西南航空 (LUV) 2004 Q3 法說會逐字稿

Good morning and welcome to the AirTran Holdings Third Quarter 2004 Earnings Conference Call.

My name is Ian and I am your conference call operator.

Today's call is schedule to last about one hour including remarks from AirTran management as well as the question-and-answer session.

In order to ask a question please press "*" followed by "1" on your touchtone phone at any time.

You may remove yourself from queue by pressing the "#" key.

I would now like to turn the call over Mr. Arne Haak, Director of Investor Relations for AirTran.

Please go ahead sir.

Good morning everyone.

I want to thank you for joining us today for AirTran Holdings third 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 we begin I would like to remind you that many of our comments today are related to our outlook.

As we plan 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 October 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 the forward-looking statements, they can be found in our Form 10-K filings for the year ended December 31st, 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 and good morning everyone.

I'd like to start off the call by noting that 11 years ago yesterday AirTran flew its first flight since then we are very proud of our company and its success.

Third quarter of 2004 was not unlike other periods in our history and which we would challenge us.

Our business was adversely affected by sharp and rapid increases in the cost of jet fuel and intensely competitive East Coast pricing environment and a record for hurricanes to hit the State of Florida.

To make matters worse all of the storms hit our operation on weekends and one over the Labor Day holiday.

In fact, we experienced the equivalent of six days without any Florida flying in the aftermath.

As tough as the circumstances were the dedication and hard work of AirTran’s employees was clearly evident throughout this period.

From the customer service staff working to accommodate passengers to the pilots and flight attendants operating a sometime hectic flight schedule to the ground staff and mechanics who brave the elements to secure and protect our facilities and to each and every employee who work to reduce expenses and conserve cash, the true character and spirit of AirTran was never more clearly evident.

The AirTran family is uniquely different in that firm adversity, we emerged stronger and better able to cope with the challenges of our environment.

Our core values of hard work, team work, and customer service, serviced the pillars for our success today and tomorrow.

To everyone at AirTran let me say thank you.

We are the company which has come from behind; we are the company which is moving ahead.

Our customers see it, our competitors see it, and as we move forward into 2005 they’re about see a lot more.

Now this time I would like to discuss our third quarter metrics and then our financial performance.

I will follow that with updated fourth quarter guidance and then a discussion of our new strategic initiative at Chicago Midway.

First, lets talk about the numbers.

During the third quarter 2004 AirTran took delivery of three Boeing 737's and 1717 bringing our total fleet to 82 aircrafts at quarter end.

AirTran achieved a significant financial milestone during the third quarter with a successful debt financing and purchase of two 737's at very attractive terms.

These aircrafts are part of a six airplane financing commitment with BNP Paribas and [DBD] which in conjunction was lease commitments from [GKF] completes the financing requirements for our 737 fleet through the end of 2005.

On a year-over-year basis capacity as measured and available seat miles increased 14.5%, well traffic as measured in revenue passenger miles increased 9.3% resulting in a load factor of 70.1% down 3.3 points from last year.

Obviously, the multiple hurricanes took a substantial toll on our scheduled flying and our traffic impacting over 50% of our business from Florida.

Average fares were also down 3.2% to $71.27 from $73.64 in the year-over-year period reflecting the intense competition in the revenue environment.

Given a 1.8% increase in stage length to 608 miles from 597 miles in 2003, yield declined 6% to $11.31.

Passenger unit revenue therefore declined 10.2% as a result of the reduced growth factor and yield, and in stage length adjusted basis year-over-year unit revenue declined 9.6%.

While we expect our load factor, daily aircraft utilization and capacity recovered during the fourth quarter we also expect to see continuing price pressure in our markets.

As long as airlines continue adding capacity without regard to financial performance or fiscal responsibility we expect to see a continuing weak revenue environment.

During the third quarter 2004, AirTran served 3.3 million customers representing a 6.2% increase over the third quarter of last year.

Looking at unit cost performance AirTran non-fuel unit costs increased 1.9% to $6.48 cents compared to $6.36 cents in the year earlier period.

Including fuel our operating chasm increased to $8.65 cents from $8.11 cents during the third quarter of 2003.

Again the effects of the hurricanes contributed to the increase of non-fuel unit costs as a result of flight cancellations and the direct costs attributed to the storms.

Other than the 26.6% increase in the cost of fuel to a $1.23 per gallon and the hurricane related factors there were no other significantly increasing cost trends during the third quarter.

In fact, we are pleased with our continuing progress in reducing costs throughout the organization.

On year-to-date basis our non-fuel unit costs were down 0.6% to $6.48 cents while our operating chasm was up 1.4% to $8.46 cents reflecting the increased cost of fuel.

On a fuel neutral basis our year-over-year operating unit costs improved 1.8% to $8.19.

The cost of fuel per gallon year-over-year has risen 15.5% to approximately a $1.14 resulting in $22.9 million in additional fuel expense.

The impact of higher fuel costs would have been even greater but for the fuel efficiency of our all new Boeing fleet.

Aircraft utilization during the quarter declined 3.7% to 10.6 hours per day compared to 11 hours in the prior year's quarter.

Once again the impact of the hurricanes can be seen in our operating performance.

Year-to-date average daily utilization was flat at 10.9 hours per day.

Reviewing our third quarter 2004, operational performance completion factor was 97%, on time arrivals were 78.1%, and baggage claims per thousand averaged 2.88%.

Excluding weather cancellations are on time arrival rate would have been 18.8% and our completion factor of 98.9%.

And now I would like to discuss our financial performance.

For the third quarter 2004, AirTran recorded a net loss of $9.8 million or 11 cents per share, compared to net income of $19.6 million or 24 cents per diluted share in the year-over-year period.

The third quarter 2004, reflects -- approximately 39% and a fewer number of shares due to the use of basic shares when computing loss per share.

Year-to-date AirTran recorded net income of $11.1 million or 12 cents per diluted share compared to $78.8 million or 99 cents per diluted share for 2003.

During 2004 AirTran recorded full of income taxes and had approximately 7.6 million additional shares outstanding.

