西南航空 (LUV) 2004 Q2 法說會逐字稿

At this time I would like to welcome everyone to the AirTran second-quarter earnings conference call. (OPERATOR INSTRUCTIONS) As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, July 27.

Thank you.

I would now like introduce Mr. Arne Haak, Director of Investor Relations.

Mr. Haak, you may begin your conference.

Good morning everyone.

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

Joining us today is a Stan Gadek, our Chief Financial Officer;

Bob Fornaro our President and Chief Operating Officer; and via conference call Joe Leonard, our Chairman and CEO.

Before we begin I would like to remind you that many of our comments today will be related to our outlook for AirTran's fleet plans, load factors, revenue and capacity growth, future cost estimates, as well as expectations about our future profitability.

These comments are not historical facts.

Instead, you should consider them as time-sensitive forward-looking statements that are accurate only as of July 27, 2004.

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

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

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

In addition, we will be discussing several non-GAAP 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 copy of today's press release and a reconciliation of these non-GAAP financial measures is available on our Company's website at AirTran.com.

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

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

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

Thank you Arne and good morning everyone.

I'd like to start off the call by saying that we are pleased to once again announce a profit for the second quarter of 2004.

AirTran's net income of 16.8 million represents our ninth consecutive quarter of profitability, which when viewed in the context of high fuel prices and a weak revenue environment demonstrates the underlying strength of our business model.

But low costs are only part of the story when it comes to making money in the airline business.

In addition to having a competitive cost structure, you also have to have a highly-productive and efficient work force which is focused on providing better customer service and winning new customers for the business every day.

AirTran has not lost sight of the importance of customer service to our passengers.

In fact, our number one strategic goal for 2004 is improving the product and building our brand.

We believe that the success we had in attracting new customers is reflected in the growing numbers of passengers who fly AirTran everyday.

In order to identify customer preferences and obtain passenger feedback, we once again commissioned a marketing study by TK Data Inc. (ph) The 2004 study consisted of over 1200 randomly selected AirTran passengers, A-Plus Reward members, and general fliers that travel frequently on other airlines.

The results were impressive and demonstrate that passengers want low fares and customer service.

Not surprisingly passengers equate these expectations with AirTran.

In fact, the percentage of survey participants indicating that they were likely or very likely to fly AirTran again was 94.8 percent.

Our research shows that our product is improving and brand awareness is growing, both of which are vital and important indicators of future success.

This leads to our second strategic goal, which is profitable growth.

Much has been said about excess capacity in the domestic airline marketplace, and people have asked how we can grow our fleet and passenger loads in this environment.

The answer is that we can grow profitably because we have an efficient and low cost base.

Our third strategic goal is to lower costs, and central to this objective is the new Boeing 737-700 aircraft which we're now taking deliveries of.

This airplane will provide benefits in the form of lower direct operating costs, higher fleet utilization, greater station productivity and improved passenger appeal.

As important as the Boeing 717 was in reducing our unit costs to date, the 737 will help us achieve lower costs as we take deliveries of up to 100 of these high-performance, fuel-efficient aircraft.

We believe that the steps we have taken to improve our brand, to grow profitably and to lower our costs position AirTran for success in the current and future marketplace.

At this time I would like to talk about our metrics.

During the second quarter 2004, AirTran took delivery of two Boeing 737s and one 717, bringing our total fleet to 78 aircraft.

On a year-over-year basis, capacity as measured in available seat miles increased 17.9 percent from seven additional aircraft, more seat capacity, and higher average daily utilization.

Traffic as measured in revenue passenger miles increased 21.4 percent, resulting in an all-time record load factor of 75.4 percent, up 2.2 points from the year earlier load factor of 73.2 percent.

Average fares in the quarter were up 1.3 percent to $77.58 compared to the second quarter of 2003.

Given the 6 percent increase in average stage length to 626 miles, yield declined 3.4 percent to 12.23 cents.

Unit revenue year-over-year declined only 0.5 percent as a result of the record load factor.

Adjusting for stage length, AirTran's unit revenue actually increased approximately 2.1 percent.

During the second quarter of 2004 AirTran served over 3.4 million customers, another all-time quarterly record, up 15.7 percent over the second quarter 2003.

On a year-to-date basis passenger counts were up 16 percent compared to the first six months of last year.

Looking at unit costs performance, AirTran's non-fuel unit costs declined 1.1 percent to 6.55 cents year-over-year.

However, a 20.7 percent increase in the average cost of aircraft fuel per gallon to $1.10 all-in resulted in a 1.9 percent increase in operating CASM to 8.46 cents.

On a fuel neutral basis cost per AFM declined 2 percent to 8.13 cents.

For the first six months of 2004 unit costs on both an operating and non-fuel basis declined 1.2 percent and 1.8 percent respectively.

The reduction in the Company's non-fuel costs for the second quarter and first six months of 2004 resulted primarily from the increase in stage length, as well as the retirement of all DC-9 aircraft at year-end 2003.

In addition, a limited amount of 737 pilot training originally scheduled for the second quarter 2004 will now occur in the third quarter of 2004.

As in prior periods, the reduction in second quarter non-fuel unit costs was accomplished after giving effect for a 20.9 percent increase in aircraft rents resulting from operating lease financing associated with the new 717 deliveries.

As a result, AirTran did not have to incur the associated interest expense which would otherwise have been related to debt financing of the aircraft.

Average daily aircraft utilization was 11.0 hours, up from 10.8 hours in the year earlier period.

The increased utilization resulted primarily from the 6 percent increase in average stage length.

