西南航空 (LUV) 2003 Q3 法說會逐字稿

Please standby.

We're about to begin.

Good day, everyone.

Thanks very much for holding, and welcome to today's AirTran Holdings third-quarter 2003 earnings release conference call.

Just a reminder that today's conference is being recorded.

At this time for opening remarks, I would like to turn things over to the Director of Investor Relations Arne Haak.

Please go ahead.

(technical difficulty) quarter 2003 earnings conference call.

Joining us today is Stan Gadek, our Chief Financial Officer, Bob Fornaro, our President and Chief Operating Officer, 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 relating to our outlook for AirTran's growth plan, fleet plans, future cost estimates, resident capacity growth, load factors and expectations about our future profitability.

These comments are not historical facts.

And instead you should consider them as time-sensitive, forward-looking statements that are accurate only as of October 22nd, 2003.

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

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

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

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

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

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

Thank you, Arnie, and good morning everyone.

Today AirTran Holdings was pleased to announce net income of $19.6 million or 24 cents per diluted share for the third quarter of 2003, representing our sixth consecutive quarter of profits and a record third quarter since our return to profitability four years ago.

We again wish to thank our customers for their support and our employees for their hard work and outstanding service in helping AirTran to achieve these earnings.

During the third quarter, we continued to expand our route network by announcing new service to Ronald Reagan National Airport in Washington D.C. and to San Francisco International Airport in California.

With service to Reagan commencing tomorrow morning and to San Francisco on November 12th, AirTran continues to bring its of low fares and great service to more and more customers.

In addition, we continued to enhance our service by offering increased frequencies and new city pairs throughout our existing route system.

We believe that the strength of our third quarter financial performance validates the growth strategy which we have been following for the past two years.

Even in an environment characterized by flat to slightly increasing revenue trends, we continue to generate profits because of our low-cost structure.

We believe that we can grow our profitability because our already low costs are going to go lower.

We have completed a major aircraft order which will provide low-cost capacity.

And we have a future growth strategy that focuses predominantly on increased frequencies, connections between cities in our already strong route network, and the addition of one to three new cities per year.

This growth plan is cost-effective and less risky as compared to a strategy based entirely upon the opening of new cities, which would require a substantial investment in infrastructure and marketing.

As a result, we believe that we can continue generating profits, and we will be able to grow our margins going forward.

During the third quarter, AirTran improved its liquidity and strengthened the balance sheet with the completion of an equity offering of common stock for approximately 9.1 million shares.

Net proceeds of $139.3 million were received on October 1st, at which time we repaid at par $35 million of 11.2 percent debt held by Boeing Capital and purchased one million warrants for $11.4 million.

The remaining funds were retained the balance sheet, and will be used for working capital with capital expenditures, including capital expenditures related to the purchase of aircraft.

Now I would like to talk about our statistics.

Beginning with the fleet, we are presently operating 69 Boeing 717s, and expect to take four additional aircraft for a total of 73 by year end.

All DC-9s will be retired, and the last DC-9 flight will occur sometime in November.

During the third quarter, AirTran's capacity increased 21.3 percent, as measured in available seat miles.

Capacity growth resulted from the delivery of four additional 717 aircraft during the third quarter.

Year-over-year, we have taken delivery of 25 717s and retired 15 DC-9 aircraft.

Traffic or revenue passenger miles increased 33.9 percent, resulting in a load factor of 73.4 percent or 6.9 points higher than the third quarter of 2002.

The current quarter's load factor ties a previous third-quarter record load factor in the third quarter of 2000, which was based upon 42 percent less capacity than that of the current period.

In addition, the current quarter's traffic and capacity statistics do not include flying, with is performed under a wet lease with Ryan International in the Los Angeles and the Las Vegas markets.

For the third quarter of 2003, AirTran set another all-time record by serving 3.1 million customers -- up nearly 28 percent over the third quarter of 2002.

Unit revenue or passenger revenue-per-available-seat mile increased 6.4 percent to 8.83 cents primarily on the strength of the increased load factor, partially offset by a reduction in yield of 12.03 cents or 3.6 percent.

The reduction in yield resulted from a 4.3 percent increase in stage length, while the average fare increased to 1 percent to $73.64.

Unit revenue performance for the third quarter represented the fourth consecutive quarter of year-over-year unit revenue improvement in an otherwise weak revenue environment.

Unit costs or cost-per-available-seat mile declined 1.3 percent to 11 point -- I'm sorry -- to 8.11 cents from 8.21 cents in the year earlier period despite a 5 percent increase in the price of fuel and an 11.6 percent increase in a total cost of fuel.

On a non-fuel basis, chasm increased less than 1 percent to 6.36 cents year-over-year, due to the additional costs from carrying a record number of passengers.

As the 717 aircraft have replaced the DC-9s, we have been realizing successively greater savings in fuel as a result of the 24 percent improvement in fuel burn.

On a fuel-neutral basis, AirTran operating chasm declined 2.3 percent from 8.21 cents in the third quarter of 2002 to 8.02 cents in 2003.

Year-to-date, our fuel neutral chasm was 8.17 cents, representing a 4.6 percent reduction compared to the similar period of 2002.

The declines in unit costs clearly reflect the benefit of the fleet investment in the Boeing 717 aircraft.

Average daily utilization increased 2.5 percent to 11 hours in the third quarter of the 2003, compared to 10.7 hours in the prior period.

