西南航空 (LUV) 2004 Q1 法說會逐字稿

Good morning and welcome to the AirTran Holdings first quarter 2004 earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Arne Haak.

Sir, the floor is yours.

Good morning, everyone.

I want to thank you for joining us today for AirTran Holding's first quarter 2004 earnings call.

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

Before I begin, I'd like to remind that you many of our comments today are related to our outlooks for AirTran's fleet plan, revenue and capacity growth, future cost estimates as well as expectations about our future profitability.

These comments are not historical facts and instead you should consider them time sensitive, forward-looking statements that are accurate only as April 27, 2004.

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

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

If you would like additional information concerning factors that could cause our actual results to vary from those in the forward-looking statements they can be found in our form 10K filings for the year ended December 31, 2003.

In addition, we will be discussing several nonGAAP financial measures that we believe are more consistent with our true operating performance and provide a more meaningful period to period comparison as they exclude special items.

A reconciliation of these nonGAAP financial measures is available in the investor relations section of our company's web site at airtran.com.

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

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

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

Thanks, Arne, and good morning, everyone.

AirTran Holdings is pleased to announce net income of $4.1 million for the first quarter of 2004 representing our eighth consecutive quarter of profitability.

The quarter was especially challenging given the continued high cost of fuel and initially soft demand in what is seasonally our weakest quarter.

Nevertheless, we managed to increase net income in margins and reduce unit costs all while dealing with high fuel prices.

AirTran's continued success is the result of a core strategy which focuses on the following: Improving the product, profitable growth, low costs.

The company is producing a consistent and reliable product having key at attributes which are superior to that offered by the competition.

Customer acceptance and repeat business continues to rise and is evidenced by the increasing number of passengers who choose AirTran.

Within 44 days, we'll begin taking delivery of the first of up to 100 new Boeing 737-700s.

These aircraft will enhance our product and are capable of flying between any two points in North America.

With the 737s, we will be able to offer more frequencies in existing markets and bring low fares to new markets as we continue to connect the dots in our route system.

This will provide customers with new travel options while at the same time bringing low fares to markets which suffer from high prices.

The 737s will drive reductions in unit costs as aircraft utilization and stage length increase.

Maintenance expense will also benefit from the warranty coverage associated with the new fleet as well as long-term follow on maintenance agreements with OEMs for engines and other major aircraft systems.

Since the first quarter 2003, AirTran customers can now check-in the Internet and at airport kiosks.

We have also recently introduced self-service baggage check-in utilizing the kiosks as well.

During the first quarter 2004, 25.6% of our customers checked in for their flights using either the Internet or the kiosks at the airport.

Starting in July, we will offer business class and full size aircraft across our entire fleet with the phase out of the regional jets.

We believe customers prefer the roominess and comfort of a larger cabin and with the introduction of XM Satellite Radio in the fall, AirTran product offering will continue to improve.

Finally, one of AirTran's greatest assets is the in-place and developed route network, which we continue to grow.

The introduction of the 737s in conjunction with our shorter range Boeing 717s will allow us to optimize schedules and connections.

Our operational performance and efficiency will improve, aircraft turns will increase, costs will go down and our customers will have more choices.

We believe that a strong network is a key element to a successful growth strategy as the high cost legacy carriers lose market dominance in the power to set high prices.

Now I'd like to talk about our metrics.

The first quarter of 2004 was the first quarter in which we operated in all Boeing 717 fleet consisting of 75 aircraft at quarter end.

On a year-over-year basis our capacity is measured in available seat models increased 21.1% resulting from a net increase of 6 additional aircraft and a 6.6% increase in average stage length, from 589 miles to 627 miles.

Traffic as measured in revenue passenger miles increased 22.4% which resulted in a 68.5% load factor compared to 67.8% in the first quarter of '03 representing an improvement of nearly 1 percentage point.

An average fare of $78.43 in the first quarter of 2004 was relatively unchanged from the year ago average fare of $78.86.

When viewed in conjunction with a 5.3% increase in passenger length of hall to 644 miles, yield declined to 12.17 cents or a reduction of 5.5% in the first quarter of '03.