Year-to-date, our average daily aircraft utilization was up 1.8 percent from 10.9 hours to 11.1 hours.

Reviewing our second quarter 2004 operational performance, completion factor was 99.6 percent, on-time arrivals were 79.5 percent, and baggage claims per thousand average 3.02.

On-time performance was impacted by unseasonable weather during May and June.

However, our relative performance improved over prior quarters.

And now I would like to discuss our financial performance.

For the second quarter 2004 AirTran's net income was 16.8 million or 18 cents per share, and reflects a tax rate of 38 percent and approximately 23.5 million additional weighted average shares outstanding.

Net income in the second quarter of 2003 was 57.2 million, which included net of tax adjustments for a government reimbursement and a non-cash charge related to the retirement of debt of 37.1 million and 1.8 million respectively.

Excluding these items, AirTran's second quarter 2000 net income was 21.9 million or 28 cents per share on 30.2 percent fewer diluted shares outstanding.

If you further adjust for the increased share count, last year's earnings per share would have been 14 cents versus 18 cents in the second quarter of this year.

Pre-tax income excluding adjustments increased 20.2 percent from 22.5 million to 27.1 million.

Operating margin this year was 11.3 percent.

Passenger revenue increased 17.2 percent to 265.9 million on a 15.7 percent increase in passengers and a 1.3 percent increase in average fare.

Year-to-date revenue increased 16.5 percent to 499.4 million.

Both second quarter and year-to-date passenger revenue represents all-time quarterly records for AirTran.

Now, looking at the individual expense line items on a unit cost basis, salaries, wages and benefits declined 2.1 percent from 2.35 cents to 2.30 cents per ASM.

The reduction in unit costs primarily reflects productivity gains driven by the greater numbers of aircraft that we are operating.

On a departure per headcount basis productivity increased 7.9 percent from 2.5 departures per FTE to 2.7 departures in the second quarter 2004.

Also contributing to productivity gains was an increase and passenger kiosk and online check-in usage to 32 percent.

Aircraft fuel expense on a unit cost basis increased 13.1 percent from 1.68 cents to 1.90 cents.

The cost of fuel per gallon increased 20.7 percent to $1.10, including taxes and fees, on a year-over-year basis, and was partially offset by a 1.5 percent improvement in fuel burned per block hour.

In relative terms we consumed 750,000 gallons less fuel, equating to a savings of approximately $825,000.

This represents a continuation of the trend of reduced fuel consumption driven by the new fuel-efficient 717 aircraft.

During the second quarter of 2004, AirTran hedged approximately 45 percent of its fuel at a price per gallon of 80.8 cents.

Aircraft rent on a unit cost basis increased 2.5 percent to 1.25 cents from 1.22 cents.

As in prior periods, the increase in aircraft rent reflects the operating lease financing associated with additional 717 aircraft delivered since the second quarter 2003.

Distribution expense during the second quarter 2004 declined 6.1 percent from 0.49 cents to 0.46 cents.

The reduction in distribution expense primarily reflects a 26.9 percent increase in Internet revenue on a year-over-year basis.

During the second quarter 52 percent of our bookings were made via AirTran.com.

All Internet bookings increased to 67 percent compared to 63 percent in the second quarter 2003.

Over two-thirds of AirTran customers now book via the Internet.

Maintenance, materials and repairs unit costs decreased 1.6 percent from 0.64 cents to 0.63 cents.

The reduction in maintenance expense unit costs primarily reflects the retirement of DC-9 aircraft.

Maintenance costs per block hour during the second quarter 2004 was approximately $242 per block hour.

Landing fees and other rents were up through 3.7 percent from 0.54 cents to 0.56 cents.

The increase in landing fees reflects higher airport assessments and increased operations at more expensive stations.

Aircraft insurance and security services unit costs increased 33.3 percent from 0.15 cents to 0.20 cents.

The increase resulted from a higher hull value of the Company's late as DC-9 aircraft were retired and replaced by new 717s.

Marketing and advertising unit costs declined from 0.24 cents to 0.23 cents or 4.2 percent.

The reduction in marketing unit costs reflects the reduction in advertising expense from the year earlier period associated with the start-up of the new cities in 2003.

Depreciation expense unit costs were down 15.4 percent to 0.11 cents year-over-year.

Depreciation expense in absolute dollars was relatively unchanged, and primarily reflects depreciation related to spare parts in eight owned 717 aircraft.

Other operating expenses unit costs declined 7 percent from 0.86 cents to 0.80 cents.

The reduction in unit costs for the second quarter 2004 resulted primarily from a reduction in professional fees and passenger related expenses.

Overall operating income improved 1 percent year-over-year from 30.7 million to 31 million.

The 17.6 percent improvement in total revenue and the 1.1 percent improvement in non-fuel unit costs were essentially offset by the 33.8 percent increase in fuel.

Looking at other income and expense and excluding the onetime special items in 2003, interest expense unit costs decreased 50 percent and an absolute dollars 43.1 percent, or $3.8 million, as a result of the repayment of the Boeing debt.

On the balance sheet AirTran ended the second quarter 2004 with $387.3 million in total cash and cash equivalents, of which 8.7 million was restricted.

Working capital at June 30 was 270.9 million and compares to working capital at June 30, 2003 of 185.7 million.

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

In addition, we now have cash deposits with Boeing for new aircraft of $67.5 million.

Long-term debt at June 30, 2004 was approximately 258.9 million.

And stockholders' equity was 329.5 million.