The increased utilization reflects the greater number of 717 aircraft year-over-year, resulting in improvements in reliability and scheduling efficiencies as the DC-9s leave the fleet.

In addition, the 4.3 percent increase in average stage length reflects longer legs of flying which also contribute to the increased utilization.

Regarding AirTran's operational performance, our third quarter completion factor was 99 percent, on-time arrivals were 75.6 percent, and mishandled baggage claims were 2.77 per thousand passengers.

Now I would like to talk about our financial performance.

For the third quarter of 2003, AirTran earned 19.6 million or 24 cents per diluted share.

This compares to 1.2 million or 2 cents per diluted share in the third quarter of '02.

Operating margin was 11.1 percent representing a 7.3 point increase over the prior year and the best third quarter margin compared to the last four years of operating profits.

We believe that the improvement in our third quarter results, which on an historical and seasonal basis has been our weakest quarter, demonstrates the improvement in our year-round revenue generating ability brought about by the changes we have made to the route network.

Finally, passenger revenue grew by more than 29.1 percent to 229.8 million on a 27.8 percent increase in passengers and a 1 percent increase in average fare.

Total revenue increased 29.6 percent to 237.3 million, including a 53.3 percent increase in other revenue, primarily from AirTran Airways' Visa credit cards and miscellaneous fees.

Looking at the individual line items of expense on a unit-cost basis, salaries, wages and benefits declined 5.4 percent to 2.8 cents per ASM, from 2.41 cents, and on a year-to-date basis declined 4.9 percent to 2.33 cents from 2.45 cents.

The reduction in unit costs reflects the significant ASM growth we have achieved without a proportionate increase in headcount.

This illustrates the tangible benefits from our growth strategy which, as I mentioned, focuses predominantly(technical difficulty) frequencies, connections between cities and a limited number of new destinations.

By growing in this manner, we improve the productivity of our existing staff facilities and aircraft, resulting in further improvement of our low cost structure.

Aircraft fuel expense on a unit-cost basis declined 8 percent from 1.90 cents to 1.74 cents in the third quarter and 3.5 percent from 1.88 cents to 1.81 cents year-to-date.

While the average cost per gallon of fuel is up 5 percent in the quarter and 9.9 percent for the year, the improvement in fuel burn from the Boeing 717 aircraft has more than offset the increase in fuel prices.

In fact, fuel burn-per-block hour decreased 9.5 percent to 654 gallons-per-block hour in the third quarter and 8.3 percent to 667 gallons-per-block hour year-to-date.

Now, the magnitude of these reductions is significant.

It equates to having saved 4.9 million gallons of fuel in the third quarter alone and 12.2 million gallons of fuel year-to-date.

At today's prices, that is equal to cost reductions of $4.8 million and $12 million, respectively.

Clearly, the 717 aircraft is highly effective in reducing fuel costs in a high fuel-price environment.

Aircraft rent on a unit-cost basis increased from .92 cents to 1.26 cents or 37.3 percent.

Year-to-date aircraft rent increased 46.6 percent from .82 cents to 1.21 cents.

As in prior periods, the increased aircraft rent resulted from the greater number of 717 aircraft in the fleet financed with operating leases.

Distribution expense on a unit-cost basis was .45 cents, representing a 1.3 percent reduction over the third quarter of 2002.

Year-to-date unit costs were down 14.3 percent from .55 cents to .47 cents.

The reduction in distribution expense reflects a 9 percent in internet revenue mix to 52 percent compared to 43 percent in 2002.

Total internet bookings, including other providers, was approximately 64 percent in the third quarter of 2003 versus 54 percent in the third quarter of 2002.

Maintenance materials and repairs increased to .55 cents from .44 cents for the quarter and from .58 cents to .61 cents year-to-date.

Maintenance cost-per-block hour increased 29.9 percent from $155 to $202 per block hour in the third quarter and 10 percent from $202 to $222 year-to-date.

The increased maintenance expense primarily reflects the commencement of the long-term maintenance agreements for the Rolls-Royce engines on the Boeing's 717.

In the year earlier period, the engines were under warranty coverage.

Landing fees and other rents increased slightly from .51 cents to .52 cents for the third quarter.

Year-to-date unit costs were essentially flat year-over-year at .52 cents.

Increase in third-quarter expense reflects the costs associated with new cities open since last year and slightly higher rates charged by airports.

Aircraft insurance and security service unit costs declined 41.8 percent to .2 cents from .34 cents for the third quarter.

Year-to-date unit costs declined 46 percent from .36 cents to .2 cents.

The reductions primarily reflect lower insurance rates in 2003.

Marketing and advertising unit costs declined 11.4 percent to .23 cents for the quarter and 6.7 percent to .26 cents year-to-date.

The reduced unit costs for marketing and advertising primarily reflect the increased ASM's, resulting from our growth plan.

Again, this illustrates the benefits of low-cost, low-risk growth in cities where we have an established presence and which do not require the advertising commitment that we would normally dedicate for a new city.

Depreciation expense unit costs declined 32.3 percent to .13 cents and 35.6 percent to .14 cents for the third quarter and year-to-date, respectively.

The reduction in depreciation reflects the retirement of the DC-9 aircraft.

Other operating expense unit costs decreased from .81 cents to .75 cents or 7.5 percent in the third quarter.

Year-to-date unit costs declined 12.7 percent to .8 cents from .91 cents.

Expense items in this category typically include passenger-related expenses and other items.