During the nine months of 2003, AirTran, received approximately $38.1 million in payments from the U.S. government under the Emergency Wartime Supplemental Appropriations Act and recorded a non-cash charge related to convertible debt retirement of 1.8 million.

Operating margin in the third quarter was a negative 4.9% and compares to 11.1% in year earlier period.

Passenger revenue increased 2.7% to 236.1 million on a 6.2% increase in passengers offset somewhat by the reduction in average fares of 3.2%.

Year-to-date revenue increased the 11.7% to 735.6 million and a 12.4% increase in passengers and a slight decrease in average fare of 0.7%.

Year-to-date passenger revenue represents a record for AirTran.

As I noted earlier the unit cost performance in the third quarter 2004 was negatively impacted by the reduction of flying resulting from the storms and the associated reduction in average seat miles.

This effect is evident in the year-over-over quarterly comparisons and we believe is not indicative of the longer term trend to our unit cost reductions.

With that said on a yearly cost basis salaries, wages and benefits increased from 2.28 cents per mile to 2.35 cents per mile.

On a per aircraft basis, head count productivity improved from 75.5 full time equivalents per aircraft last year to 70.5 full time equivalents in 2004.

Year-to-date unit costs were down 1.3% to 2.03 cents per mile.

Aircraft fuel expense unit costs increased 24.3% from $1.74 cents per mile to 2.17 per mile during the quarter due to the increased cost of fuel the greater numbers of aircraft flying offset by improvements.

Year-to-date fuel unit cost increases are not as dramatic but still we reflect an 8.8% increase to 1.97 cents per ASM.

During the third quarter 2004, AirTran hedged approximately 53% of our raw price per gallon of 88 cents.

Aircraft rent on a unit cost basis is 3% to 1.29 cents compared to 1.26 cents in the third quarter of '03.

Year-to-date the unit costs increased from $1.21 cents to 1.28 cents.

As in prior periods the increase in aircraft rent reflects the operating lease financing associated with the deliveries of 717 aircraft.

Distribution expense unit costs were down 10.6% during the quarter at 0.4 cents and declined 8% on a year-to-date basis from 0.47 cents to 0.43 cents.

The reduction in unit costs reflects a nearly 2% increase in internet revenue on a year-over-year basis.

During the third quarter, 53% of our bookings were made via airtran.com.

All internet bookings increased to 68%, compared to 64% in the third quarter of 2003.

Over two-thirds of our customers now book their travel on the internet.

Maintenance, materials and repairs unit costs increased 3.4% during the quarter from 0.55 cents to 0.57 cents.

On a year-over-year basis, unit costs were up 2.4% to 0.63 cents per ASM.

On a cost per black hour basis, maintenance was $221 in the third quarter of this year, compared to $202 for 2003.

Year-to-date costs were $239 compared to $222 in the prior year.

The increase in black hour costs reflects the reduced flying in the third quarter of 2004 as regularly scheduled sudden maintenance costs.

The deliveries of the 737 aircraft will improve maintenance cost performance, as these aircraft will come to AirTran with full warranty periods.

Landing fees and other rents were up 3.6% at 0.54 cents for the quarter and up 2.4% to 0.53 cents year-to-date.

Aircraft insurance and security services unit costs were down 0.l9 cents per ASM on a quarterly and year-to-date basis.

Marketing and advertising unit costs were up 6.3% to 0.24 cents for the quarter and declined to 0.25 cents on a year-to-date basis.

The reduction in unit costs here reflects the higher level of advertising in 2003 associated with the opening of five new stations last year.

Depreciation expense unit costs were down at 0.12 cents for the quarter and down 15.8% year-to-date.

Other operating expenses increased 2.9% from 0.75 cents to 0.77 cents, in the third quarter as a result of passenger rerouting and the reduction in ASMs.

Year-to-date unit costs were down 4.1% at 0.76 cents.

Overall in the operating line the combination of 42.3% increase in fuel costs, the reduction in flying from the Hurricanes and a 10.2% reduction in unit revenue combined to produce a net operating loss.

Looking at other income and expense and excluding the one time special items in 2003, interest expense on a unit cost basis declined from 0.28 cents to 0.16 cents for the quarter and declined from 0.31 cents to 0.17 cents for the year-to-date periods.

This significant reduction reflects the debt retirement accomplished during 2003

Looking at the balance sheet AirTran ended the third quarter 2004 with $347 million in total cash and cash equivalents, of which 8.4 million was restricted.

Working capital at September 30, 2004, was $247.7 million compared to a $119.9 million at September 30, last year.

The increase in working capital primarily reflects the proceeds associated with securities offerings, during 2003.

In addition, cash deposits at Boeing currently totaled $69.2 million.

Long-term debt at September 30, 2004 was $307.2 million compared to $265.5 million for the year-over-year period.

The increase in long-term debt primarily reflects the debt financing associated with the purchase of two 737s during the third quarter.

Stockholders' equity at September 30, was $321 million.

And now I would like to provide some updated guidance for the fourth quarter of 2004, with respect to the current AirTran operation.

During the fourth quarter, we will receive two 717s and three 737s.

Our capacity growth in AirTran will be approximately 20-25% year-over-year.

Ryan International will be replaced with AirTran flying at the beginning of November resulting in an all AirTran flight schedule.

With respect to fuel hedging, we are hedged approximately 73% at a raw price per gallon of a $1.11 in the fourth quarter.

We are modeling our fourth quarter all in fuel cost per gallon to be in a range of $1.30 to $1.40 cents per gallon.

During the fourth quarter, we anticipate that are non-fuel unit cost will improve 3-5% year-over-year approaching a 6 cent per mile unit cost based upon ongoing cost reduction programs.

Capital expenditures during the fourth quarter will be approximately $5 million and finally our corporate tax rate is projected to be 39-40% for the year.

At this time I would like to talk about our strategic initiative at Chicago (Midway) and describe the nature of the transaction.

Due to the ongoing planning of the transition it is too early to provide any guidance as it relates to the fourth quarter of 2004.