And now, I would like to provide some updated guidance for the second half of 2004.

With respect to remaining 2004 aircraft deliveries, we expect to receive three additional 717s and six additional 737s.

Our capacity growth in ASMs for the third quarter will be 16 percent and 25 percent for the fourth quarter.

All RJs will be out of the fleet by August 1st, which necessitated some interim additional lift from one 737-800 operated by Miami Air until September 2004 to bridge the capacity shortfall from the exiting RJs.

Ryan International A320 flying will phase out in the September to November timeframe and will be replaced by AirTran 737 flying.

Of the use of the 137 seat 737s to the West Coast will be a better match of capacity and demand and should somewhat reduce the revenue risk in these markets.

In the area of fuel hedging, we're hedged 53 percent at 85 to 90 cents in the third quarter and 42 percent at 85 to 90 cents in the fourth quarter.

We are modeling our all-in fuel costs per gallon to be in a range of $1.05 to $1.15 per gallon for the remainder of the year.

During the second quarter 2004 we did a better job of reducing our non-fuel unit costs than we projected.

Going forward we see non-fuel unit costs up year-over-year from 1 to 2 percent in the third quarter due to the timing of pilot training and down 1 to 2 percent in the fourth quarter.

For the full year we anticipate that non-fuel unit costs will be flat to down 1 percent.

Our corporate tax rate for the full year is now projected to be in the range of 39 to 40 percent.

In summary, I would like to thank our customers for their continued business.

We appreciate your loyalty and support and pledge to you that we will bring low fares to many new markets in the future.

I also wish to thank AirTran's most important assets, our hard-working, dedicated and caring employees.

You know that AirTran's success is about hard work, teamwork, and customer service.

Together we're winning the battle for low fares and new customers.

As we continue into the second half of 2004, the marketplace will remain challenging and fluid.

We believe our core strategy of brand, profitable growth, and low costs are a clear path to success.

We look forward to the opportunities which will come and believe we have the plan in place to achieve that success.

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

(OPERATOR INSTRUCTIONS) Ray Neidl, Blaylock & Partners.

Congratulations on the quarter in this horrible fuel environment guys.

Going forward one is you have got pretty good fuel hedges in place.

I am just wondering how you managed to get them in there at the current high levels of fuel costs.

We have a daily conference call with a few analysts at noon, and each day we review the current market and we look for any opportunities to put in new hedges.

We do it incrementally; we do it with the goal of protecting the fuel price in the plan.

And on a daily basis you can generally find some opportunities.

I should also point out that in the first quarter of '05 we have fuel hedges in place of about 22 percent at 79 cents; and then in Q2 through Q4 of '05 10 percent at about 77 cents.

We've been doing this for several years.

It also gives us the benefit of having a laddered approach to hedge expirations.

So it's a managed process, and so far it is working.

On the insurance area, I know all the airlines including AirTran have been getting hit with very high insurance costs.

Do you see any relief in that area yet?

We've actually had two year-over-year reductions in our rates for hull and liability, as well as in the absolute dollar value of insurance.

What's driving our insurance upwards is the fact that our fleet now is all new aircraft versus the older DC-9s which had very little hull value to insure.

Going forward finally, you have got a pretty aggressive fleet acquisition program.

How do you think that's going to be financed?

Will you be going through the ETC markets, public TC markets (ph) or continuing for a while doing your present leasing?

Well, what we did in our order with Boeing and TCAS (ph) was we front-loaded our deliveries primarily with TCAS aircraft.

So those airplanes already have the financing in place in the form of operating leases negotiated at the time of the aircraft order.

We are taking some production aircraft to this year for next year, and then it ramps up in '06 and beyond as the Gcraft (ph) aircraft term out.

And for the two airplanes this year, and actually in conjunction with the four next year, we are already in the market.

We're in the final stages of documentation to get bank financing for debt.

And I think we're going to be able to report some very competitive rates in the near future.

If Bob Fornaro is there, do you want to give us your opinion on Virgin America, their chances of starting up and what they might do as far as competition goes with AirTran?

Quickly, it's hard to tell really what their strategy is.

It appears that certainly they're going to have some focus on the East/West Transcon market, which is about one of the last places this industry needs additional capacity.

But beyond that, I would say they're going to be facing a very, very competitive market because there's a lot more capacity out there and the market is much more competitive today than it was two years ago.

So I think they're not going to be welcomed with open arms, at least by the competition.

Thank you guys.

William Greene, Morgan Stanley.

I was wondering if you can talk, Bob, this is about RASM trends at all here in July, and how you think those might differ from the third quarter as a whole.

Good morning.

Actually maybe I could just spend a little time on this area.

I think at our last call we talked about some pretty good revenue outlooks for the second quarter.

And I think although we did pretty good on the revenue side in the second quarter, we actually thought it would have been a little stronger.

What we began to see in May and June was a weakening of the close-in booking trends.

And we say it is an absence of really selling up on a close-in basis.

So the close-in booking in the, I would say, particularly late May and June were disappointing.

So although we had good revenue numbers the second quarter, we thought they would have even been better.

As we shift into the third quarter, we do see a change in the revenue environment.

We didn't put out an 8-K about a month ago that really talked about it.

And I think what we're seeing is now a weakening of the longer-term booking trends now.

So we see load factors falling in the third quarter.

July will be a little lower, but August will be a -- you will see a particularly steep in the load factor on a year-over-year basis.

Actually fourth quarter is really too far out.

But essentially there is basically too much capacity out there in the third quarter to absorb the available revenue.

