, you know, I think we're probably structured better than ever in terms of product -- I'm sorry, Mike, in terms of fundamental route strength.

If you go back to 9/11, I think Delta has cut capacity, their mainline capacity 15-20%.

I think their capacity is down in Atlanta at about 5%.

But their capacity at AirTran markets is up 3 to 4.

So Delta has a strategy of chasing AirTran wherever it goes.

In fact they have a strategy of chasing Jet Blue.

So they are putting a lot of assets up against have very profitable airlines and in the process are taking substantial losses.

Actually, in fact, recently they announced an additional RJ flight, they actually pulled that out of a monopoly route to Atlanta to use the asset to put in AirTran markets.

So there certainly is a pattern.

And again, our numbers are getting better with all this capacity coming on top of us.

Our response has been number one, if they are going to keep doing it, we are going to keep making the hub bigger.

We get stronger as Atlanta gets bigger.

It hasn't impacted our volumes.

We can be profitable in these kind of markets when they can't.

So again, when capacity comes into our market, we will compete vigorously and maybe add capacity some place else.

If we lose traffic in one place, we will make it up some place else.

It has been going on about two years and AirTran about two years ago had about 140 to 145 flight to Atlanta.

Now with the RJs in our main line we are almost 190.

So we have gotten bigger, and I'd say their strategy is failing.

It is not slowing us down.

They are losing a lot of money.

So, I think they have to reexamine what they are doing.

Certainly they are not focused profitability.

That's for sure.

Bob, as a follow-up and I know I wasn't clear when I initially articulated the question.

When you look at markets, let's throw a Newport News out there as an example, where Delta, I think, is flying the CRJ 700s, I guess its really a ComAir, or an ASA shell, at a market where you may actually be flying the 717.

I'm curious about just what your performance revenue-wise has been in that market, you know, year-over-year because you have a business class cabin and they don't.

I mean, is it possible that you could be generating premium revenue at least with respect to the local passenger in some of these markets?

I mean, that is what I am trying to get at too?

Ok.

It is a two-step process.

Generally when a competitor has capacity in the market, there always is an initial hit.

Because that is what capacity does.

But I will tell you in many of our markets, you know, we face RJs, we have by far superior ride.

You put a 717 with large bins, full-size cabin of business class, up against a 50 or 70 seat RJ.

I mean from a product perspective it really isn't close.

You know, we're seeing RJs flying 800 to 1100 miles, that's not a very good product.

So I think eventually in some markets where we were in these markets initially, we're probably stronger today than we were three or four years ago.

Because we have a superior product and we have certainly have brand loyalty in a market where we have been there first.

So, I think all over time, again, we compete against all kinds of equipment.

But, I think an RJ clearly is an inferior product.

And I think again, the longer the routes these things are on, the more inferior it gets.

You can't upgrade on an RJ.

You can't put your bag overhead and certain sized bags overhead.

It really makes me wonder how effective RJs will be in the long run against the low-cost carriers.

I think the other thing I would add, Michael, is the beauty of the 717 is the plane mile costs are not that much different than an RJ.

But, the seat mile costs are incredibly lower.

Okay.

Well, listen thank you for the comprehensive answer and great quarter.

Thank you Michael.

We'll take our next question from Lori Fabian with Sky Blue Capital.

Thank you.

Good morning gentlemen.

Good morning Lori.

Stan, can you speak a bit about your expectations for the financing of the 737s and sort of a breakdown versus what will be owned and leased aircraft?

SureOf the 50 firm order of 737s, 22 will be take on operating leases from GECAS.

We already have that commitment in place, leaving 28 aircraft to be financed.

I will tell you that all of our deliveries through 2004, the financing is already in place.

So, we're talking about deliveries in '05 and beyond.

As we get closer to that time frame, we will take a look at the equipment financing market as well as debt market and make a determination at that time.

Okay.Thank you.

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Okay.

We will take our next question from David Van Hueten of JP Turner.

Good quarter guys.

Good business class.

We really enjoy you out in Denver.