We anticipate providing further updates to you over the next few weeks.

As we announced yesterday, AirTran Airways is acquiring ATA's lease rights to 14 days at Chicago’s (Midway) airport as well as in number of slots at New York's LaGuardia airport and Washington’s Reagan National Airport.

In addition, AirTran has acquired the right to develop additional ramp space at Midway for the construction of up to 10 regional airliner gates.

The purchase price of this transaction is approximately $87.6 million actually paid upon the approval and transfer of gate leases and slots.

Over the next 60 days, a transition time will be worked out with ATA to include a limited term, with leasing arrangement for up to 15-20; 737, 800 aircrafts which will be supplemented with AirTran's route system.

Considering wet lease period AirTran will replace wet leased aircraft with 737, 700s and Boeing 717 aircraft from our own delivery schedule.

And then we will also enter into marketing agreement and will coach there with ATA in a variety of markets.

We believe that this transaction has many strategic benefits for our company and will result in a right sized Chicago (Midway) to compliment our existing hub in Atlanta.

Chicago is the nation’s second largest travel market and the acquisition of these gates in a facilities constrained market place is a significant benefit.

Coupled with our aircraft deliveries we hope to achieve greater scope of operations, which will result in additional markets and improved travel opportunities for our Chicago area customers.

We are excited about the opportunity ahead of us and look forward to working with our new partners to accomplish the transfer with a minimum of disruption to our customers in the market place.

At this time I would like to wrap up by thanking our customers for their continued business.

Your loyalty during and after the recent hurricanes was greatly appreciated, and we look forward to seeing you again on another AirTran flight.

To our employees I again want to say thank you for the daily effort to make our Company a success.

AirTran is about hard work, team work, and customer service, and now we will have new challenges and even greater opportunities for success than ever before.

And finally I would like to say that we look forward to working with ATA and our Chicago customers to bring about low fares in many new markets.

With our business class cabin, a side seat selection, and soon an excellent satellite radio, we look forward to earning your business and seeing you on AirTran flights.

For all of us at AirTran, we have worked hard to build our Company, create individual opportunity, and profits for our shareholders.

We are committed to these goals and believe that the next chapter in our Company history will be even more exciting and rewarding.

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

We look forward to the challenges and believe that we have the plan and place to achieve our goals.

At this time operator I would like to open the call for questions.

Thank you, the floor is now open for questions.

Again in order to ask a question please press "*" followed by "1" on your touchtone phone.

When posing your question if possible please pickup your telephone handset to provide optimum sound quality.

Once again please press "*" "1" on your touchtone phone if you do have a question.

Our first question is coming from Tony Cristello with BB&T Capital.

Thank you.

Good morning, gentlemen.

Good morning, Tony.

I just wanted to follow up one thing you said you acquired the rights for ten regional dates as well, what did you pay or what would be the price paid for that?

Well it is part of the -- its part of the total transactions Tony.

What it is it is the right to develop ramp space into ten regional [AirTran] gates.

And as part of I guess of a bigger question you got rid of a regional jet provider recently and I was thinking that you can do that at a more cost efficient way yourself, are you now thinking that the potential exists with two larger hubs being able to deal -- may be go back and pursue some type of regional feel whether you deal it with respected party or may be consider taking on a smaller regional aircraft?

Tony, I think what we required is the option and ATA has a regional [order] now, we need to do some evaluations of their results but again we had reserved the right to develop if we see fit against having the right is really important because at least we will be able to make a decision as to, you know, where those gates end up.

So, it's going to take a little bit of time.

We, you know, I guess reserved the right to, you know, change our mind and re-evaluate our decision that we felt wasn’t appropriate in Atlanta but we will see how this whole thing plays out here.

Okay and then I guess one other question would be when we think now of Midway in Atlanta, how should we be thinking about the mix of growth between the two going forward and in sort of a bigger picture and how you deploy capacity and were you want to take these two hubs?

Tony, I guess it's too early to tell but let's just say by the end of '05 if the plan unfolds the way we have it laid out Atlanta would be reduced to about 55% of our capacity and which we think is very, very important to create much more balance and diversification on the system.

But also during 2005 we think there is going to be other changes in the industry and we have a situation were the East Coast has tremendous excess capacity.

With the carriers in the East Coast are loosing tremendous amounts of money and so there has been no rationalization yet and we think there will be some.

So we could see our situation where, you know, we are growing Atlanta, growing Chicago, we will be growing in the Northeast as well but the key thing is the East Coast does not undergone the restructuring.

The Delta airlines will be bigger in the Southeast than they were 5 years ago at the peak of the revenue market.

They are still growing and basically taking on a lot of [inaudible] so I think flexibility here is very, very critical.

And the one key point we will make -- you will hear us say over the next couple of days we order -- key to our strategy Midway is to right size the operation.

AirTran will be flying a mix of airplanes, a 117 to a 127 seats where as ATA was flying airplane 185 to 200 seats and with both sized airplanes you create your own downward pressure on revenue.

So we will, I think, play a very big role in rationalizing that marketplace at least in the current routes because we will remove the downward price pressure on the marketplace like with small planes.

So we have got a number of components going on but, it’s very, very important to be very, very flexible over the next 15 months.

Okay.

Great, thank you.

Thanks Tony.

Our next question comes from Ray Neidl of Calyon Securities.

Good morning, Ray.

Good morning.

Could you give us just an estimate on what you thought the hurricane damage was in the third quarter and what effect it will have on your fourth quarter earnings outlook?

Yeah, Ray, there is a hard number and there is a soft number one with the projection but the hard number is outright net cancellations.

We had about $8 million in cancellations and that is a very easy number to calculate because we have trend on.

We know what that number is and in terms of [mass] bookings, we believe we lost about $7-8 million as well and it is people who decided not to book or not to travel.

So, I mean the cancellation number is sort of a very hard factual one, the other one is more of an estimate but, it was significant.

What we do see now is that we are finally seeing a strengthening in the market, no, it begin about very week to 10 days ago.