Partially offsetting the lower yield was the result in load factor, which resulted in unit revenue of 8.34 cents.

Stage length adjusted RASM was 8.67 cents.

In the first quarter of 2004, AirTran served nearly 3 million customers a first quarter record representing a 16.3% increase over the prior year.

In fact, the first quarter 2004 passenger totals were only exceeded by the last two quarters of 2003.

On the cost side, our unit costs improved significantly in all measures.

Operating costs per ASM declined 4.3% to 8.26 cents per with mile, even given the high costs of fuel and a 17.5% increase in flight hours year-over-year.

Operating chasm on a fuel-neutral basis decreased 4.4% to 8.26 cents.

Nonfuel chasm was 6.42 cents reflecting a reduction of 2.7% from 6.6 cents in the first quarter of '03.

The reduction on the company's costs primarily reflects the increase in average stage length as well as the retirement of the DC-9 aircraft, productivity improvements and lower fuel burn per block hour.

As in prior periods, the reduction in unit costs was achieved even after giving effect for a 36% increase in aircraft rent related to additional operating lease financing.

Average daily aircraft utilization in the first quarter 2004 was 11.3 hours, reflecting a 2.4% increase compared to 11 hours in the first quarter of '03.

The increase utilization resulted primarily from the increase in stage length.

Reviewing our first quarter operational performance, completion factor was 99.0.

On-time arrivals was 74.7 and baggage claims per thousand were 3.06.

Now I'd like to talk about our financial performance.

The first quarter of '04, net income was $4.1 million or 5 cents per diluted share and reflects a full tax share of 38% and approximately 14.1 million additional weighted average shares outstanding.

In the year earlier period, our net income was $2 million or 3 cents per diluted share based on a 0% tax rate and fewer outstanding shares.

On a pretax basis, first quarter income increased more than three times from $2 million to $6.6 million in 2004.

Operating margin increased .3 percentage points to 4.3% and net margin increased to 1.7%.

Passenger revenue grew 15.7% to $233.5 million on a 16.3% increase in passengers slightly offset by half a percent decrease in average fare to $78.43.

Total revenue increased 16.1% to $241.4.

Looking at the individual expense line items on a unit cost basis, salaries, wages and benefits declined 4.7% to 2.25 cents from 2.36 cents in the year earlier period.

The reduction in unit costs primarily reflects the greater productivity of our workforce as we operate additional aircraft.

On a departure per head count basis, productivity increased .9% from 2.27 departures to 2.29 departures in the first quarter of '04.

Aircraft fuel expense on a unit cost basis declined 9.8% to 1.84 cents compared to 2.04 cents in the first quarter of '03.

This reflects a 5.2% reduction in fuel burned per block hour on a year-over-year basis from 675 gallons to 640 gallons.

In relative terms, we consumed 2.6 million gallons less of jet fuel than we would have using the prior year's burn rate for a savings of $2.8 million in the first quarter.

The reduction of fuel consumption and fuel expense effectively acts as a natural hedge that equates to a reduction in the price per gallon of fuel of 5.9 cents.

As in prior quarters, we continue to realize the cost savings from operating a young, fuel-efficient fleet.

During the first quarter of 2004, we hedged 68.7% of our fuel at an average price per gallon or 87.4 cents.

Aircraft's rent on a unit cost basis increased 12.3% from 1.14 cents to 1.28 cents.

Again, as in prior periods, the increase in aircraft rent reflects the operating lease financing associated with additional 717 aircraft delivered since the first quarter of 2003.

Distribution expense dropped 8.5% from .47 cents to .43 cents.

The reduction in distribution expense primarily reflects a 50.9% increase in Internet revenue on a year-over-year basis.

During the first quarter of 2004, 50.5% of our bookings were made via airtran.com.

All Internet bookings increased to 65.2% compared to 59.2% in the first quarter of 2003.

Maintenance, materials and repairs unit costs increased 4.6% from .65 cents to .68 cents primarily as a result of contractual increases and engine maintenance agreements and a lower level of component warranty coverage.