Thanks David.

Any possibility of doing anything more out west before the 737s arrive?

Well, I think certainly, but we need to get established first.

So, our plan would be to establish ourselves in the west coast markets from where we are stronger first.

Obviously that's Atlanta today.

Perhaps a few other points in the east, in the future.

So we have to put the building blocks in place.

Again, our strategy is just to not to open up routes.

We like to tie the new routes to where we have fundamental strength.

So it will take a little time before we can change our game plan.

Okay.

Any concerns with Jet Blue nibbling a little bit?

No, you know what, again, AirTran and Jet Blue are different.

You know, we don't see much opportunity for us to go head-to-head with them in JFK.

You know, they're bigger, they're stronger.

They have more support up there.

Again, we found out there is not a lot of support for Jet Blue in Atlanta.

So, we're going to build where we're strong.

If we've got our route structure in place, we can compete with anybody.

So, our game plan is to put together strong route structure.

We got low cost, strong restructure, we will be successful in any environment.

That's the way we're going to put AirTran together in the future.

We see a lot of opportunities, even without any other restructurings out there by the majors, to grow the airline for more strength in the future.

I know you are keeping cards close to your vest, but St. Louis certainly would come to mind for that, wouldn't it?

I think certainly St. Louis is an option.

There may be other options out there becauseyou know the majors, in general, are still cash negative.

And they have a long way to go and right now our revenues are down 25- 30% since the peak and capacity has not come down the same amount.

There will be a few more shoes to drop over the next year.

Awesome job.

Thank you.

Thank you David.

It appears there are no further questions.

I will now turn the meeting back to your moderator, Joe Leonard.

Thank you very much.

Thank you, Stan, Bob and Arne.

Obviously we are very excited.

This was just one hell of a quarter for us.

Not only from a financial standpoint, but debt restructuring of -- or debt offering of $125 million, 110 airplane order, new service to the West Coast makes us coast-to-coast.

First month we have ever served over a million customers was in June.

There will be many more of those to come.

So, we're back to double-digit margins, which is what we need.

And what we're used to getting.

So, we're very proud of the fact we're back there.

We think there will be a lot more quarters looking like that, as well.

Secondly, our operations are really quite good.

One of the things our rival performance in the DOT is very, very high, higher than it has ever been for the industry.

A lot is being done with just an enormous amount of block time pad, which is the most expensive way to get on-time performance.

A lot of spare airplanes, a lot of spare crews sitting around.

We are not operating that way.

We are operating the 60% block.

We have two DC-9 spare airplanes and that's it.

We are working our fleet pretty hard at 11 hours per day.

So we have got excellent operations, excellent bag numbers.

Again, second best in the industry only to Alaska.

We continue to do that, so, very high completion factors, very friendly service.

People love the new airplanes when they see them and get on board.

As Bob already reported, bookings going forward are the best I've ever seen here.

Very, very encouraging.

We've taken revenue numbers up almost every week for the past eight weeks.

So, we see a good third quarter and obviously the third quarter is not as good for us as the second quarter.

But this will probably be the strongest third quarter we've ever had.

It looks like going forward, we see just tremendous number of opportunities in place for airplanes.

Our confidence level is very, very high.

We believe that as long as we are smart and prudent in our route selection, that we can put our airplanes anywhere we want to and there is really nothing anybody can do about it.

We've shown that, i.e. the conversation we just had with Delta end capacity and every single on of our markets losing a tremendous amount of money and having no impact on us.

So we are very confident we've already basically established where we are going to put the fifty 737s.

That will change obviously from time to time, but the good news is we don't find any problems placing fifty 737s as we move forward.

So, we're very bullish, very confident and very proud of all of the crew members at AirTran that have worked so hard and built this network and are providing the product that our customers seem to like and being able to do it at the fares people that can afford.

So, that's sort of the wrap-up for the second quarter.

We look forward to seeing you again in the fall after we announce our 6th consecutive profitable quarter for the third quarter.

Thank you very much.

Have a pleasant day.