So I think you're going to see weakness in this industry, particularly in late August and September as well.

Again, in terms of the yields, some stabilization.

But mostly from a traffic prospective we're going to see declining load factors.

Regarding RASM, I think you'll see RASM declines third quarter more similar to what we saw in the first quarter.

We expect to be profitable, but I think at this point the industry has got way too much capacity.

And at some point we see some of this capacity shaking out.

In a couple of areas, the East and West environment is particularly weak.

That's about 12 percent of our capacity when you include Denver.

I think again the selling up on the East Coast has been very difficult.

And I would also say that Independence Air is having a pretty big impact on pricing and the East Coast.

It's very, very competitive.

You have an RJ operator who has walk up fares anywhere from 50 to 70 percent below AirTran and everybody else.

And those fares, we don't believe, are sustainable.

But they're going to create a considerable amount of pain in the upcoming months.

So revenue outlook, at least for the third quarter we see it as being very challenging.

We think seasonally fourth quarter will be better.

We are certainly stronger in the fourth quarter as we move into the Florida (ph) season.

But again, the second half of the third quarter is going to be challenging from a revenue prospective.

So you're going to grow roughly 15, 16 percent here in the third quarter and 20 plus I guess in the fourth.

Does this suggests that perhaps even you should be growing more slowly?

Would your margins be better if you grew more slowly at, say, sort of a 10 to 15 percent rate for the second half?

Firstly, anything is possible.

One of the things that is going on with AirTran, a lot of our capacity, particularly over the next six months, is really going into replace other services, and it does show up as growth.

So this year, September and October, we're going to be replacing our West Coast services with 737s.

Do you have a sense for what the net add would be then?

Our real economic growth is probably 7 to 8 percent less than what our reported growth will be.

That will be the case for the next eight or nine months.

Again, we are getting rid of 10 regional jets on our system and 4 Airbuses on our long-haul routes.

That's a lot of capacity that we're going to taking out, and we're going to be replacing much of it.

So the reality is they're not moving new routes from a risk (ph) standpoint.

The good news for us is we will see a tremendous decline in the cost of our East-West line.

And we think we will be right down near the lowest in industry, and we will be very well-positioned given the low yields that currently exist there.

Thank you for your help.

Michael Linenberg, Merrill Lynch.

Good morning.

I guess two questions; one just to follow up on Independence.

What sort of impact -- I realize that they don't have full conductivity, but what impact are you seeing in the Atlanta-Dulles market?

Is it being stimulated or is it just the fact that they've dumped so much capacity and Delta has gone to hourly service?

Is it just a bloodbath (indiscernible) If you can elaborate?

Your characterization is actually pretty good.

It's not only the Atlanta-Dulles market.

I could tell you Delta is matching their fares tooth and nail from Atlanta to Boston as well.

And so the Independence fares are being matched not only in the non-stop market, but on the connection market as well.

And we're kind of an awkward situation because Delta's got more capacity than us and it is very hard to be selling up when the competition, especially someone like Delta, is selling fares and $99 and you could probably sell a business fare (ph) 50 to $80 more.

So what you're seeing is very, very aggressive fare matching in the mid-Atlantic right now.

And in terms of what we've seen so far, we don't believe the Independence loads, at least in Atlanta, are very good.

I would add that we're counting them in Atlanta.

We know what their load factors are.

They're below 50 percent, and we think at the fares are charging that break even is in excess of 100 percent.

So clearly what's going on right now is not sustainable over the long haul.

It's just a matter of how much cash they want to go through before they back off or somebody decides to reduce the pressure on them.

But everybody is jumping on top of them in a pretty big way.

Based on just kind of what's going on along the Eastern Seaboard, does it make you maybe reconsider where you redeploy capacity later this year; maybe move it further westward?

Or do you even have any sort of appetite for, say, adding service to Pittsburgh which is going to see the US Airways withdrawal of about 35 percent of its capacity?

Regarding that, I think we think we've got a number of opportunities.

Again, the East Coast, at least for the next six months, you have got to view is very competitive.

Certainly -- again, the mid-Atlantic, Philadelphia, even the Southeast is quite competitive.

And we're following the situation in Pittsburgh, and we certainly are studying what USAir is doing.

We've added some service in Pittsburgh.

It's a good market for us to Atlanta and Orlando.

That's actually the kind of market that could create opportunities for us.

If you'd got a good competitive cost structure, you can be successful where perhaps certain legacy carriers can't be successful.

In terms of how we react, we basically have laid out a lot of options for us, and we will implement the ones that we think in the near-term will provide the best performance.

I think you'll see us over the next week or two laying out in advance our fall schedule and winter plans.

Thank you very much.

Jamie Baker, J.P.

Morgan Chase.

If we were to characterize the network as Atlanta non-stops, Baltimore non-stops, other non-stops and then connecting flows, of those four pieces which would be the most profitable?

I prefer not to get into the detail of profitability.

How about which one would be the least profitable then?

Right now the good news is I would say we're making -- growing money in all divisions.

I think you may have noticed that we in the last week made a decision to drop two city pairs.

One is Greensboro, which we flew only to Atlanta, and Tallahassee.

And we made those decisions pretty much toed to getting rid of the RJs.

In our opinion it did not make sense to keep 50 seat airplanes around to serve one or two cities, and so that was really the cost of exiting the RJs.

Again, certainly very short haul routes still are the weakest, even relative to any 9/11 comparison.

And what you have seen here is you have seen a steady increase in AirTran's length of haul since 9/11.