But some clearly we were impacted I would say by 5 by several million dollars in the early part of October.

And again, the booking cycle was really impacted because people thought there was going to be a hurricane in Florida every week, and fortunately it has ended and it is beginning to rationalize again and you know, most of the key leisure and regional areas are intact.

The place that people really want to go are intact so, the good news is it is really behind us now but we do have some impact in the fourth quarter.

Okay, good Bob.

Bob, the Midway acquisition now I believe you said that it shouldn’t have too much of an impact on your planned growth and that you may switch around areas where you were going to grow, but I am just wondering if something happens to U.S.

Airways or if further opportunities develop by going into Midway this is going to [preclude] you from taking advantage of some of those other opportunities that you were planning on already.

Ray, Joe had stated that, that will be a high class problem.

You know we have such a tremendous overlap with U.S. Airways.

We have about 70% of pricing overlap in our markets and if we did nothing our revenues would dramatically improve and we think, you know, we are very, very flexible company.

I mean just the ability to do [inaudible] with fairly acknowledged airplane that's unique in the industry.

And so we can always reserve the right to adjust our schedule and again we don’t need six months fleet time, we need 30 days lead time around here.

So, you know, but we can't plan on U.S.

Airways, you know, not making it.

We have been in the industry long enough to know that we can’t forecast these and people normally get along, normally you know U.S.

Airways is tough competitor and they are going to find a way to hang in there for a while.

So, we can run the industry based on somebody else failing.

Again that’s what's going on in this industry and that’s why there is -- everybody is losing so much money.

So we are going to be moving ahead, if something happens at U.S.

Airways its great, we will participate and make claims of going out and getting others in the short run.

Okay, great.

Roy this is Joe.

We got -- between now and the end of December next year we got 21 airplanes coming.

So we have got a lot of equipment coming, and if you know we really wanted to get bowled I have no doubt we can get our hands on some additional airplanes if need be.

Okay, great.

Finally Joe, I don’t know if you will be able to answer this question, but I am just wondering what road blocks could be thrown up with this Midway deal.

Could it be ATSB or creditors of AMTRAN try and block the sale of the assets until they are fully recovered or could the city of Chicago decide to take the gates back and partial and not themselves or could other bidders come in and try and outbid you for some of these assets?

Well I think all of those things that you mentioned they are certainly possibilities, you never know what’s going to happen in chapter eleven, but you know, if this were not to happen, we would have other opportunities; acquired other assets that you just mentioned.

But having said that ATA spent a lot of time looking at a number of different proposals; it’s our understanding they did that in conjunction with the ATSB and other interested parties.

They concluded that this was part away the best solution, not only for AirTran but for ATA at least the viable ATA entity, operating at the end of this.

We think it maximizes jobs, and so the interested parties have already done an enormous amount of study and analysis of this in the process of our bid.

And so we think that we know ATA has strongly endorsed this and will continue to do so.

We think the other interested parties, which already ATSB and other creditors are very much aware of this deal and how it's structured and we believe are very supportive of.

So like I say anything can happen in chapter 11, although we think we have a huge head start here and just have a business plan that makes a lot of sense for all of the takeovers.

Okay, well congratulations on this move it seems like a pretty solid move.

Thank you Ray.

Our next question comes from Gary Chase with Lehman Brothers.

Good morning guys.

Good morning Gary.

Hey, listen just kind of a clean up point here, the consideration paid for ATA, that is, none of that is cash outflows anticipated for the wet lease agreements.

Correct?

Correct.

Okay that would all be incremental.

Correct.

You know Bob or Joe, could you just may be go back and I mean I know you sort of touched on this a little bit, I mean you know, on the surface looks like you paid you know $87 or $88 million for an operation that right now is losing quite a bit of money.

I mean there's a reason ATA is in this position.

Could you just kind of go back and walk us through the thought process, is it really all just down gauging, do you think you can take enough trip cost out without revenue loss that you can turn that operation around.

I mean or is there kind of more to it.

Can you just may be help us little bit more with that?

Sure, I think can I go in first, I think there is two things and the ATA has got a good cost structure but it really is nowhere nearly as low as AirTran.

They are -- a good piece of their low cost rates got a very, very long [stable] list.

And if you stage rent adjusted then you will see the AirTran is probably 10-15% below even the smaller planes.

So I think that’s the key thing is you know our cost structure is right there with Southwest, step-by-step.

So that’s a positive.

The second thing is with our cost structure and their revenues we could be profitable even if we show no improvement.

But what we think it will do for AirTran--

Bob, I'm sorry just to be clear, with your cost structure and their current [rhythm] or --?

They can kind of also traffic and yields.

Okay.

When the operation turns around.

Right.

Because what we would end up doing is we will be more depended upon the local market and maybe less depended on all the connections.

You can take -- that’s one of the problems you have in large airplanes.

Big airplanes you end up discounting and as we have seen these Transcon yields are 4-5 cents a mile, and that’s one of the problems in this industry right now, is the quality of connection yields has dropped dramatically.

With smaller planes yeah, we would emphasize conducting business to a degree.

So that’s part of it as well; the third piece of it is, it really begins to strengthen the AirTran route portfolio in many of our markets.

If you look at really where we are at Boston and New York we have got a good focus to the South and the South East.

But you know all of a sudden, going east-west really changes the way a business flyer would perceive AirTran in several of our key markets.

Well again dramatically changes our route profile and now we got nonstop services to some of the largest markets in the country.

You know Baltimore, Atlanta, Chicago, Philadelphia, got a pretty big blue portfolio.

So I think the last element is yeah, we have got a lot of capacity coming on.

We have thought that 2005 would be better.

You know we think the prospects in the Southeast are going to be really tough in the fourth quarter and next year.

There are going to be a lot worse for our competitors I can tell you but, this allows us to reduce our capacity going into the Southeast over the next two years.

Our feeling is that eventually the Southeast will rationalize, again the Delta Airlines has done everything it can so -- it's has put themselves on the brink of bankruptcy chasing AirTran and Jet Blue.