Overall, AirTran's unit costs declined 1.2 percent to 8.11 cents in the third quarter and 2.6 percent to 8.34 cents year-to-date.

On a non-fuel basis, unit costs increased less than 1 percent in the quarter and were down 2.4 percent year-to-date.

Looking at the balance sheet.

During the third quarter of 2003, AirTran continued to improve the balance sheet through profitability and as a result of the equity offering previously discussed.

Net proceeds from the offering were approximately $139.3 million and were received on October 1st.

Concurrent with the funding, AirTran repaid at par $35 million of 11.27 percent senior debt held by Boeing Capital.

The retirement of this debt will result in a non-cash charge of approximately $5.6 million in the fourth quarter to record the write-off of unamortized loan fees and discount associated with the reduction of principle.

In addition, we purchased from Boeing Capital warrants for the purchase of one million shares of AirTran common stock.

The effect of this transaction reduces the number of fully-diluted shares outstanding by approximately 700,000 shares.

Following the debt repayment on October 1st and a scheduled principal payment of 3.3 million on October 15th, AirTran's total long-term debt is $277 million.

Our outstanding long-term debt consists of $32 million of 11.27 percent senior notes held by Boeing Capital, $125 million of 7 percent convertible debt, and $120 million of 10.28 percent EE2C (ph) debt.

Total cash as of September 30th, 2003 -- prior to the receipt of proceeds from the stock offering and the October 1st and 15th debt payments -- was $308.7 million.

Stockholders' equity at September 30th was $143.2 million, and upon the closing of the equity offering on October 1st, increased to 265.4 million.

Finally, the Company has the option to repay the remaining $32 million balance of the Boeing senior debt at par prior to year end.

In addition, we will evaluate the cash purchase of two Boeing 737 aircraft to be delivered in August and September of 2004.

I would now like to provide guidance for the remainder of the year.

Our fourth-quarter ASM growth is projected to be approximately 21 percent at the end of the quarter, resulting in an annualized growth rate of approximately 21 percent as well.

Keep in mind that our Los Angeles, Las Vegas and San Francisco flying is performed under a let (ph) lease, and the capacity and traffic statistics are reported by the let-lease operator.

For informational purposes, that flying equates to approximately 9 percent of additional available seat miles in the fourth quarter of 2003.

During the fourth quarter, we are projecting fuel to average between 95 cents and a dollar per gallon, including all taxes and fees.

In the fourth quarter, we are hedged for approximately 67 percent of our needs at a raw price per gallon of approximately 82 cents or 95 cents all in.

We are projecting that operating costs per ASM for the fourth quarter will be flat on a year-over-year basis.

Non-fuel chasm is projected to be flat to up 1 to 2 percent.

And fuel-neutral chasm is expected to be down 1 to 2 percent year-over-year.

Non-aircraft-related capital expenditures during the third quarter were approximately $2 million and total CapEx for the year will be approximately $20 million.

Aircraft deposits for the fourth quarter are projected to be 1.5 million.

We expect to fund all capital expenditures with cash flow from operations and existing cash balances.

And, finally, our effective tax rate for the remainder of this year will be approximately 2.5 percent.

In conclusion, we would like to, once again, thank the many customers who fly AirTran everyday and who have discovered our special offering of low fares and great service.

We would also like to recognize the efforts of our employees who are working hard to build an airline that customers will want to use again and again.

Our people are truly our greatest asset, and we are proud of the teamwork and enthusiasm which they bring to their jobs everyday.

And finally, we want to thank our new and existing shareholders for their support.

We view our obligation to generate profits as one of our highest goals.

Our investors have placed their trust and confidence in AirTran, and we intend to reward them with superior financial performance.

We believe that our opportunities are bright against an industry backdrop of bankruptcies, mega-losses, and increasingly poor customer service.

Our plan is simple.

Low costs are going lower.

Low-cost capacity will be coming from a major aircraft order.

And we have a profitable growth strategy, focusing predominantly on increased frequencies, connections between cities in our established route network and the addition of one to three new cities per year.

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

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

Thank you. (OPERATOR INSTRUCTIONS) We will pause for just a moment.

And we will take our first question from Jim Parker at Raymond James.

Good morning, guys.

Just a question regarding airfares.

Are you seeing any indication that fares might be improving, say, for the holidays or peak travel periods ahead of us?

Jim, if I had to characterize airfares, I think -- you know, leisure fares are fairly -- are pretty solid.

I think business fares, if you want to call -- what a business fare is, booked inside of seven days -- that area is weaker.

I think we still see customers shifting their purchase habits further out from the day of travel.

And as that happens, that pushes you into lower yield categories.

So I think it's not robust.

I think it's -- it's really not declining but really I don't see that much strengthening at least in the short-term.

Right.

You guys are obviously doing just a fabulous job.

And the numbers certainly so show that.

Now I live in Atlanta and read the newspapers, and they are writing about on-time performance.

And Stan, I think you mentioned it, and it doesn't appear that that's any kind of problem.

But what are you doing about the on-time -- the completion is very high -- but is there something you can do about on-time performance?

(indiscernible) I get to go through that.

I think you're accurate.

Again, our goal from a completion factor is to be in the top quartile (ph) in the industry, and we're there.

From a baggage perspective, the same thing.

In fact, we're probably number one in the third quarter in the industry in baggage.

And really the same, area of complaints.