Going forward our focus is going to be on mid-haul.

But I think certainly Atlanta right now is very, very competitive.

We're doing pretty well in the local market right now.

Connections, the yields are a little bit weaker going across the hub right now due to the increased competition on the East Coast.

We really have got a situation where we we're directly competitive with really the weakest performing airline right now is Delta.

Delta's added a lot of capacity.

Certainly not making money on anything that they're doing, and they're really playing market share games.

They have pulled down the least, as far as we can tell, since 9/11.

And they have the weakest results.

So we have to ride out the Delta situation.

And certainly we see a lot of potential in Atlanta, but as long as they're adding capacity and don't seem to the optimizing their airline for profitability, it's going to have an impact on our results there.

I appreciate that color.

And could we just get a quick update on the XM Radio roll out?

I think Jamie we're looking at an October time frame right now.

We probably slipped about two to three weeks from the last time we talked.

But October.

And it should be on every airplane, I believe, in December, if I got my facts right.

Or maybe all the airplanes will be done in early '05.

But we're looking forward to that.

And do we need to be thinking about the cost impact of that or is it too small to measure?

I think it's too small to measure.

If that changes we will let you know.

Thanks a lot everybody.

Dan McKenzie, Smith Barney.

My question on DWI was answered, but I was wondering if you could comment a little bit about the competitive dynamics that you're seeing at DFW (ph), in particular AMR's (ph) by simplifying its entire fare structure to the Los Angeles market.

If I had to characterize the Dallas operation again, again a year ago at this time we were just flying to Atlanta and today we fly to Baltimore, Orlando, Las Vegas and Los Angeles.

And if I had to characterize it from our standpoint, I think I mentioned the last time I gave it a B, and I would probably give it better than that.

It's in a pretty good start-up.

And when you consider the competitive reaction, we feel actually pretty good about it.

Again, one of the things that we normally plan on is we expect particularly an incumbent to add capacity.

That is pretty much the playbook -- either add capacity, drop the fares, and discourage you.

And that's a pattern we expect, and we saw it happen.

Basically from Dallas to the West Coast (indiscernible) American Airlines has matched our fares and they have twice -- 26 seats for every 1 we have.

So when they have issues about their deals, we shouldn't be surprised.

They have 26 seats for every 1, I believe, we have in the market.

So forgetting the normal response -- and we have profitability in our network to basically finance a slow development of Dallas.

We're going to keep our new group (ph) very close to the vest (ph), but pretty happy with the way it's going so far.

And in the past AirTran has talked about public-private partnerships.

And I think in the fourth quarter of 2001 -- this goes back a few years -- I believe management reported that this (indiscernible) accounted for about 7 to 8 percent of capacity.

Now it's a couple of years under your belt.

Where are we at today?

And I was wondering if you could talk about where you're seeing success and perhaps where you're not.

The number is probably -- I'm guessing maybe 2.5, 3 percent.

That's a rough guess.

And we have a couple of market where some communities have come to us and we've done a few things in Rochester and Akron/Canton.

Those are very, very good examples.

On the flip side, after 9/11 we had made a decision to go into Tallahassee with a public-private partnership.

And it's a 200 mile route from Atlanta, and the fact is that's been a real struggle.

So there's not always a guarantee that these things will work.

But our policy going forward is if it's an idea we think it's a good one and someone wants to finance the start-up, we view that as a positive.

Because normally it takes a new route you have got to assume anywhere from nine months to fifteen months before it is going to be profitable.

I think it's very tricky.

It's not perfect.

You can always be wrong.

But we're attempting to just consider subsidies only if it would do the route on our own in the first place.

I see.

Lastly, I imagine the flight attendant contract at Southwest would impact negotiations with your flight attendants.

I was wondering if you could tell us a little bit about how negotiations are going and whether or not -- how that Southwest contract, you expect that to sort of impact your negotiations.

We continue to have discussions with the flight attendants.

We took an unusual approach of hiring a private mediator to try to move negotiations along and to avoid the mediation because as was demonstrated at Southwest once you go to mediation the process really drags out.

We know for a fact that we've had many more meetings with our negotiators than Southwest had under mediation.

I don't know what impact the Southwest agreement will have.

I think clearly our company is at a different stage of development and Southwest is, and I think our employees understand that.

We're very eager to get this behind us and give our flight attendants the raises and improvements in working conditions that they deserve.

If the private mediation doesn't work, then we'll probably go to federal mediation and go through that process.

We're hopeful to avoid that, but I can't guarantee that that won't be the outcome.

But it's sort of moving along, but a very slow pace.

Okay, great.

Thanks very much.

(technical difficulty) Mr. Parker, you may proceed with your question.

Good morning, guys.

Bob, you said that it takes nine to fifteen months to realize profitability in a new route, so you're about there with the time frame on the West Coast now.

When you put in your 737s will you be probable right away on the West Coast routes?

It will be a close call.

We know the costs are going to head down, we think about 20 percent, which is the good news.

And we do lose about 15 to 20 seats.

So if we can find a way to make sure that we really push off the lowest yielding traffic, then we may be there.

I would tell you we entered the West Coast routes about a year ago primarily to improve our seasonality because the East-West is normally where you get your boost in the summer.

I can tell you so far we haven't gotten the boost because the East-West market is probably more competitive today than at any time I have seen it in the last two decades.

And I think if you heard our previous calls, the East-West environment is pretty weak.

So we're really going to have to ride it out.

I think we're well positioned to do that because at least we're going to have a cost structure commensurate with the yield environment.