And that's still got ways to go.

I think they will write their new strategy in Atlanta is going to further enhance their losses, because they will be competing with themselves.

They have got 75, 80% market share and they have got to take their own customers.

So we have to live through it.

We think in the short-term we can dramatically improve some of our weaker routes by reallocating their capacity over the next 12 months.

And do you expect any material -- I mean are there going to be material changes in the current flying that ATA does, I mean one of the things this springs to mind as well is you know, even in Baltimore and Philadelphia there really isn't that much overlap yet with Southwest.

I mean very little in fact.

There is quite a bit in Chicago (Midway) that ATA flies against Southwest, I mean does that -- do you expect that will continue or you plan to reallocate and restructure the flying there so that there will be less?

Well I you know, the way -- this Joe, Gary you know, if you can't compete with Southwest, then you really got to get out of the game, because Southwest is going to be everywhere eventually and they are already in every major market.

So you have to be able to compete with them.

Our cost is the same as there’s.

We run on our company exactly the same way they run theirs, and that is to maximize profits every single quarter.

We are not out to show that we're macho; they don’t behave that way unlike a lot of other competitors.

So they are in the business to maximize profits as are we.

We have managed to peacefully coexist Baltimore.

There is a big gun there, we have a sizable operation but they don’t feel threatened by us as they should not.

We will actually think improve the yields at Midway which they should be happy about.

So we really have -- we have not really figured out exactly what schedule we are going to run.

Kevin and his gang will be up in the Indianapolis as soon as we can, and be working that out with guys up there.

Not only our revenues and assets, but ATAs as well because we are going to have a future relationship with those guys, so we kind of look at it you know, that could -- everything can change, you never know what’s going to happen.

But we think that Southwest will be rational, so that they can continue to get their 31 times multiple and if they are they will make a ton of money or make more money in Midway than they have been making and we will make money in Midway.

So that’s kind of the way we look at it.

And these guys are everywhere.

So eventually all of the low cost carriers are going to bump up again each of other somewhere, and so you got to have a good product and low cost which is proven to be the case.

Okay, and I apologize, just one quick one how long do you anticipate the wet lease agreement is going to last?

We are looking probably the minimal would be six months to maximum -- well, we have said here but hopefully it won't be that long.

We are going to be very, very flexible.

We want to make sure that we have very strong -- solid transition.

We don’t want to give up the equity they develop in the market so, we’ve got to workout the finer details with ATA over the next 30-60 days.

Thanks a lot guys.

Thank you, Gary.

Our next question comes from William Greene with Morgan Stanley.

Yeah, good morning.

I was wondering, if you can Bob, maybe you can comment on the some of the recent fare and traffic you are seeing in the fourth quarter.

Sure.

I think really in terms of going on looking at an outlook, I think what to see with AirTran is it is really beginning to stabilize.

I think first of all you will see the load factor begin to like October look similar to last year.

November should be higher, but really for us in the quarter December really is the really is the wildcard.

There is still downward pressure on yields and I still see the yield being down for the quarter although, you know, we put in fewer price increases and I think we are beginning to some of the impact of some of the price increases especially in the Atlanta market.

But regarding us and I would suspect it impact other carriers in the East Coast, Independence Air has a significant impact on AirTran.

We estimate that it will cost us about $5 million -- 5-6 million in the third quarter.

They are pricing about 40% of our Atlanta local market and they have very, very low fares.

The Delta has been very, very aggressive with them than we can imagine and so we have seen our average fares in these markets drop significantly to Boston, to [inaudible] and markets like that.

We don’t think Independence Air was a strategy sustainable, so hopefully it will correct itself at some point next year.

But that’s a big negative impact.

To be flying at [RJ] -- the $59 fare is one the silliest things that I have ever seen, because RJ is a high cost airplane.

So, that will lead to a system and eventually hopefully it will clarify itself.

With Delta’s growth in the South East and U.S.

Airways reallocation from Pittsburgh and both Philadelphia and Charlotte you can put a lot more pressure on the East Coast going forward and into the first quarter.

I think the one positive is and Stan mentioned it in his notes [inaudible] of your cost and, you know, we are hoping to get below 6 cents.

We are very close to it in the fourth quarter and that’s pretty big.

You know, a lot of carriers talking about driving that cost down we are still finding ways to take ours down as well.

So at that time we kind of stay ahead of the game, just keep bringing them down.

The levels where the competition can’t get through.

Okay and have you done any analysis that might be premature but have you done any analysis on what the Delta schedule change for January will mean for you?

Well, the bulk of it occurs in, you know, already at the end of January.

It really is hard to figure out because we don’t know what the size of the Atlanta revenue market is.

If you look at the government’s [DLT] data and compare the current revenue to 2000 the last snapshot said that Atlanta revenue was down about 20% versus '02 if Delta's capacity will be up domestically.

So, you know, it's a really kind of interesting because basically they have been using employee concessions to fund the forward strategy.

You don’t put additional seats in a market that has very weak revenue growth but that’s what we are seeing.

And markets that have 80% market share so, what happens is when they add more capacity the first several customers will come off their flights but take one of our flight and what we would be forced to do is, is fact fill the connection but it really is hard to see the total impact because we are not really sure what the underlying revenue growth is in the market place.

It is hard to figure out, you know, whether Florida is an issue, whether the economy is slowing down, and [inaudible] travel, or even [Royal] is taking away discretionary income.

We don’t know how strong the revenue market is going to be next year.

There is a lot of negative things, I think holding back domestic revenue growth.

So, too hard to tell except that the supply, demand relationship does not look good over the next six months.

Okay, one quick one for Stan, did do you say you had hedges in '05 or not -- no, you didn’t?

I didn't update but I will give you that update now.

In '05 in the first quarter we are 28% hedged at raw price of 95.7 cents a gallon, in the second quarter about 10% at roughly 80 cents per gallon, and then in the second half we are about 8-9 % hedged at a price per gallon of about a $1.40.

At $1.40 is your hedge.