In terms of on-time, our on-time performance for last year in the third quarter was 80 -- just over 80 percent.

This year was about 76.5 percent.

So it was lower.

And I think there is two primary reasons.

One is we probably have the shortest block times in the industry, and I think too short for a summer (ph) operation.

And we really had about 24 weather days in Atlanta that really hurt us.

And shorter your haul, the more you're impacted by ATC.

There is clearly -- in Atlanta and most centers, long-haul flights and international flights clearly get priority in terms of landing, and most of our flights to Atlanta are under 500 miles.

In September, we're over 85 percent on time, and in October, we will be in the same area.

So, clearly a rebound in any way.

But our strategy has not been to -- you know, pad the blocks -- like a lot of carriers do.

We find it kind of interesting that someone can be very high on-time and lose a lot of bags -- which says you're fundamentally not running a good operation.

You're leaving customers behind, and you're sending the airplanes out with bags.

That has been our priority -- is to get a customer there with their bags.

So what we need to do is improve the on-time and it's already happening.

And to be honest with you, it's not that hard to fix.

It's a matter of where you went to put your references.

We don't want the airplane arriving 20 minutes early, which happens a lot around industry.

But we have taken a number steps, and I think you already see when the September numbers come out and the October numbers come out that there will be a big improvement.

Great.

Bob, we'll look forward to their writing some good stuff about September.

Thanks.

Our next question comes from Ray Nettle at Blaylock (ph) and Partners.

Good morning.

Stan, a couple technical questions for you.

For 2004, what is the tax rate?

What is the -- what is your projections for the balance sheet?

I know you're still pretty heavily leveraged against the stock deal?

And what is going to be the ASM growth by quarter?

First of all, in the tax rate we anticipate that we will still be in an NOL loss-carryforward situation through the first half and then we will be full-up in the second half.

So I'm guiding currently at about a 25 percent rate of tax for the full year.

In '05 we will be full up at probably about a 38 percent.

In terms of ASM guidance, we're still in the budget process right now.

And we will have further guidance later but nothing at this point.

As far as the tax rate goes, Stan, we should backload it to the second half of the year at what rate?

Full-up rate.

Full-up rate, second half of the year?

Yes, I would use about 37 to 38 percent because of the -- of course, the state income tax rate.

And, finally, with respect to the balance sheet, we do have this option to pay off the remaining $32 million of debt with Boeing by year end, which we will evaluate, taking into consideration industry conditions in our cash balance at that time.

Regarding (indiscernible) -- I work with about 25 percent.

It could be a point above.

It could be a point below.

Ray, I think you remember at some point during the year, capacity that we were flying already -- and we don't kind of get credit for that capacity -- we will be turning into aircraft capacity as we deploy our own aircraft on the West Coast.

Well, Bob will the contract aircraft -- will that then go down in percentage or will you have other use for those aircraft?

Well, it will probably go away.

I mean these guys have done a great job for us.

But the fact is we can do it cheaper.

When you got a middleman in there, you got pay the middleman, and they have done a great job.

But we think our costs of running our own operation will be substantially lower.

And east-west routes -- you know, if you can reduce your costs other 5 to 7 percent, that's real money in that kind of operation.

Hey, Bob about the new foray into DFW (ph).

If you could talk a little about that?

And maybe is Salt Lake City next on the agenda?

Well, I think in terms of -- we try not to target or really talk too much about where we are going to fly because we don't necessarily think it necessarily helps us.

All it does is positions the competitor.

Yes, we do have the ability to grow our operation in Dallas next year.

It's a pretty good market for us.

We have already added Orlando.

And we have announced Baltimore.

And, again, we have the option to expand because we have available gates that were not available a year ago.

But, at this point, we are not ready to preannounce anything.

Okay.

Great.

Good quarter, guys.

Moving on next to William Greene (ph) from Morgan Stanley.

Yes, good morning.

I think Delta is talking about growing capacity as much as 10 percent next year.

And I was wondering if you could talk a little bit about if you have any sense whether that's being targeted at you -- what your response might be and if you think it will have an impact on yields?

Well, you know, I think a lot of what Delta is already doing, really is baked into the numbers.

Where Delta competes with AirTran, they have not pulled back capacity, and in fact, their capacity is up versus AirTran compared to (indiscernible) Fall, pre-9/11.

So they have actually increased their capacity --again substantially.

So their domestic operation is down about 8 to 9 percent -- and I am talking about domestic seats overall.

They have pulled down Atlanta but they have grown against AirTran.

They have done that by entering our single carrier routes or typically flying off a number of markets with capacity.

I think it's kind of baked in the numbers.

I think -- you know, if Atlanta is probably not rebounding like the rest of the nation -- and I think it shows in the Delta numbers.

I mean, they're not holding up anywhere near the rest of the industry.

So the competition in Atlanta is -- has been pretty aggressive.

So -- and we don't see it changing.

I think our response will be number one, we can probably control the costs as best as we can because that's the best antidote -- number one.

Number two, we really won't back off if they keep chasing us, we will keep adding service.

Because we think we will just get stronger and stronger as we add more capacity.

So we don't have any reason to roll over.

We think we are doing pretty well.

We think everybody can do better in Atlanta.

There's very little yield management occurring in the Southeast.

And I think there's a lot opportunity to be selling up.

But we rarely find Delta sells up.

They tend to change the lowest-yield customer right up until the day of flight, and we don't really want to sell above them.