Maintenance cost per block hour in the first quarter 2004 was approximately $254 per block hour.

Landing fees and other rents were flat on a unit cost basis at .56 per ASM for the first quarters of 2003 and 2004.

Aircraft insurance and security services unit costs declined 20.8% to .19 cents from .24 cents from the year earlier period.

The primary reason for the decrease in aircraft insurance and security services was the reduction in the company's 2004 aviation haul and liability insurance rates.

Marketing and advertising unit costs also declined significantly from .31 cents to .27 cents or 12.9%.

Reduction in marketing unit costs stems from higher advertising expenditures during the first quarter of 2003 related to the start up of new cities last year.

Depreciation expense unit costs decreased significantly reflecting the retirement of the owned DC-9 aircraft.

Other operating expense unit costs declined 8.9% to .72 cents from .79 cents.

The reduction in unit costs for the first quarter 2004 resulted primarily from reduced passenger-related expenses and professional fees.

Overall, total operating expenses on a unit cost basis decreased to 4.3 % to 8.26 cents in the first quarter of '04 from 8.63 cents in '03.

Operating margin improved from 4% to 4.3%.

During 2003, AirTran significantly reduced its long-term debt resulting in a 32.3% reduction to interest expense on a year-over-year basis.

Pretax margin for the first quarter of 2004 improved to 2.7% from 1% in the first quarter of '03.

Looking at the balance sheet, AirTran finished the first quarter of 2004 with $394.6 million in total cash and cash equivalence of which $9 million was restricted.

This compares to $348.5 million at December 31, 2003.

The increase in cash balances reflect proceeds from advanced sales of tickets and net income.

Working capital at March 31, 2004 was $272.8 million in compares to working capital at March 31, 2003 of $20.7 million.

The increased working capital resulted primarily from the proceeds associated with convertible debt and equity offerings during 2003.

Long-term debt at March 31, '04 was approximately $241.4 million and stockholders equity was $307.4 million.

And now I'd like to give you some updated guidance for the remainder of 2004.

Capacity growth and ASMs by quarter will be 18% for the second and third quarters and 27% for the fourth quarter and 21% for the full year.

Regarding fuel and fuel hedging, we are hedged 45% at 85 cents to 90 cents per gallon in the second and third quarters and 35%, again, at 85 cents to 90 cents a gallon for the fourth quarter.

We project that our all-in price per gallon of fuel including the benefits of hedging will be in a range of $1.05 to $1.10 per gallon for the remainder of the year.

While we have done better in reducing our nonfuel costs than projected, the unpredictability in fuel costs going forward could offset those benefits.

At this point in time, we are not revising our cost guidance other than for fuel.

Aircraft deliveries remain on schedule and exist of four 717s in the second half of the year and eight 737s, two in June, one in August, two in September and one a month October through December.

I'd like to wrap up by thanking our customers for their continued business, which allows us to grow and offer low fares in the markets we serve.

I would also like to thank our employees whose hard work and daily effort wins new customers for AirTran and generates repeat business.

As tough and challenging as the airline industry is today, we see the opportunity to grow the business and generate earnings for our shareholders.

We believe that a strategy of product improvement, profitable growth and low costs is on target and in step with the changes that are taking place in the industry.

With the deliveries of our new 737-700 aircraft, AirTran will be positioned to capitalize on the opportunities that will come from having a new fleet, a seasoned and experienced workforce and a changing marketplace.

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

Thank you.

The floor is now opened for questions.

If you do have a question, please press star one on your touch-tone phone at this time.

If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key.

We do ask that while posing your question, please pick up your hand set to provide optimum sound quality.

Our first question is coming from Ray Neidl from Claylock and Partners.

Please go ahead with your question.

Congratulations, Stan and guys.

Better quarter than we expected in a tough environment.

Thanks, Ray.

You continue to do a good job in cutting your costs as you emphasize with your unit costs.

I was wondering, Stan, if you could just go into a little bit more detail of how you did cut costs and if we could extrapolate this going forward as you continue to see this type of momentum?

