西南航空 (LUV) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the AirTran Holdings, Inc. fourth quarter 2004 earnings conference call. (OPERATOR INSTRUCTIONS).

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

Sir, you may begin.

Good morning everyone.

I want to thank you for joining us today for AirTran Holdings' fourth quarter and full year 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 just like to remind you that many of our comments today are related to our outlook for AirTran's fleet plans, load factors, revenue and capacity growth, future cost estimates, as well as our expectations about future profitability.

These comments are not historical facts and instead you should consider them as time sensitive forward-looking statements that are accurate only as of January 25, 2005.

These statements are subject to a number of risks that could cause our future results to very 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 at AirTran.com.

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

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

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

Good morning everyone.

Today AirTran Holdings is pleased to announce net income for the fourth quarter and full year of 2004, making this our 6th consecutive year of profitability.

We're very proud of our financial performance following the aftermath of four hurricanes, intense competition on the East Coast, and protracted high fuel prices.

Any one of these factors on its own would have significantly affected the quarter's results.

Taken together the impact was broad in scope and took a substantial toll on our fourth quarter results.

Nevertheless, we made a profit, and thanks to the hard work of every person on the AirTran team we turned in another profitable quarter.

As you all know, the AirTran business model is based upon low costs.

And our success in reducing costs underscores the Company's ability to survive in a tough economic environment.

In an industry beset by overcapacity and high costs, having a low cost structure and a productive workforce is a strategic advantage which allows AirTran to continue its growth while other carriers are forced to cut back.

As the industry adds uneconomic capacity and introduces new pricing plans, AirTran is able to succeed by driving down costs and improving productivity.

In the fourth quarter 2004 we achieved our lowest nonfuel unit costs ever.

We believe this result is due in part to the introduction of the new Boeing 737-700, and validates our decision to purchase up to 100 of these outstanding aircraft.

The 737 is an important part of our strategy to reduce costs.

By deploying the aircraft to increase frequencies and connect AirTran destinations, we increase utilization and drive efficiencies through the network.

The 737 allows us to upgauge in markets with strong demand, and provides the range to expand markets that were previously unavailable.

The 717 aircraft will continue in its mainstay roll and represents the ideal new market development tool.

Product differentiation is also important, and we continue to stay ahead in this area, particularly as it relates to other low-cost carriers.

Our customers tell us they prefer assigned seat selection, extra large overhead bins, and the availability of a business class cabin.

We work hard to offer these product enhancements without increasing fares, because we believe in giving customers what they want.

If we add improvements, which increased costs, we look for offsets through other savings and productivity improvements.

In this manner we keep our fares low while providing more value.

Now in the first quarter we're beginning to equip our aircraft with XM Satellite Radio.

Soon our entire fleet of aircraft will have XM and our customers will have one more reason to choose AirTran.

You see we believe that low cost does not have to mean low service.

And we're committed to providing the greatest value to our passengers for the money.

Now I would like to talk about our metrics.

During the fourth quarter AirTran took delivery of 3 737/700 aircraft and 2 717 aircraft.

As of today our fleet totals 89 aircraft consisting of 9 737s, and 80 717s.

On a year-over-year basis fourth quarter capacity as measured in available seat miles increased 23.4 percent as a result of new aircraft deliveries and a 5.4 percent increase in stage length to 649 miles from 616 miles.

Traffic, or revenue passenger miles, increased 22.6 percent resulting in a load factor of 69.3 percent.

During the fourth quarter of 2004 we estimate that the impact from the hurricanes on our Florida operations caused a reduction in passenger bookings of approximately 3 to $5 million.

Load factor for the quarter declined only .5 point and for the full year .3 points to 70.8 percent, even with the year-over-year capacity increase of 19.2 percent.

We believe that these results illustrate the demand for our product.

Average fares during the fourth quarter increased 1.6 percent to $78.12, and declined slightly for the full year to $76.33.

Yield declined 5 percent in the fourth quarter and 4.8 percent for the year.

A portion of the yield reduction is tied to increased stage length, as well as intense price competition on the East Coast.

As a result of the lower yield, passenger revenue per ASM, or unit revenue, declined 5.6 percent in the fourth quarter and 5.3 percent for the full year.

During the fourth quarter AirTran served a record 3.5 million passengers, up 14.8 percent over the fourth quarter of 2003.

For the full year 2004, AirTran set another record carrying 13.2 million passengers, representing a 13 percent increase over 2003.

Looking at costs, AirTran's nonfuel unit costs continued to improve on both a quarter and full year basis.