We will sell at the same fares but we don't want to be undersold.

So I think there's actually some opportunity for yield improvement, but I think the leadership position has got to come from someplace else.

Okay.

And then, Stan, do you have an estimate of what the cost savings from the retirement of the DC-9s will be?

And if you have a share count estimate for fourth quarter?

The share count estimate will be probably about 101 million fully-diluted shares and that includes the equity offering.

We're down to about what -- 4 DC-9s right now, and they are flying a partial schedule, so I will have come back to you with a better number.

Okay.

Thanks for your help.

From J.P.

Morgan, this is Jamie Baker.

Actually, this is Jamie Baker from J.P. Morgan.

Good morning.

Hey, Bob, if we look at your network, in terms of Atlanta O&B and Baltimore O&B and then let's just call it "other," could you comment on the RASM trends by division?

And most importantly, whether you are experiencing RASM duration in the Atlanta O&B?

You know, it really is hard to tell because we tend to really view these things on a network basis.

I think Atlanta is holding up.

I think what's happening in our situation is that sometimes it gets to a point where you are better off taking a connection rather than a local -- which is not normally the case.

A lot of times when markets get flooded with capacity -- which we've seen a number of markets -- you have got to replace the local with connection.

But I think all throughout the airline in the third quarter, all the areas were up.

Again, I think -- I am just thinking off of top of my head -- it's fairly balanced.

It's hard for us to really tell whether we are gaining share or losing share because, ultimately, I'm not really sure how big the markets are.

There is no question that Atlanta has been hit hard by the recession, as hard as many places.

But I think -- you know, I am pretty happy with the way we've held up in light of all the capacity.

Again, I don't know how long this thing will exist.

But, again, and I think that we're pretty happy with the results over the last two years since Delta aggressively came after us.

Sure.

Sure.

And then simply from a modeling perspective, you know, round numbers -- the 717 is a low six cent airplane ex-fuel -- or so it appears.

What sort of seat-mile economics should we be assuming on the 7-3 program, at least based on how you intend to fly that aircraft?

Yes, Jamie.

This is Stan.

I think our expectations are probably about a 3 to 5 percent improvement in unit costs for that aircraft.

Okay.

Alright, perfect.

Thank you, gentleman.

We will move onto a question from Dan McKinsey at Smith Barney.

Good morning.

I'm just curious how average daily frequencies have increased versus a year ago.

I would guess it's probably -- it's probably about 10 percent on a system-wide basis.

Again, our (indiscernible) is lengthening.

So -- and the airplanes are getting slightly bigger, so, again, departures are up about 9 percent.

Block hours are -- our stage (ph) is up about 4 percent.

And so ASMs are up about 21.

But again it's the actual length of flow (ph) is increasing, and will continue to increase going forward.

As the average daily frequencies increased, have you noticed a more competitive response from Delta or your other competitors versus their responses to you at other points?

Well, it really isn't related.

We generally find that the competitive reaction is highest on the new routes.

That's where you see most of the activity.

It's almost the sense that whenever -- if you add a new route, they try to drive us out of the route.

And, obviously, that's not working.

Certain parts of Atlanta are stable and other ones are more competitive, again with the West Coast being, you know, the most competitive area.

Again, right now, we've got about 186 departures as we fly in Atlanta.

And so we have got a fairly substantial operation.

And again -- in about 60 percent of our routes we have seen a capacity increase.

Some times it's Delta mainline, and sometimes Delta RJ's (ph) -- it varies by type of route.

Okay.

Great.

Thanks very much.

Next up is Gary Chase, Lehman Brothers.

Good morning, guys.

Just a couple of quick ones for you.

First, a finer a point.

What was the increase in stage length?

I missed that in the comments.

I think it's about 4 percent.

I think it's 573 to 596 year-over-year.

So this year was 596.

Is that stage length or --? (multiple speakers)

That's stage length.

And the panels (ph) (multiple speakers) are all up about 6 percent.

So that's increasing a little bit more.

Okay, Bob, do you have any flavor for how things -- you know, is there any sense that you can give us for how things are shaping up in October and as we look forward into November and December versus last year?

Well, you know, I think -- again, as we look out.

We stay (ph) in a situation where, again, bookings look good.

But, though, you're not going to have the same kind of load factors as you had in the third quarter.

But I think clearly there would be a good strength -- the industry seems to be doing very well in a period of pretty good leisure demand.

And that's what you're going to see in Thanksgiving.

And, in fact, you're going to have an exceptionally strong November because all of the Thanksgiving holiday traffic will be in November.

Last year the big days were in December.

So, you are going to see a big improvement in November.

I think December is shaping up very, very good.

October looks good but I think it's more reliant upon business travel rather than leisure travel.

So, again, I kind of like what I see certainly on a leisure basis.

I just don't see exceptional strength on what I would consider traditional business demand.

There are certainly people who look like business travelers on the airplanes.

And I just think they purchased it -- purchase patterns are changing.

I think it's really more important to have the fares higher seven days out or ten days out rather than have them higher on a walk-up basis.

Because there is not that many customers purchasing on a walk-up basis.

So I think the pricing patterns are going to see fares further out increase -- that's where you'll get the yield improvement.

Raising the fares that seven to ten days out.

Right.

Well, clearly, you're not going to get summer-load factors in the fourth quarter.

I guess, as you look year on year, are bookings up, down, sideways?