Ray, I think what you are starting to see is the leverage effect of bringing the new airplanes in and not having to add proportionate increases in manpower and infrastructure.

We've got the infrastructure in place and that's now leveraging our costs going down.

In fact, our average flights per station have gone from 6.6 to 7.5 flights per station per gate, and that's going to continue going forward.

Also, insurance is down and as we bring in the 737s, you're going to see the benefits of the lower ownership costs as well.

Well, you think that could change going forward as you start to initiate additional new cities?

I think what we're doing is we're going to grow, first of all by increasing frequencies in existing markets and then secondarily by connecting the dots in our cities.

So all of which will continue to leverage the infrastructure that we've already got invested.

Okay.

With US Airways developments at that company, do you see any additional opportunities particularly on the east coast?

Yeah, Ray.

I think as opportunities, but I think what everybody in the industry is focusing on the same opportunities.

It appears both the low-fare carriers and legacy carriers are each focusing on the northeast either with RJ's's or in Southwest's case, adding mainline flights.

So it's an important area for us but it's also an important area for everybody else in the industry.

Okay so it's going to be very competitive then?

Yes.

Finally, Stan, tax rate going forward is 38%?

We're using 38%.

I think that's probably about where we'll come out.

Okay, great.

Thank you.

Thank you, Ray.

Our next question is coming from Bill Greene from Morgan Stanley.

Yeah, good morning.

I was wondering if you could talk at all about whether or not you've seen any change in the competitive environment, particularly in Atlanta with the changes that are going on at Delta at the management level?

Yeah.

Actually, we haven't.

I think the competitive situation in Atlanta pretty much the same for about four years running right now.

What we typically see is increased capacity where we fly, and certainly matching most of the fares and a lot of discounting.

So the environment's been tough and it continues to stay tough.

I think the fact is that Delta has an appetite to lose a lot of money in Atlanta.

So our strategy has been just keep getting our costs down.

Yet at the same time, we've seen triple miles.

We've seen one give away after another.

Really it really is non-stop.

The only way to stay ahead of it is get your costs down and don't lose more money as they continue to compete against us.

Okay.

And then Stan, just two quick guidance questions.

Have you provided an estimate of what the chasm will be on that?

And if you can also give us what you think share count will be in the second quarter?

Yeah.

First of all, on share count, we're estimating that would be weighted average of 100 million shares.

In terms of 737 chasm, we haven't given specific guidance on that aircraft type, but we have said that we expect our unit costs will probably decline on a run rate of about 3 to 5%.

That's obviously as we get a critical mass of airplanes in the fleet.

20 to 25?

I think that would be fair.

Okay, thanks for your help.

You're welcome, thank you.

Our next question is coming from Jim Parker, from Raymond James Associates.

Good morning, guys.

Question for Bob.

Bob, just in general, what's the outlook for bookings and any chance that you're seeing your fares get any better?

Well, you know, obviously the contrast the second quarter versus the first quarter.

I mean the bookings in the second quarter actually look pretty good.

I think that could also be easy times about ut we like what we see in the second quarter and, you know, hopefully we'll see a positive increase in unit revenue in the second quarter, which would contrast the first.

So even though our stage length is going up and even though yields are relatively low, I think the environment is pretty good.

Again, I think the industry had a pretty good March and the industry's having a very good April as well.

So I think the second quarter is shaping up pretty good.

Right.

Regarding pricing, I think you know, we look at it all the time.

We don't necessarily move when the industry moves.

But, you know again, at some point in time, if fuel prices stay up where they are, I think fares need to go up a little bit, no question.

We had hoped to see the business traveler come back and that would have increased yields but I'm not sure you can really count on the business traveler carrying the day here.

Right.

Question for Stan.

Stan, when you get the 737s in running coast to coast, how much a swing might we look for?

I believe you are losing money there now currently.

How much of a swing might there be, say, a year out with the 737s operating those markets?

Jim, actually, we're going to see a swing in two areas.

I would tell new round numbers, our costs are going to go down about 18 to 20% per seat mile on a smaller plane.

So the good news is we think the yields are going to go up because in theory, you know, the least economic 20 seat wills come out and the costs will drop.