At some point, Jim, and again I won't put a date on it, this industry capacity will come down East-West because what we're seeing out there now is really not sustainable.

A lot of the fares East-West are below 4 cents a mile, and there's not many airlines who have costs below that number of a $1 (ph).

So at some point you will see capacity reduction.

I think we're in pretty good shape.

We're probably pretty well positioned once we get our own airplanes on there to ride it out.

Bob, it appears the odds on Delta going Chapter 11 I guess are 50-50 currently.

Would you assess the pros and cons on AirTran of Delta going Chapter 11?

I will make a couple of comments, and I know Joe will want to add a few.

I think from our perspective my preference would be to compete with an airline who is focused on profitability.

And if they have lower costs, really so be it.

The fact is they are flooding the market with capacity, they match all the prices already, so I think my instincts tell me we would rather compete with the company who is focused on shareholder value and that is focused on profitability.

I think that would be a change in the marketplace because we think we have a sustainable franchise in Atlanta.

The customers like us.

We've got a great product.

We're not a new company there.

We've been around a long time.

And the one thing, the Atlanta customers see that AirTran has gotten better and better every single year.

And so we're not just an alternative to Delta; we are a real player in that marketplace.

So we feel we belong.

We've got a competitive cost structure.

And I think, again, we would be probably well-served by a company that was focused on profitability.

Joe, do you want to add something?

No.

The only thing I would add to that is that the notion that Delta or any of these legacy carriers can get their cost down in the neighborhood of ours is really just not in the cards.

The thought process from the time we get up in the morning to the time we go to bed at night is so much different than the way these other guys think that they just can't get there.

I will give you an example.

I read in the clips on Friday there was a comment about a song (ph) and that Delta had installed these articulating (ph) bag bins so that they could get the turn time down from 90 minutes to 50 minutes on a 757.

And our approach would be to get it down in 30 minutes without making the investment in these heavy, troublesome systems.

And we would do that.

So that's just one example, and there are hundreds and hundreds and hundreds a day in the thought process of these legacy carriers and the way we think.

They may make progress in getting their cost down, but they will never get their costs as low as ours because they just approach the business differently.

And I will just reiterate what Bob said -- they already compete with us as though we had they had our cost; they just lose 1 billion or 2 a year in the process.

What causes you to think legacy carriers will begin to focus on their shareholders?

Nothing.

Maybe it's rational thinking, but over the last couple of years the only self-help we've had is to reduce our cost -- we think we can get our costs lower.

And our goal is not just to let them rise and meet in the middle; we're looking for ways every single day to get ours lower, and we see some vehicles to do that.

I think certainly we're getting more efficient at our stations.

We're making -- again, we're getting very productive at our stations.

Our operating performance is getting better.

We think we have some opportunities in the Internet space to move our internal bookings up.

So we're not standing still.

And like I said, eventually the shareholder wins.

I think I assume at some point in time there will be somebody like Delta who is focused on profitability.

It eventually happens.

Thanks.

Helene Becker (ph), The Mitch Market Company (ph).

Okay, so I have two questions.

One is really easy.

I missed the 737s that you're taking in the second half of the year.

Can you just tell me how many are coming again?

We've taken two and we're going to get six more.

My second question is for either Bob or Joe.

So if the East-West markets aren't meeting your expectations, surely you must have better missions for the aircraft.

So why don't you cut capacity where it makes sense and put the planes in markets where you could be more profitable?

I think ultimately -- first of all, that's a real good question.

And regarding our decision to leave Tallahassee and Greensboro, again, we're willing to do that.

But over the next five or ten years we're going to have the best long-haul cost structure from any airline in the Southeast.

And we view really Los Angeles and San Francisco as critical cities because we are building a network.

And our customers in Newport News expect that they can be taken with good prices to the West Coast.

So our view of the West Coast is we're going to focus on key cities.

Our game plan is not to operate ten or twelve cities from Atlanta to the West Coast.

But certainly the top three or four, we think are in the cards.

The second thing is we believe our profitability will be better than the competition's.

We're in a situation where we see Delta, at least in those markets, add a lot of capacity (indiscernible) losing a ton of money.

And at some point -- if all that capacity came in and we decided to enter the market, that's the logical capacity to vacate the market.

And so we look at Los Angeles, Vegas, and LA as core markets.

Again, we're certainly prepared to rethink what routes we fly.

Again, we're doing that in Greensboro and Tallahassee.

And I think we're a little bit different and we will assess the market and decide whether it's the right place to be.

In this industry most of the competition will just substitute a smaller airplane.

We actually went out of our way to drop two cities.

And so we evaluate our route structure on a routine basis.

We think we will prevail on the West Coast.

We think it's smart for us to remain there.

Let me add one comment.

I think if you look at the way we developed our airline, which is the way we will continue to develop it, is first we add frequencies in cities that we already serve.

Secondly, we connect the dots, i.e. we operate from cities that we serve to other cities that we serve;

Dallas is a good example of that where we serve a number of markets out of Dallas and we haven't opened any new cities.

And only lastly will we add cities.

And this year, for instance, we probably will add no cities whatsoever.

And next year we will probably add two or three, but not any more than that.

So we're very conservative in the way we add our capacity.

And we know that when you go into new routes we're likely to lose money at first, and therefore we try to keep the number of those new routes at a minimum while we keep the core of the airline profitable and then invest some money in developing new routes.

Thank you for that explanation.

I appreciate it.

Gary Chase, Lehman Brothers.

Stan, could you just elaborate a little bit?