Listen, I think bookings are -- in terms, of raw bookings and raw values, again, their bookings, again, look very, very good.

I mean -- I'm sorry, Bob -- book-load factors, is that --? (multiple speakers)

Very good.

Again, not quite as high as they were going into the summer.

But still very strong on a year-over-year basis.

It in terms of yield, I think in our yield did not increase in the third quarter.

A lot of that is driven by stage length.

It will be close.

It will be interesting to see whether we can get a yield improvement in the fourth quarter.

It is going to be close.

Okay.

Bob, just one last one for you.

You noted the retaliation that -- or whatever you want to call it -- the pressure that you have been facing Atlanta.

I'm curious if you think that there is any change in the pressure that you're facing there and more importantly elsewhere in the network.

I mean, do you get a sense that the response from whoever you're competing with is stronger --?

I don't know, do Baltimore, Milwaukee -- you know, the other places where you've got presence.

I think the focus is primarily in the Atlanta origin (ph) markets.

I think Delta remains very aggressive.

And it's ironic even today, as we speak, they have double miles in about 45 markets out of Atlanta -- only the markets that we fly to.

So you know, that's -- there's a big focus -- and we're a big priority there.

Again, it's going to last as long as they want it to.

There doesn't seem to be a very big focus on profitability right now because clearly we haven't slowed down our growth in Atlanta and to be honest with you, we really don't want to get pushed around.

It's not that hard for us to expand in Atlanta.

I would to add to that -- that, you know, the development of our route structure over the last couple of years, where our dependence on Atlanta has gone from about 98 percent to 70 percent.

And the development of a lot of point-to-point flying -- development of Baltimore, the development of some of these other cities that we've done, really makes our network very hard to penetrate.

You can lay on us on one or two routes but you cannot lay on us on 20 or 30 routes.

That's the strength of what we have put together in the last two years.

That really is kind of unique for -- other than Southwest -- for low-cost carriers.

Okay.

Thanks a lot, guys.

Moving on now to Jim Higgins, CS First Boston.

Yes, hi.

Stan, I am wondering if you could elaborate on your comments about costs coming down.

You already gave us one clue, I think, on the 3 to 5 percent lower CASM of the 7-3 versus the 7-1.

But any other sort of meat you could put on these bones?

Yes, I think I'll just make a couple of comments.

Certainly, the airplane will bring costs down but we are going to get a hard dollar cost savings in a number of areas.

First of all, with respect to the airplanes, they come with warranty periods, and so we will enjoy the maintenance honeymoon that you would expect from new aircraft on both engines and airframes.

In addition, we -- as part of our deal -- we negotiated with the OEMs long-term maintenance agreements on both the engines and major systems of the aircraft.

So those deals are already in place with the maintenance rates already negotiated in the follow-on post-warranty period.

You know, you simply have the greatest amount of leverage when you are doing your aircraft deal to get those rates.

In addition -- and I want to go back to comments in my script about our growth strategy -- most of the growth from these 100 airplanes are going to go to increased frequencies in connecting the dots in our system.

And that is the lowest cost growth that you can have.

And also lowest risk versus going into totally new markets.

So we'll be able to increase the efficiency and the cost effectiveness of the people and the facilities that we have in place and get some real paybacks, I think, that will be significant.

And then, finally, there were other benefits associated with the aircraft deal, such as training credits.

And we have a -- I would say an unique arrangement with Boeing with respect to our spare parts, where they will essentially maintain a spare parts inventory at their expense for 20 years, that we will be able to draw from.

So it's, essentially, a 20-year consignment deal.

And I avoid the capital costs of having to go out and invest in inventory.

So those are just a couple of examples of where we are going to continue to see improvements in the costs.

Just clarify, you only have 50 of the 7-3's on firm order, is that correct?

That's correct.

We have options for 50 more.

Sounds like you have plans for the other 50.

What proportion of 2004 capacity would you expect to be 737s?

Well, I'll give you the delivery schedule.

The 73s -- we get two in June and in then one a month, August through December.

So as they come in during the month, we're working the global operations plan right now in conjunction with our budget process.

I will be able to give you some further guidance on that as we finalize it because the airplanes can float within the month as to delivery date and so on and so forth.

But eight airplanes next year by the end of the year.

And when an airplane comes into the fleet, how long does it take you to put into service?

You know, the first one or two would probably take 20 to 25 days because you have to do all your proving runs and all that.

But after that, I think probably a week -- will be it. (indiscernible) want to make one other note.

Stan talked about the introduction of cities.

We actually have opened up five cities this year.

Again, we kind of laid out a platform.

You know, three West Coast -- actually, four West Coast destinations and Washington National, which starts today.

Right now in the plan for next year, we only have new city.

I guess we could always go to two.

But we made a big move this year in terms of opening a lot of new things, and we have got a lot of new capacity kind of rolling through our numbers.

So I think -- so, next year to some degree the expansion is kind of less risky.

And I think will be easier.

You see fewer new cities next year, which I think is a plus for marketing perspective.

Just to clarify an accounting question on the let (ph) leased capacity.

Do we see a net of revenues minus costs in your other income or -- I'm sorry -- other revenue line?

Where does that show up?

In passenger.

Okay, it does show up in passenger.

And it's a net number?

That's correct.

Okay.

Great.

Thank you very much.

We have a question now from Michael Linenberg at Merrill Lynch.

Yes.

Good morning.

I guess this is a question for Bob.