So we're going to see a big improvement in our, you know, underlying profitability in September and October.

That's when we're going to go through the changeover.

So it's going to be pretty positive for us right now.

But it's a couple months away.

Right.

Okay, thanks.

Thanks, Jim.

Our next question is coming from Jamie Baker from J.P.

Morgan Chase.

Good morning, everybody.

Stan, you mentioned and I happen to agree that passengers, you know, prefer the water cabin, 717 as opposed to the RJ's, but I've got to imagine that your decision distance yourself from [ INAUDIBLE ] was , you know, much more driven by the profitability or lack there of of that operation.

Can you give a little color as to what your brief experiment revealed in so far as mixing 50 seat economics with low fares?

This is Bob Fornaro.

We look at the thing -- again, it is true that we did have a review period in here.

And just to go back, we made a decision probably at the bottom of the traffic cycle when the short hole of traffic was very, very weak.

And we decided that, you know, we needed more frequency in the short haul markets.

What we found after a year was a couple things.

Over that 15-month period of time, our costs have come down a lot.

To a point that for an additional thousand dollars of black hour we could get 65 to 70 more seats.

We thought that, you know that was a real positive one for us.

The issue of the business class, I think it really is a big one.

In Atlanta, I think haft of the competitors' capacities is with RJ's's.

The big park is business class.

So we were becoming a look-alike, and we think it's better off to differentiate ourself.

And a couple of other issues operationally, regional jets do not hold up well flying 11 hours a day.

They're not as reliable as mainline jets that are built off of sort of a business jet chassis.

They are not as reliable as the 737 or big Airbus airplane.

So I think it was a number of factors that really pushed us you know, in a new direction.

Our feeling was that it was marginal today and we didn't really want to update this thing for another five years.

I think the fact is 50-seat RJ's does not really mix well with a low-fare environment.

So that really has played a big, big role in it. 50 seats you cannot price the product the way we'd like to price the product.

Okay.

And secondly, the follow up, Bob, you indicated if I heard correctly that with any luck, second quarter RASM would be flat.

That was on a year-over-year basis?

Yes.

I'm just curious because, you know, this kind of back of the envelope, that suggests that yields will need to rise, you know, modestly from the first quarter, which, you know, anything's possible in this business.

You haven't had a first to second quarter yield increase since the second quarter of '01 when Delta pilots were, you know, rattling their sabers and there was admitted think some book away.

I'm just curious what gives you, the confidence you see in improvement in prices going into the summer months?

I think the, you know, three more months of what we're seeing today is just simply better.

I think January was exceptionally weak.

We're typically stocker in the second quarter.

Second quarter is fairly strong from business travel perspective as well in the southeast.

You have a must be of factors like that.

I think the way -- yeah, the southeast very, very good you get business demand in the second quarter.

Florida holds up pretty.

So again it's just what wheer looking at.

Good.

Thanks for the color.

I appreciate it.

Thanks, Jim.

Our next question is coming from Jim Higgins from Credit Suisse First Boston.

Yes, hi.

Thanks very much.

You have I think you said eight 737s coming in.

How of those are needed to replace the current wet lease flying you are doing?

Four.

Four?

Yes.

So you are going to have another four to do something else with then?

Correct.

Does it make a difference when you start to mix fleet types coming into, you know, stations other than Atlanta in terms of costs related to, you know, overnight maintenance or anything like that?

It should be negligible.

One of the things we'll try to do is keep the 737s in a limited number of cities.

Certainly starting out, we're going to keep them close to home with the first couple of airplanes.

Let our mechanics get used to working on them every night and get our initial operating experience behind us with the pilots.

But it shouldn't be a big issue running the A-320s right now on limited routes.

And right now, we're doing a lot of funding for the 737, which we get no benefit from.

Right.

Once we start producing some seat miles with them, it should bring our costs down, but we don't see it as overly complicated.

We just got out of 737s about a year ago.

Right, right.

So it's not like we're totally unfamiliar with the airplane.

Sure.

Finally, can you just update us on your gate situation in Atlanta.