That's correct and that’s actually in the money right now.

Okay.

Thanks for your help.

You are welcome.

Our next question comes from Jim Parker with Raymond James.

Good morning.

Good morning Jim.

You have indicated that one of the reasons I guess in carrying your profitability to the West Coast currently does a new route to a relatively new route has been the wet leases were you having to pay a margin of profit to Ryan International, I'm curious about your wet leases from ATA, will those markets, will those wet leases have a margin of profit for ATA which Mike calls those markets to the unprofitable or low -- generate low margin until you put your own aircraft in there?

General we think first of all the best situation is to have our own 737, 700 particularly on the long haul routes but our intended agreement is a transitionary one and basically based on their cost.

And the cost will be impacted by the lease payments, the lease rates which hopefully will be lower and some of the cost reductions that they already have put in place.

At the same time round numbers we would redeploy about 10 airplanes into that system in the first quarter.

Now Stan mentioned that we have five deliveries coming soon and we have a few more deliveries coming in the first quarter.

So, a lot of capacity just sort of coming on in the market place for us can get very quickly to diverted here's -- a lot of the early capacity is AirTran capacity.

But we think the cost will be better than what we are experiencing on [Ryan] and our goal is to again get our airplanes out as quickly as possible.

One of the things that we have seen is that our unit cost have dropped more than 20% when we got our own airplanes and instead of these [inaudible] wet leased airplanes.

So we are going to move pretty fast on it because we think in this market place cost is everything.

Would you suggest when you like to be in the black with this new operation at Midway?

I mean ultimately it is going to depend on -- everything we see in the future depends on what the fuel prices are going to be.

This industry at as 55 bucks a barrel it is very, very hard to post the profit.

You know, we hope to be close in the first quarter.

I mean, obviously we think the second quarter will be pretty good because -- second year because of the entire airplane operation.

A lot depends though on fuel prices.

At current fuel prices when do you think Chicago Midway would be in the black?

We think it will be in the second year and the reason why we think that is we think there will be even further reductions in capacity by the time we reach '06.

I mean if we just do the math on fuel prices most airlines will not have enough money on the balance sheet to get to '06 with these kinds of prices?

Yeah, by the [inaudible] it sounds $55 a barrel fuel strategically is good for our trend.

It's not in the near term but strategically its good for AirTran because it will absolutely take capacity out of the system.

I agree Joe that’s not proportional.

It will.

Okay thanks guys.

Thanks Jim.

Our next question comes from Michael Linenberg with Merrill Lynch.

Yeah hi good morning gentlemen.

Hi Mike.

Joe you know earlier you made the comment you know that if you can’t keep with -- if you can't compete with Southwest you ought to get out of the game.

And you know, I think you know the questions that are being asked today Southwest has about a 140 flights at Chicago (Midway) and I think ATA has may be you know half of that on a main line basis.

You know can you give at least the sense of may be how some of the markets that you are competing with head-to-head you know, Southwest presently likes Chile and Baltimore down to Orlando.

You know how do those markets stack up relative to your other markets.

Are they sort of in line are they more profitable, less profitable?

Well they have it is a few unique ones.

First of again Laguardia, Boston and DCA which do pretty good markets and they are actually, they are non-Southwest markets.

I think --

DSW

Yeah even DSW.

I mean non-stop to Florida yeah, we can compete with anybody.

Because on the larger leisure routes and yeah we can fill the plane as good as anybody else.

So we can make money on a Chicago to Florida just like we do in Baltimore, in fact its like we are doing in Philadelphia.

Even though while there has been a daily increase in capacity in Philadelphia to Florida, yields are down about 8-10% year-over-year but the load factors are up.

So we stay profitable in those routes.

So we're comfortable with that route.

Okay.

The most difficult area for us is the West Coast, because we don't have a very well developed root system out there.

Quiet frankly we would not get into a frequency battle on the long haul routes.

We think we can fly those routes, but you know we own -- we are not really focused.

Again one once gain on traditional market share mechanism.

For comfortable you know take for example our market to Las Vegas, frequency is not as important as time of day.

And with our cost structure yeah, we don’t need to go 6 or 7 times a day, we can go 2 or 3 times a day and be very-very profitable on that market.

I think other thing Mike is our airplanes will have on average 50 seats less than theirs.

So we will be much less dependant on flow traffic than ATA has being but then we will be on the local market in Chicago and the nice thing about Chicago is there is not going to be any growth at all here and there is not going to be any growth in Midway.

Okay,

I mean both airports are land locked.

Okay.

Then you know with the focus on Midway and the focus on Atlanta, what sort of happens with Dallas.

Does Dallas go on the back burner for now give those two opportunities and you know, may be the potential liquidation of U.S. airways which would certainly keep your hands full with respect to East Coast markets?

You know I think I mean there has been a lot of discussion about Dallas but I mean we would fly, again you know Dallas Chicago, but I think a big portion to Dallas beyond Chicago is you know it won't be in the carton next year, I mean we'll take a pause there.

Okay.

And you only have so much capacity.

We clearly -- I think in the steam of things you know we have done okay in Dallas, I mean August and September is kind of the bottom of the market, it looks pretty good in the fourth quarter.

But you know, we are not naïve, it’s been a dog fight and we will continue to do that.

But this -- we think this is a easier and better path overtime.

You know, there is capacity constraints that are [here] the FAA is involved in pulling down flights.

It is limited gates here and we think having Chicago would allow us to, let’s say fill in if there is an issue with U.S. Airways.

I mean in our opinion U.S.

Airways has a lot of key pieces, Charlotte, Pittsburg, DCA.

You know our type of airplanes they are all good.

There are a lot of opportunities there and also you know in the scheme of things getting to a lot -- lot of times we were asked about Southwest, Southwest is much bigger than us and we don’t want to be getting in foot races with them because they got more size than us.

So we're really going to pick our spots, and even in place like Pittsburg which has been you know [maligned], we think it could be very profitable in a city like that with you know 717s and 737s.

So we still think of these opportunities and we don’t want to cut those off clearly though in '05 down Dallas goes on the back burner.