Nonfuel costs per available seat mile dropped 6.8 percent in the fourth quarter to 6 cents even, compared to 6.44 cents in the year earlier period.

For the year 2004 nonfuel unit costs declined 2.3 percent from 6.5 cents to 6.35 cents per mile.

Operating costs, including fuel on a fuel neutral basis, also declined significantly.

For the fourth quarter unit costs on a fuel neutral basis declined 5.9 percent to 7.64 cents, and 2.9 percent to 8.04 cents for the full year.

Fuel neutral unit costs include fuel costs adjusted to reflect comparable fuel prices for the year earlier period.

The reduction in these unit costs highlights the improvements in fuel efficiency from our new and modern fleet.

Operating costs, including fuel, increased 2.5 percent to 8.32 cents in the fourth quarter, and 1.7 percent to 8.42 cents for the full year.

The higher unit costs reflect increases in the average cost per gallon of fuel of 41.3 percent and 22.4 percent respectively, offset by improvements in fuel burn rate.

During the fourth quarter of 2004 and for the full year AirTran reduced its fuel costs by $13.6 million and $38.6 million respectively as a result of fuel hedging.

Improvements in the full year for fuel burn saved another $5.7 million.

Average daily aircraft utilization remained flat at 10.9 hours for the fourth quarter and the full year.

Aircraft utilization was adversely impacted by the fall hurricanes, and would have been approximately 11.3 hours per day.

Reviewing our fourth quarter operational performance, completion factor was 99.2 percent, on-time arrivals, 77.9 percent, and baggage claims were 2.4 per thousand.

Year-to-date AirTran's baggage claim performance is the best in the industry.

And now I would like to review our financial performance.

For the fourth quarter and full year 2004 AirTran reported net income of 1.1 million or 1 cent per diluted share, and 12.3 million or 14 cents per share respectively.

Included in the fourth quarter were net tax and credit adjustments of .8 million.

Without the adjustments, net income would have been .3 million.

Passenger revenue for the fourth quarter increased 16.6 percent to 269.7 million, compared to 231.4 million in the year earlier period.

Full year 2004 revenue increased 13 percent to $1 billion.

Both the quarter and full year revenues were all-time records for AirTran.

Looking at the individual line items of expense on a unit cost basis, salaries, wages and benefits were flat at 2.24 cents per ASM during the fourth quarter of '04 and '03, and down 1 percent to 2.28 cents from 2.31 cents for the full year.

The reduction in unit costs for the year reflects the increased productivity driven by a 12.8 percent increase in block hours and 8 additional aircraft on a weighted average basis.

Aircraft fuel expense on a unit cost basis increased 37.9 percent to 2.32 cents per ASM during the quarter, and 16.4 percent to 2.07 cents for the full year.

The increased fuel unit costs reflect the increases in the cost per gallon of fuel previously discussed, offset by the improvement in fuel burn and the savings from fuel hedging.

During the fourth quarter of 2004 AirTran was hedged for approximately 79 percent of its fuel needs at a price per gallon of $1.07.

Aircraft rent on a unit cost basis declined 7.2 percent to 1.22 cents in the fourth quarter, and increased 1.9 percent to 1.26 cents for the full year.

The fourth quarter reduction primarily reflects the purchase of 2 737/700s, while the full year comparison includes 6 additional leased 717s and 6 leased 737s.

Distribution expense in the fourth quarter was flat year-over-year of .41 cents.

For the full year distribution declined by 5.9 percent to .42 cents.

The reduction in distribution unit costs primarily reflects a 20.3 percent increase in Internet revenue year-over-year.

During the fourth quarter 52 percent of our bookings were made by our AirTran.com, and all Internet bookings increased from approximately 62 percent to 65 percent.

In addition, 50 percent of our customers checked in for their flights using Internet or airport technology.

Maintenance, materials and repairs decreased 33.5 percent to .46 cents from .69 cents during the fourth quarter, and 8.3 percent from .63 cents to .58 cents for the full year.

The reduction of maintenance unit costs for both the quarter and year was primarily the result of the retirement of the DC-9 fleet in 2003 and the timing of overhauls.

In addition, the Company has received FAA approval for an extension of the seat check interval for 717 aircraft from 18 to 24 months commencing in the fourth quarter of 2004.

Maintenance cost per block hour improved 28.8 percent to $182.33 per block hour, and 3.1 percent to $223.74 per block hour for the full year.