Where are you in terms of numbers of gates and utilization of those and availability of potential incremental gates?

Yeah, we have -- I have to look -- I won't go into any details of any conversations, but we have 26 gates which we occupy and with all our operators, we have 197 departures.

We think there's a few gates available, you know, on the concourses out there.

And, you know, again, it's a couple ways to grow.

One is to obviously get a new gate and also at some point focus more on increasing the number of departures per gate as well.

So, you know in Atlanta, you need to have at least seven departures a gate to control a city gate.

So that's ultimately our target.

We see no limitations, Jim.

Okay.

Very good.

Thank you very much.

Thanks, Jim.

Our next question is coming from Helene Becker from Benchmark.

Thank you very much, operator.

Hi, guys.

Hi, Helene.

Stan, as we look at the 737s coming in and salaries what should we do in terms of training costs there and how far ahead of you -- of the curve are you?

Well, first ever all in terms of crew costs on the 737 aircraft, they are going to be identical as 717.

We already have agreement with our pilots that they'll fly the airplane same wage rate as the 717.

Flight attendants identical.

So there's no increase in crew salaries for the different types of aircraft.

With respect to the training, we've already begun that.

As you know, we've operated other fleet types before and learned a lot from the 717 transition from the DC-9s.

So we've already begun incurring training costs.

They're in our first quarter results.

They're also in our guidance going forward for the second and third quarters.

I would say that we are probably tracking a little bit better than we projected on those training costs.

Okay.

Thanks very much.

I appreciate the help.

Thank you, Helene.

Our next question is coming from Gary Chase from Lehman Brothers.

Good morning, guys.

Just wanted to ask a clean up question first.

Can you tell us what the change in stage lengths was for the quarter and what it will be in the second and for the year?

I mean, I'm loosely on the schedule coming one something just under 7%.

Yeah, the change in the first quarter year-over-year was 6.6%.

It went from 589 miles to 627.

And, let me just take a look going forward here.

I think you could probably, you know, go anywhere from let's say 5.5 to 6.5% increase for the year.

Okay.

Probably consistent for the second quarter?

Yeah.

I mean, the question for Bob is, we're hearing a lot about sort of the competitive environment, changes in Atlanta, so on and so forth.

When you back your stage length change out of your unit revenue, I mean, you said yourself you were down I think Stan said with a as 8.6 stage adjusted.

Down 100-150 basis points.

Certainly sounds about where we'd calculate it, but you grew 21%.

Right.

So it would seem anyway, that you are holding up relatively well in the competitive environment.

Is there anything that you can add to that about sort of how Atlanta's doing versus other places?

Sure.

Let me take a crack at it.

First of all, I would tell you again years ago, the ATA yield report used to be about the most valuable report you could get, but the fact is, I think it's lost a lot of relevance because you can't tie it to profitability.

But in terms of the things that we're doing, I'm going to give you some examples.

We fly Dayton far and nonstop to Rochester and these are very good routes for us.

But they are lower yields and they are longer hauls so to some degree, we're not focused on general measures.

We're focused on profitability.

If we can make money on a thousand mile Florida route we'll add it and we'll push our costs down, we'll push our RASM down, but it's building margin.

So that's kind of the way we think.

What we're trying to do is build and develop our airline really to try and enhance the network strength.

What we're finding is as we get bigger and stronger in some of our stations, numbers start to look better.

So we're thinking about network defensibility.

You know, if we added short all routes that would boost our RASM.

And again, we're not focused on RASM per se, we focused on sort of margin.

To summarize it, I think we're trying to design the network that takes into consideration, you know, the margin gap as long as costs are going down faster and RASM and we're building revenue, I think we're happy.

Gary, this is Joe.

I'll just add to what Bob said.

We went into this year pretty much assuming that it was going to be a hostile firm out there.

You've got Independence Air coming online, United's going to fight with them.

Who knows what Virgin's going to do, but we just viewed this as pretty hostile environment.

We didn't expect fuel to be as high as it is, but as a result, we're not opening any new cities at all this year, and so as Stan mentioned, we've taken our flights per station from 6.6 to 7.5.