Okay and just one big housekeeping, the 87.5 million is that consideration -- is that all in cash or you know is there a way that you could actually offer up some debt you know, may be pledging the assets themselves as a security backing some sort of loan.

And it should we be -- that is cash coming off the balance sheet or what?

It’s the cash deal we are looking on whether to fund it from cash on the balance sheet or go to market.

But we are not assuming any of ATAs debt in the transaction.

Okay.

We have been advised that we would have virtually no problem going to any number of different markets to finance this if we choose to do that rather than use our cash.

Okay, very good, thank you.

Thanks.

Our next question comes from Helane Becker with Benchmark Brokerage.

Thank you very much operator.

Hi guys.

Hi Helane.

Most of my questions have been answered, I wanted to talk about the Dallas thing, but you answered that and the other question I had was, Tad I missed the long-term debt number, and my third question is you are not speaking on any of the ATA military stuff are you, you are just doing straight scheduled quarter?

Yeah that’s correct, ATA is going to retain the military and charter business ambassador, and they will do some limited scheduled flying out of Indianapolis, as well.

On the long-term debt number, that’s $307 million at September 30, compared to $265 at September 30, of '03 and the increase is primarily the two 737s which get financed.

Right, okay and then just in terms of going forward as you take these aircrafts Stan, you said that you are one of the fleet was [pre-financed] for '05.

So should we think about it as a mix or a combination of lease financing and outright ownership, is that how we should take them in, one -- you know one for one or --?

Well I will give you the actual breakdown because in fact all our deliveries through '05 are now financed.

First on the 737s we have 21 airplanes coming next year and four of those -- I'm sorry let me backup we have 13 737's coming next year.

Four will be debt financed nine will be financed by GKS on operating leases.

In addition we have eight 717s and that gets us to the total of 21, and we already have financing commitments for those on operating leases as well.

Okay, great, thanks very much.

Thank you Helane.

Our next question comes from Glenn Engle with Goldman Sachs.

Good morning.

Good morning Glenn.

Good morning Glenn.

Couple of questions.

One, help me with the accounting when Ryan Air, when you stop paying them, where does that show up as a reduction in expense?

Actually the way it's accounted for on a wet lease system net expense is against the revenue, and so the net goes in the passenger revenue.

So, and they claim their statistics.

We don’t show any RPMs or ASM's because the airplanes are operated by Ryan Air, they report those.

So when they go away the net results of the operation comes out of passenger revenue.

Alright secondly when I look at the yields down 6% in the third quarter can I assume that like the industry they were down a lot more at the end of the quarter than the beginning of the quarter?

Yeah absolutely.

Yeah Glenn that -- I think you know you know [inaudible] with a strong July, actually the first 40 days of the summer.

Which [grew] and I think if you remember unlike [inaudible] we tell people in late July that we still have a relatively weak revenue outlook.

And so we really weren’t surprised by what we saw although you know we have the zinger here with the hurricanes, but first 40 days were pretty good.

And it was I would call it a real normal summer, and the second half was just very-very soft.

Can you talk about a stabilization on the yield side it's -- after having coming down 10% year-over-year starting to stabilize--?

Absolutely, you know that’s right Glenn, some of it is because I think clearly at 55 everybody is, is trying to move fares up to some degree.

And take the risk that traffic is impacted.

I think right now there is a lot of focus about getting yields up throughout the industry which is positive.

And the Florida tourism industry is planning on spending some significant amount of money to advertise Florida as a destination that hasn't occurred yet because they are going to make sure they will all run the ads that not another hurricane, but there will be some substantial effort to improve tourism in Florida that is coming out of our budget.

Thank you.

Thanks.

Our next question comes from Daniel McKenzie with Citigroup.

Yes, good morning.

Good morning, Dan.

Just a couple of few more house cleaning questions here, you know, the Form-41 holds are little dated, could you please provide a current annual revenue number for ATA's business at Midway?

I would guess, I am guessing because we have never really focused on it that way, its probably pushing I am not sure Dan, it's got to two-thirds of the revenue but it's only a guess.

We modeled our own numbers, we really hadn't modeled our numbers.

Yeah, okay, willing to show your own model numbers?

Yes.

Okay, also I joined a little late, did you talk about how this might change your capacity growth expectations for 2005?

I guess -- I think what it does at some point it will provide for you, we end up about the same size at the end of the year because at the end of the year we will just be the AirTran airplanes.

I say as soon as we start the transition, in January, for 6 months or 6-8 months we have additional capacity in terms of wet leases.

Right now, our planned capacity for '05 is about 30% and so that would increase a little bit in the first half, because of the wet leases create a short term bubble and so we have to workout that transition, trying to figure out what the size, what's the appropriate size go in the first quarter and the first half but we end up the same size, we end up 30% bigger at the end of next year.

Okay, I see.

In the past you have talked about block hour cost for maintenance and Halley step up over time, I was wondering if you could please provide an update of how you think the rates will step up going forward and the timings for the step ups.

Dan, I will just give you some general commentary that the 717's now are out of warranty so we are incurring regular with scheduled maintenance events and that will be an upward pressure on block hour cost although we do have power by the hour agreements in place, on that aircraft, for engines and major system so, you are not going to see dramatic increases, offsetting that, though the 737's which are going to come in under warranties and so we will have the same maintenance honeymoon that jet blue for instance has enjoyed on their aircraft.

How that shakes out I can't give you a specific guidance at this point but you are going to have a significant positive offset there from the 737's.

Now, I see okay.

Under the scenario where U.S.

Airways doesn't have the [inaudible] to pull off a restructuring, can you talk about sort of the percentage of your rail system or your currency say just a number two competitor to U.S.

Airways and where you could find yourself a number one competitor in the markets?

Well, I think when you see big improvements, you ask the members even on the East Coast we are so much smaller than Delta, or American, or U.S.

Airways, but I think you need to go out and really look where we compete.

We are in Buffalo and Rochester which are historically stronghold.