I know in the past you have provided us with the percentage of revenue that came from business travel.

And I realize that it's getting harder to define that.

So maybe percentage of your revenue that falls within the seven days of travel?

Yes, right now it's around 40 percent.

And it's actually -- you know, that number -- it's about a quarter of the customers and about 40 some odd percent of the revenue.

Some of that -- as the structure has changed -- we have got a little bit more Florida non-stops this year than we had a year ago.

But in that number, if you a kind of looks and said -- I actually think the number of business flyers is going up. (indiscernible) The (indiscernible) research plus our own research says we're carrying more business flyers than we had in the past.

They're just moving the purchase time a little bit that further out.

So I think -- it would be interesting to see how we can (indiscernible) there's revenue to be captured there for AirTran and I think everybody else in the industry because that -- again that's an underlying trend.

And that's where the revenue management systems and such need to be focused on -- you know, seven to ten days out.

Bob, you know, a year ago or maybe even two or three years ago, just to add some context, what would have that number -- you know that 40/25 split -- you know, 40 revs., 25 percent tax (indiscernible) -- (multiple speakers)

Well, you remember -- this is seasonally the lowest number.

That number would have been probably up 5 to 6 points higher.

But, again, it does vary by quarter and the third quarter is typically the weakest from a business perspective.

Not only at AirTran but already (ph) across the industry.

But I think there was a time when you would like to see 50 percent of your revenue inside a seven days.

I think -- if you go back two and half years, over a twelve-month period of time, you would have seen that at 50 percent.

Just -- my second question, Bob, if you were to look at mature markets out of Atlanta versus some of the other point-to-point mature markets -- you know, maybe markets that -- you have been flying in out of Baltimore for the past couple of years -- is there anything that you can say with respect to profitability?

Especially given Delta's pretty aggressive response, which has been significance, but seems to building -- I mean, you brought-up the double mileage promotion that they're targeting at your markets.

You know the traditional markets, again, throughout the system, I think that markets you have been for a couple of years, really, were very strong throughout the industry.

So we've now been in Baltimore for about two years, and we had a pretty good summer there.

And I think the traditional roots in Atlanta which are the Northeast and the big Florida destinations tend to hold up pretty well.

A lot of it is, again, monopoly routes -- when your route has no competition, they typically do better.

And when you see more capacity, you typically have to absorb it and rebuild the market.

So most of competition really is focused on the new stuff.

And so, for example, we went to Kansas City after Vanguard went in, and we saw a number frequencies come in by Delta.

You know the West Coast -- it really is kind of phenomenal what's happened on the West Coast.

We're just going to wait it out.

You know, the change in profitability at Delta is substantial.

And we think we can fly two or three flights per day Atlanta -L.A., no matter what the competition does.

So I think, we'll just wait.

I think on a relative basis, we have gained a lot more financial strength.

We've got a lot more money in the bank.

I think our popularity with customers has improved.

So I think our reaction is -- you know, that's part of our long-term strategy.

We're not going to fly nine flights a day, Atlanta-L.A., but it's certainly -- I think we can fly three flights a day.

Kind fits in with what we really want to do.

Again, in terms of our strategy, our game plan is not to have 800 flights in Atlanta.

That's not what we're looking at.

Our game plan has been to slowly grow Atlanta.

Again, that's what we have tried to do.

I think we're willing to add new cities if we have to maintain that strength of business.

So, yes, most of the activity that occurs on the new route -- they pretty much go down the list, and they say, well, where is AirTran flying?

Let's go there.

And that's what we have to deal with.

We have been dealing with it for two and a half years.

We're overcoming it.

I think we are holding our own.

And I think their profitability is lagging behind everybody in this industry.

So I would not view it as successful.

From a financial perspective, it's simply not working.

Thanks.

I guess, one just quick last one to Stan, and I apologize if you addressed this but I noticed your revenue number went to zero.

And I realize that -- excuse me, your cargo revenue number went to zero, and I realize that there was not a lot there in the first place.

Is that a just a reclassification?

If you could just --

No, that's accurate.

We're not carrying any cargo these days and mail revenue is just basically drying up.

Okay.

Thank you very much.

We will go back to Ray Nettle:

Yes, Stan, did you give the number out for the contract flying -- the net revenue that goes into the passenger category?

What amount would that be by quarter?

We didn't give it out, and I don't think that is something we're going to give out.

Okay.

And Bob, you said that you think that business flyers are coming back.

Is that an industry trend or is that -- or do you think your capturing business flyers from the legacy carriers?

You know I can't be sure.

I can't tell but I think we see more business flyers out there than a year ago.

I think the trick is how to capture the revenue.

I see business -- more business travelers purchasing further out which is a different phenomenon then we saw two or three years ago and one which we should assume has got some permanence to it.

The fare structures can satisfy the customers to book further out.

So we have got to again try to figure out how to capture that revenue.

Okay.

Great.

And finally, Stan, when you think the contract flying will terminate as far as the revenue goes?

Sometime next year?

Probably in the latter part of next year.

Okay.

Great.

Thank you.

Jamie Baker.

Hey.

A follow-up -- you know everyone keeps waiting for the business traveler to come back and I guess we have to assume that former airline executives start to come back as well -- I'm referring to Bovase (ph) interest in Pittsburgh.

Clearly things are not going as they should at USAirways -- at the same time Atlanta is growing as a problem for you -- you know a manageable problem -- but a problem nonetheless in terms of competition and as Jim pointed out operation.