We've increased our airplane utilization from 11.1 to 11.3.

So we've really just been focused on tightening up the network, sort of hunkering down, trying to get a more efficient.

We have pretty much across the board.

And if we do that this year, we think it would really be set up very well for some aggressive expansion next year with the 737.

So this is sort of a breather year for us.

And just looking at the fundamentals.

So by doing that, you can grow 21% and kind of hold your own.

Okay, sorry, guys.

Just a couple more questions here.

Bob or Stan or Joe, can you tell us how things are shaping up relative to your expectations in Dallas and can you also tell us if you've seen any significant change in how things look on the competitive front to Houston and Kansas city where Delta's running a single class configuration against you?

Well, I think regarding the Delta configuration in Houston and Kansas City, it may be helping us because we're -- I don't think anybody knows about it, so it's nothing special.

You know, I think in Dallas, Dallas is going a little bit better than we thought.

I'd give it a B, which after six months, I think that's pretty good.

Again, what we're focusing on and there is really nolo-cost carrier flying Dallas long haul.

We can fly it with a 717.

So we've got the smallest plane and the lowest costs.

The very, very tough combination to compete against, and what we've also seen in the number two carrier in Dallas has been struggling for more than a decade and they've been pulling back.

And at the same time, other carriers have been skimming Dallas long haul with a lower fare.

So there's actually a pretty good opportunity for us.

It's possible what you might see is AirTran replaces everybody else in that marketplace because certainly again, the second carrier there has been struggling for, you know, how many years?

We think it's a good opportunity.

Okay, thanks for the help there.

And lastly, first Stan, why no change in the cost guidance given the performance for the quarter?

Is there something that I mean,it entirely fuel that makes you say that or is it?

Yes it is, Gary.

We're getting $1.05 to $1.10 a gallon, you know, in the fourth quarter, we thought we were going to end up 95 cents to a buck and we're almost a dime above it.

Again, on the nonfuel side, I'm pleased with our progress and reducing costs.

We're tracking better than what we anticipated.

It's strictly on the fuel and I want to be erring on the side of conservatism.

Thank you very much, guys.

Thank you.

Our next question is coming from Dan McKenzie from Smith Barney.

Good morning, a lot of my questions have been answered.

Joe, comparing last year's proxy with the current year, it appears beneficial ownership of AirTran stock by directors and officers has dropped about 900,000 shares from roughly 7.8% of shares outstanding to 5.7%.

AirTran stock is currently about 40% off its one-year high.

I'm surprised to see the ownership drop.

Given AirTran's growth trajectory, it seems natural that this is the time when management would want to be building their stake.

Anything holding management back from taking a more bullish position?

No, not at all.

I think the difference that you see in the holdings is basically primarily Lewis Jordan and Robert Priddy both of which you had options expiring that if they didn't exercise them, they would have lost them.

That was the only reason that they traded them.

In fact, we have a couple of our board members that are active purchases in their own right just buying stock off the market.

So that was sort of a unique situation.

There were ten options issued ten years ago that were expiring.

So that's really been the only significant activity among either the directors or the officers of the company.

Okay, great.

Thanks.

That's it.

Thanks.

As a reminder, if you do have a question, please press star one on your touch-tone phone at this time.

Our next question is coming from Sam Buttrick from UBS

Thank you, good morning.

Bob, you touched on this a little bit, but I want to expand the question.

As you diversify your network away from Atlanta, which is sort of essentially the direction that it's going, could you comment on your relative RASM performance or contribution performance in Atlanta versus non Atlanta flying?

I guess you touched on DFW a little bit, but I want to look at the question more broadly.

Sure.

I have to be a little general.

I think, yeah, some of the things that we're doing and perhaps place like Canton/Akron and Baltimore, the profitability may be better than Atlanta at this point.

Baltimore has been very, very good for us.

And again, some of the other places are better as well.

The yields maybe lower because of the mix, you know, if you are flying more leisure routes, you might have a low are yield but the cost is lower.

In terms of the Dallas marketplace, we look at it as typically as what we don't want to expect to make any money in the first year.