You said -- I think initially assumed in the guidance for cost anyway were some start-up costs related to the 73.

You said some of the pilot training had shifted.

Could you just clarify that a little bit for us?

Was it all of those costs that shifted?

Were there any costs related to the 737s in the quarter, and can you quantify that for us?

Yes we do have pilot training costs in the second quarter.

We had some scheduling issues that will push some of that off into the third and fourth quarter.

I would characterize it as less than $1 million.

In addition, in the second quarter we also had flight attendant training costs to give them their familiarization with the 737s, as well as mechanics.

So it's not a significant departure from what we were anticipating, but nevertheless there was some scheduling that we have to push in the third quarter.

If I'm not mistaken, you took a couple hundred basis points out of the capacity growth in the third and fourth quarter.

Is that all related?

We did adjust the capacity.

I wouldn't say it's directly related to the pilot training scheduling, no.

We're right on schedule with the training as far as getting it done.

Really the capacity is directly related to when we get the new airplanes.

So it is related to the 73s or the delivery schedule.

The 73s, the initial delivery dates are a month, and then as we get closer in we get more specificity on actual dates.

So this is to be expected and it's really tweaking.

A question for Bob.

If I look in the schedule, which admittedly may have some imperfections in it, and I try to scrub out what is flown capacity for you as opposed to what you have your code on, after some significant stage length growth in the first and second I show in the third quarter that your stage length is pretty flat.

It looks like you're replacing some of those JetConnect lines with main line.

And you still haven't really spooled up on the 737s.

Is that accurate?

And if so, wouldn't that mark a real deterioration in a flat stage length environment to have the kind of RASM number that you're talking about?

I think you see two things, and that is a good point.

I think you're going to see the stage length up only about 2 percent -- 1 to 2 percent in the third quarter, although in the fourth quarter you'll see it lengthen and stretch out once again.

A lot of the replacement flying -- is a lot of that is happening in August and September.

So that's going to impact a few of the numbers.

That's the lowest stage length change we've had in a couple of years.

But it will begin to increase again fourth quarter and then going into next year.

I guess that's one of the reasons I'm trying to think through what -- your revenue commentary.

If you also look in your local markets, just kind of like a same -- some people call is same-store sales growth or whatever; markets you were in last year that you're still in this year -- your growth at a market level isn't that big.

It's 5 or 6 percent.

I don't think it's much changed from where you were.

So I'm just wondering is there a connecting issue.

Is most of the weakness here related to your connect business, and is that because of Independence?

Or is there any other color you can give us on what's happening?

I would certainly say certainly yields in the second quarter are a little bit -- the connecting yields are a little bit lower.

A lot of that is on the -- again, up-and-down the East Coast.

So I think connecting fares, again, are relatively worse in the North-South this year versus last year.

And it's just a matter of you have got USAir growing a lot, you have Delta growing a lot.

And so that market is generally getting more competitive.

It is clearly a situation where the capacity coming into the marketplace is really uneconomic and not sustainable.

In terms of the Atlanta local market, actually we think we're posting pretty good results.

I think the key thing to understand how revenue management works, normally with the load factors at we have there is more selling-up in the last week, and you really don't see it.

The industry has a big focus on market share, and that's not a big focus in AirTran because of our size.

Market share is not important.

But we have a hard time selling-up in a marketplace when the competition has got a lot more capacity than us.

I see normally you would see selling up at this time with these kind of load factors and so that mindset has got to change.

The focus has got to move to profitability rather than market share, and until that happens the industry is going to see difficult times.

Is there anything unique about the third quarter other then the anniversary of last year's tax holidays?

I mean do you think it's market related or is it just specific to AirTran?

It just seems like the third quarter is going to be a worse revenue performance all things equal than the rest of what you're describing for the year, including the fourth quarter from what you said.

I can't speak for others, although generally I think historically if we see things we don't like we will let people know.

And I think last year's third quarter domestically was somewhat of an anomaly.

It was exceptionally strong for a lot of players.

I certainly think you're right; retail sales last year got a boost from these tax cuts and checks.

Some of those things we're not seeing this year.

But again, is we see a big increase in capacity basically coming into the marketplace.

And I think it impacts everybody.

I apologize.

Just one last one.

The changes in other revenue related to the shift of flying, should we expect any of that to be material?

Actually, the net results of the Ryan Air and the Air Wisconsin flying is in passenger revenue as opposed to other revenue.

Okay.

Thanks a lot guys.

David Strine, Bear Stearns.

You pretty much answered them all.

Quick question on headcount.

Where was it at the end of the quarter and where do you anticipate it will be at the end of the year?

The headcount that we're going to be adding between now and the end of the year is primarily related to the fleet growth, and those people are pretty much on board now because they're in training.

We're getting you a number right now in terms of where we were at the end of June 30.

But I don't expect significant growth in headcount over the next six months.

The pilots are already on board in training; flight attendants as well.

And what we're doing out in the stations is actually holding the headcount constant or keeping it down through attrition so that we can begin to leverage the productivity from the unit additions of aircraft.

Plus the Internet and kiosk technology.

Exactly.

The number I referenced in my remarks of 32 percent is significant.

Almost one-third of our passengers now -- customers -- are checking in in some automated manner, not requiring any interface with our agents.

And we expect that to grow.

And in fact, we're driving the growth internally.

We've made an investment in kiosk technology.

We have an investment in the Internet.

And we expect to get productivity improvements from that.

So I would say our current headcount is about 5600 employees, and we don't expect that to grow too significantly before the end of the year.