Why no expansion into Charlotte or Philly or Pittsburgh or -- Bob specifically given your background why not a hub in one of those three places?

Well I think -- they are all really good questions.

I think that first of all we have announced more service in the Philadelphia area in a year-over-year basis.

We've also got it into Boston as well.

And Philly has been a good market for us -- so Pittsburgh and Philly are -- they really are on the drawing board and I would suspect Charlotte is on the drawing board for a couple of airlines because there -- actually can be pretty decent markets.

Maybe you don't want to have 300 departures but certainly there certainly is some opportunity.

Just a matter of how many of these things do you really want to do at one time -- how many fights you really want to pick on.

I would just say this do -- USAir has its struggles but it is not a pushover.

I would certainly say they will fights to maintain their business.

Especially in Philadelphia which is probably their most important operation and I would say they even consider Charlotte stronger.

You know Pittsburgh -- the awkward of Pittsburgh is that it is a very high-cost airport.

And again we have an operation to Atlanta -- we fly to Orlando.

Certainly with a change in capacity there, there's a lot of attractive markets.

But it's -- our goal this year is that we really want to deploy this West Coast operation that we have - get our own airplanes on there.

Like I said we do have -- we've added a number of more flights at Philadelphia on a year-over-year basis.

So again, we have strength on the East Coast but we are diversifying as well.

Jamie this is Joe I want to add to that.

While our seat mile growth is very aggressive we're trying to deploy that in a very conservative manner which is really what we've done in the last two years.

We've been very very patient in putting a route here, a route there but not going out and doing things like starting a new hub somewhere and take somebody on.

We're really aggressive in seat mile growth but conservative in how we're going to do it.

Okay.

All good points.

Thank you gentleman.

We have one question remaining at this time and that's Gary Chase.

Hey guys.

It's just one finer points for Stan and then a final question for Bob.

You had said that the revenue that shows up from the wet lease line was in passenger revenue and that's going to be whatever you get, net of your cost for the wet lease.

Is that in all of your yield and unit revenue calculations as well?

Yes.

Okay.

So all of that includes whatever the impact of -- you know whatever it be -- losses or profits on those particular segments -- correct?

That's right.

Now keep in mind that the dollars are in there but the ASMs are not more than are the RPMs because Ryan reports those.

But that's correct.

Okay.

So I guess we're left to wonder what the impact of that is on your yield.

Which is what I wanted to ask Bob just finally.

I know you have some length of haul differences but you still did show some declines year on year in yield -- clearly offset by much better load factors but I just wondered what your take there was -- you know we did (technical difficulty) gone you are a short-haul carrier.

Any thoughts there would be helpful.

No.

I think -- clearly there is -- there's a taper out there and when your stage length goes up or when your passenger haul goes up 4 to 6 percent even without the West Coast, you're going to see downward pressure on your yield because it really is just mathematical.

This summer, you really have to decide where do you want to revenue growth to come - with load factor or yield?

There was a lot of discounting.

We historically don't chase load factors -- it's not necessarily the most important number.

But it looked like the best way to grow your revenues this year was to take it in load factor.

I think there are more opportunities to sell up in the industry and maybe for us as well - taking more risk -- because clearly I would argue that with the load factors we have this summer, we should have even better revenues across the industry.

And again I think there is not a lot of selling up going on in the southeast.

But maybe we can take a more independent approach.

And I know America West commented that they did a lot more selling when the competition wasn't -- I can't verify that.

So that is the environment that we're in.

We are going to still see for at least the next three or four months that the revenue improvement is going to come in on the load factor side.

Again at least for the next few months -- but I think going forward that will change at some point there will be some opportunities to improve yield.

The customer is telling us how to price the product -- the saying is -- charge a little more on 14 day advances and seven-day advances and charge less on walk-up fares.

That's what the customer is saying.

I don't think the customer is going to come back to buy traditional wide (ph) fares.

I think the leverage is elsewhere in the pricing curve.

That's what we're going to focus our attention on.

All right.

Thanks a lot.

Gentleman, at this time there are no further questions in the roster.

Okay Stan.

Yes Jim?

I will take it over.

Okay?

I just wanted to wrap up and thank everybody for attending our conference today.

We appreciate your interest in our company.

We feel very bullish about where we are.

This is a quarter that since I've been with the Company we have really struggled to break even every single year.

I think our strategy to deploy the east-west line has clearly paid off for us.

This is far and away the best third quarter we have had in recent history.

We've had a lot of records - passengers, revenue, RPMs, ASMs, you name it.

We got the equity offering done in the same -- end of quarter.

We improved our balance sheet, paid down debt.

So we think this was a very good quarter for us.

Bookings looked very good for the fourth quarter, so we believe we can carry the momentum through the fourth quarter and into 2004.

So we're going to stay on the strategies that we've been on.

To reiterate what Stan said -- we have a very low cost -- going lower.

The 737 will lower that cost even more, by flying a lot more seats a lot longer distances.

So structurally, we will see an improvement there.

And we're going to continue to grow -- we're going to do that predominantly by increasing frequencies in current markets, connecting the dots, and lastly adding one to three additional cities, which is -- so again just making our network stronger and stronger as we develop the network and end up not dependent on any one segment of our route structure for our success.

So with that, thanks for attending our meeting today and good day.

Again, that concludes today's conference call.

Thank you for joining us.

Have a good day.