Boston -- you know, obviously Philadelphia, you have to find a way to go there, Pittsburg.

I mean the overlap is just so pervasive.

I think we priced about 70% of the revenue markets.

The big market that we are not in is in Charlotte, which I believe that carry about $250-300 million in revenue year out of -- and I think what you will see is pricing rationalization.

You'll see that the average price rise tight away.

It's uneconomic but, I would guess that on a percentage basis we would probably have the most to gain, because that overlap relative to our size is significant.

Okay, I see and I guess just one last question here, you know, at this point is their trend willing to forecast a profit for the fourth quarter.

I think it all boils down and we are happy to come down in December.

I think, you know, unfortunately October got off to a slow start, we liked the way November is shaping up, but really -- clearly December is a wildcard for us.

Now, we really don't know what we will see in December is as we normally see, first two weeks normally light traffic, and the second two weeks normally strong.

There is so many things that can happen over the next 45 days, so it’s a little too early to call.

I think the positive is at least the very most recent trends, are positive.

It really is, its going to down in December.

I see, okay, great.

Hey, thanks a lot you guys.

Thank you.

Our next question comes from Jamie Baker with J.P. Morgan.

Yes, good morning everybody.

I just wanted to make sure I got this right, you expect to lose money on the ATA wet lease and lose money in Midway your own operations for the first year, is that right?

No, I think, about -- I'd say round numbers what we looked is a about a break even on the Midway operation next year and again that is helped by the fact that we are reallocating some capacity away from the Southeast that we think will perform better in Midway.

And is that net of the wet lease losses that you suggested in response to Jim's question, earlier.

Well, we didn't say anything about a wet lease loss.

Okay, that was [inaudible].

The numbers are getting better with our equipment on it, we are not forecasting a wet lease loss and we are we think if our numbers are right and we think we have been conservative, we think we will breakeven on Chicago operation part of which comes from adding better places to put the last ten airplanes we own, which will redeploy to Midway and then we think it will be highly profitable in 2006.

I guess I am still confused on this wet lease.

I mean you have made it very clear that ATA can't make money at their cost structure.

I can't imagine that they construct a wet lease that would be worse than what they are doing so, you are assuming that you will do better in the wet lease because you redeployed their oversized assets to some place that would make more sense, is that it?

Jamie, this is Stan.

Hi.

We expect to improve the cost structure of those wet leases and our deal with ATA is basically covering the direct costs of those aircrafts, so ATA if you recall, bought their airplanes at the peak of the market and they have very high lease costs, so we expect to improve on the economics of those airplanes.

Okay, so it's implied on some of the cost reduction process that they are likely to encounter in the bankruptcy proceedings.

Yes.

Okay.

And part of it is that we will, roughly we are looking at you know 20, 25, 26 airplanes, 10 of which will be ours, 15 or so -- 15, 16 would be theirs.

So day one, 10 of those airplanes go from very big airplanes to smaller airplanes.

And along with that is we can absorb a lot of the capacity on our existing gates in you know at Tampa and Orlando and in Washington National, in Pittsburgh; it's -- for us some of the cost particularly in the, we call the outstations are really almost incremental.

You just, you are just taking the landing fees in certain handling prospect it, kind of [inaudible] there where you can take four flights of their's and five of AirTran, you make a gate very-very efficient.

So it works out pretty well from an operational standpoint outside the hub.

Okay that speaks out, thank you.

Thanks Jamie.

Our next question comes from David Strine with Bear Stearns.

Thanks good morning.

Just that you have covered pretty much everything except labor.

What's -- how is progress there flight attendants and pilots, and what's the --any impact from the new agreement with the mechanics?

Well first of all last week we -- week before last we just reached a new agreement with our mechanics; one year extension on our deal with the teamsters.

We are in negotiation with other union which we think we might be able to get quick settlement as well.

Flight attendants were moving along, we had a mediator's [puzzle].

We, to refresh our memory, we hired a private mediator to mediate the action of our negotiations that mediator at the request of the union and management made a mediators proposal, we accepted it without any caveats.

The union decided to reject it and as subsequently as for federal mediation, we are a bit disappointed in that because that's going to take a long time.

We had our first meeting with federal mediator last week, it lasted three days under his supervision and we will see where the process leads.

But right now we are in mediation that process is generally is slow.

Hopefully we can short circuit that and get a deal with the flight attendants without going through the normal mediation process, with nice sort of a wrap.

So nothing on the hot burner right now, the only contract that we have opened is in fact the flight attendants.

Morale is sky high, relations with the unions are excellent and they are in pretty good shape.

We met with our pilots extensively yesterday.

They are aware of what's going on here and we think they view it as a very, very positive event for them.

Obviously, first officers will be looking at captain seats and when they are going to move into them.

And so, all-in-all, very, everybody is viewing this situation very positively.

Great, thanks a bunch.

Our final question comes from Betsy Schneider (phonetic) with Standard & Poor's.

Okay, this is just a quick question.

I missed the cash position at the end of the quarter?

Sure, let me get that for you, Betsy.

It was--

347.

Yeah, I believe it was 347.

And that's all under restricted?

Eight of which was restricted.

Okay and the $87 million over what period of time do you expect that to be paid out?

Well, its -- it will be paid out in accordance with the achievement of certain milestones, the transfer of the gate authority to us, transfer of the slot authority, so however long that takes, that will then drive the pay out.

Okay, thanks.

Thank you.

Thank you Betsy.

Okay, there is no other questions, I just like to again wrap-up by saying that this transaction that we are doing with ATA, which we do as a partnership is very important to the company and we think that it will result in benefits for both companies, not only AirTran but ATA, and that will give us a very strategic hub in the mid-west.

It will diversify our revenue going forward and will allow us to bring low fares and services to a lot of new markets beyond which we have today.

And so we are pretty excited about it, in fact we are very excited about it.

We are looking forward to working with our new partners with ATA and going forward.

So, with that I would like to end the call.

Thank you very much.

Thank you.

This does conclude today's teleconference.

Please disconnect your lines at this time and have a great day.