Can you break out CapEx --?

We had about $10 million of non-aircraft CapEx in the first half and we will expect about another 10 million in the second half for non-aircraft related.

And in terms of aircraft, we've got deposits due, but we're also getting some money back from prior deposits.

So the net of that is going to be about $10 million for aircraft related.

Operator, we've got time for one more question.

Two more questions.

Tony Cristello, BB&T Capital Markets.

Again, most of the questions have been answered.

I just wanted to -- Bob, maybe you could address this a little bit.

You talked about, I think, costs for the 737s about 20 percent lower.

Looking at the size of your fleet now, how many deliveries do you need, or how many 737s do you need in the mix to really start to see that throughout your system and start to drive costs lower that way?

I guess that's related to maybe Stan you could talk about costs in the quarter were good; ex-fuel down 1.1 percent.

Is there any easy opportunities left?

Or is that just sort of at a level now that we can see going forward?

First of all, let me talk about the 20 percent number that Bob was referencing.

That was in the context of what we're currently paying for Ryan International.

What we're expecting is in '05 as we get the 737s, and we will be starting the year 2005 with eight 737s and then taking thirteen more.

We expect about a 3 to 5 percent reduction in CASM.

As we get into '06 with 21 of those airplanes flying, we expect that to further increase in CASM reduction for a total of 5 to 8 percent.

And I think we're being conservative and those estimates.

In the current run rate, in the current environment of the fleet we're continuing to look for cost reductions.

But more importantly we're looking for productivity improvements.

And that's what we're talking about earlier with the kiosks, is driving up the efficiency.

And as these new airplanes continue to come online we're going to be getting even greater efficiencies out of the stations, greater utilization of aircraft.

That's what's going to drive the unit cost reductions going forward.

And I guess, did you say you were at 11 hours for the quarter?

That's correct.

Where can we see that number go to?

What are you trying to target?

We're trying to get in excess of 11 hours projected going forward.

And I think we see some opportunities to improve that, but we want to at least get to 11, 11.5.

We don't think 11.5 is out of the realm of possibilities here (multiple speakers) couple of years.

That's for a fleet average, including 737s.

I'm sorry, 717s.

Great.

Thank you.

Sam Buttrick, UBS.

I guess part question, part observation.

I was looking at a bunch of East Coast markets the other day in connecting markets.

I don't remember all of them -- Buffalo, Jacksonville, Boston, New Orleans -- markets where you would be competing with Delta, United, Independence Air.

And what I found was that in most instances Independence Air's fares or the lowest, Delta and Northwest were a little bit on top of them, and then AirTran was at an additional premium to Delta and United.

So I guess as a low fare carrier it's odd to find you with the higher fares in the market.

Is this deliberate?

Did I just sort of stumble upon an exception?

What's going on their?

If you look at it, take an example of a market, let's say, 7 to 800 miles.

And you have a fare of about $49.

There is -- certainly with Independence's cost structure, they can't make (indiscernible).

It's very, very dangerous to carry that kind of traffic across two segments and perhaps block another customer.

So we are a little bit more cautious about filling the airplane at all costs.

Our breakeven load factor is the 67, 68 range.

And to be honest with you, we would like it lower.

And to be out really chasing everything at the 39, $49 (indiscernible) again some of the fares -- Transcon fares are $69 across a connection is very uneconomic, and it only works if you can carry that person on a Tuesday or a Wednesday off-peak.

It's very hard to do that.

So we don't match every price, although again on the flipside you will find us at certain times underselling the market as well.

But I'd say what's going on with Independence certainly is very uneconomic, and I think it's very painful for the industry.

Secondly, and quickly, I think Joe had mentioned earlier that if AirTran were flying 757s the goal would be to turn them in 30 minutes.

And I think -- and I could be wrong on this -- I think Song's scheduled turn time is 50 to 55 minutes.

Looking at your November schedule, it looks like you're scheduling 60 to 70 minute turns for your 737s, which I think are operating by then in Los Angeles.

Why is that?

I don't have the schedule in front of me, but actually in places like Los Angeles and in San Francisco we subcontract out that work.

I'd say more typical for AirTran is to go look in places like Akron or Newport News.

I think the other thing is you're looking at a 4 or 5 airplane fleet, which you're certainly not going to flow as efficiently as you are when you're going to have 20, 30 units.

Thanks very much.

At this time there are no further questions.

I will quickly wrap up.

It was a decent second quarter, although certainly not what we thought we were going to produce going into the year.

We obviously had much bigger numbers.

But with a very soft revenue environment, tremendous capacity increases and fuel, it was not that bad, I don't think.

As we would look into the second half, we are looking at a fairly hostile environment.

Again, we think revenue will be weak in the third quarter, I doubt that we're an island in that regard.

Fuel, we expect is going to remain above $40 a barrel.

So that's going to be a challenge; cost us about $10 million or 10 cents a share in the second quarter.

We will continue to try to put hedges and as we can.

And we see the East Coast in particular with a lot of capacity in there, so again a very hostile environment.

Having said that, we believe what we will be probable in the third and fourth quarters.

And obviously if we do that we will be profitable for the year.

So relative to the rest of the industry, we think we're doing well.

We don't like to look at it that way.

We like to look at it on absolute terms.

But we think we're really have the Company positioned for a great 2005 and a very good long-term future with the new airplanes coming in and costs continuing to go down.

So Stan, with that we can wrap it up.

Operator, that will conclude the call.

Thank you for participating in today's conference.

You may now disconnect.