In fact, generally we anticipate a loss.

I think we're tracking against slightly ahead of that, Sam.

The thing that has impacted our profitability the most and really has been no secret has been our Airbus operation to L.A., San Francisco and Las Vegas.

We went into those markets probably about 15 months sooner than we expected.

We did it with the second best solution.

We've got a sub service.

And we really did it at time where there was really massive, you know, capacity increases so the first year and that not only did we expect significant losses, it was -- there was no positive surprises at all.

But that's kind of really winding down and we can really see the end of the road there.

We see that improving.

So the Atlanta west coast piece has been, again, a big drain for the last seven, eight months.

So I take it from that comment then that your net wet lease contribution, which I guess you found in other revenue was a negative in the March quarter?

Yes.

Absolutely.

And again, it's been a negative really for the last nine months both.

It's been a negative since August.

First couple months were good, but really the last five to seven months.

It's starting to improve right now.

Mm-hmm.

And secondly, just any general comments your on-time performance continues to be less than optimal.

What initiatives, if any, have you got in place to move that back into a higher percent tile of industry?

Well, I think it's a couple things.

You know, the things that we have historically focused on the most have been completion and baggage, which would have been very good.

You know, we had a tough first quarter, and I think, you know, we've taken a few actions.

We finished about 84, 85 in March.

We finished the quarter at 75, but I think you'll find that in the second quarter will probably finish about 85%.

It's just -- I think it's just a little bit more focused.

We've done a few things on the airfield, particularly in Atlanta, where we've, you know, in certain parts of Atlanta, you can maintain significant ground holds.

So we've got a couple of processes in place, which I think will be a plus.

We've also done some things which will separate our Atlanta hub flying from our Baltimore flying.

So if we have thunderstorms in one part of the system, it won't impact the other.

We're 85 in March.

We're running 85 in April, so I think, and that's really made up, Sam, of a lot of 92, 93% days and one or two blow outs in Atlanta or like yesterday blow out up in the northeast with rain.

Yeah.

But Bob really spearheaded a team to make pretty dramatic changes effective March 1.

And they're paying off for us pretty big time.

Okay, that's great.

Thank you very much.

There appears to be no further questions at this time.

I would like to turn the floor back over to Mr. Leonard for closing remarks.

Okay, thank you, everybody for joining us this morning.

You know we're sort of pleased and disappointed at the same time.

We went into the quarter thinking that we would do a lot better than we've done, although when you look at fuel and you look at what sort of the competitive environment out there, we have to say we feel pretty good about what we were able to accomplish as Bob already mentioned, January bookings were awful.

We had sort of a normal February and March was quite good.

Going into the second quarter, April and may bookings look very strong, and when you talk to the hotel folks and people like that, there's reason to believe that we could have a decent summer if these booking patterns continue and other travel-related businesses continue to report the kind of progress they've seen year-over-year.

The theme parks down here in Orlando are reporting extremely strong bookings for the summer.

On a year-over-year basis.

So we could have some pleasant surprises, but we don't count on that.

We'll continue to work on our costs.

We're looking forward obviously to the next time we talk to you in this format.

We will have already introduced 737.

So we're looking forward to that.

We're going to take a bunch of employees out to Seattle and take the delivery of the first airplane June 10th with a big celebration out there with our employees and this that and the other.

We're well ahead of schedule on all of our plans for the 737, crew training is ahead of schedule, manuals are ahead of schedule, parts are all ordered.

So we bought the 717 online pretty easily.

We're way ahead of where we or within the 717 at this given time, which is 44 days out.

So we think we can bring that airplane online pretty easily.

We've got tremendous support from Boeing, GE, Honeywell and others.

Going to have lots of field service engineers wherever the airplane flies.

So the bottom line is we're pretty optimistic going into the second quarter, and pretty optimistic for the year.

We'd like to see fuel come down, but there's not much we can do about that.

Thank you very much for joining us.

Look forward to talking to you later in the year.

Thank you.

That does conclude today's teleconference.

You may disconnect your lines at this time and have a wonderful day.