Landing fees and other rent unit costs declined 9.7 percent to .48 cents during the fourth quarter, and 1 percent to .52 cents for the full year.

The reduction in unit costs primarily results from a combination of rate adjustments and the mix of airports served.

Aircraft insurance and security services unit costs dropped by 1 percent to .19 cents in the fourth quarter, and 2.5 percent to .19 cents for the full year.

The reduction in aircraft insurance and security costs primarily reflects the reduction in the Company's insurance rates for 2004.

Depreciation expense unit costs increased 44.3 percent to .14 cents in the fourth quarter, and declined 2.8 percent to .12 cents for the full year.

The increase in fourth quarter depreciation unit costs reflect the acquisition of the 2 owned 737s.

And the year-over-year reduction reflects the retirement of the DC-9 fleet at the end of 2003.

Other operating expense unit costs dropped 11.4 percent to .67 cents in the fourth quarter, and 6.1 percent to .74 cents for the full year.

The reduction in unit costs for the quarter and the year primarily reflects reductions in passenger relating expenses and professional technical fees.

Total operating expenses increased 2.5 percent to 8.32 cents per mile for the fourth quarter, and 1.7 percent to 8.42 cents for the full year.

And again the primary reason for the increased total operating expense unit costs was the increase in the price per gallon of fuel.

The Company recorded fourth quarter 2004 operating income of 3.5 million, resulting in an operating margin of 1.3 percent.

For the full year the Company recorded operating income of $32.8 million producing an operating margin of 3.2 percent.

Looking at the balance sheet, AirTran ended the fourth quarter 2004 with $342.3 million in cash and investments, of which 7.9 million was restricted.

In addition, the Company has approximately $70 million on deposit with the Boeing Company for future aircraft deliveries.

Long-term debt increased approximately $58 million, reflecting the debt associated with the purchase of 737 aircraft.

And stockholders equity increased $31.8 million to 334 million.

And now I would like to provide guidance for 2005.

The following projections for 2005 capacity growth depicts net additions which represent the true increase in market capacity and the reported capacity additions, which will include the RJ and wet lease flying that we have taken over.

I'm going to give you numbers by quarter.

And I'm going to give you 2 numbers per quarter, the first number representing the net capacity additions, which represents the net new flying.

The second number will be the reported capacity addition, which includes the capacity that we've taken over.

And if you recall when the wet lease and RJ operators were flying for us, they reported those statistics.

All right, for the first quarter net capacity addition will be at 11 percent.

The reported capacity addition will be 25 percent.

Q2, 15 percent, 30 percent.

Q3, 23 percent, 35 percent.

Q4, 27 percent, 30 percent.

And for the full year our net capacity addition will be 19 percent, but the reported capacity addition will be 30 percent.

Regarding fuel, our cost assumption is a price per gallon in the range from $1.40 to $1.45 per gallon, all in.

Our fuel hedges for 2005 are as follows.

Q1, 40 percent at 95 cents a gallon.

And these are raw costs.

Q2, 24 percent at $1.04 per gallon.

Q3, 14 percent at $1.31 a gallon.

And Q4, 13 percent at $1.31.

Nonfuel unit costs guidance by quarter are as follows.

In the first quarter, down 1 percent.

Second quarter, down 4 to 5 percent.

Third quarter, down 6 to 7 percent.

Fourth quarter, down 1 to 2 percent.

And for the full year we're projecting that our nonfuel unit cost will be down 4 percent. 2005 deposits for future aircraft deliveries will be approximately $55 million.

Non-aircraft CapEx will be approximately 20 to $25 million. 2005 aircraft deliveries will consist of 6 717s, 13 737s as follows.

In the first quarter 2 717s and three 737s.

Second quarter, 2 717s, 3 737s.

Third quarter, 3 737s.

Fourth quarter, 2 717s, 4 737s.

And finally our effective tax rate for 2005 is expected to be from 37 to 39 percent.

In conclusion, we wish to thank our loyal customers for their support and their business.

And to our new customers we want to extend a very special welcome and look forward to earning your future business.

To our employees we thank you for doing your best and being the best every day.

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

As we look forward to 2005 we are mindful of both challenges and opportunities ahead.

We have worked to create an efficient low-cost airline which customers will choose for value as well as service.

We believe that we can compete in the current environment and will continue to grow our network.

We also believe that we are uniquely positioned to benefit from the eventual restructuring which will occur in the industry.

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

(OPERATOR INSTRUCTIONS).

William Greene of Morgan Stanley.

I'm wondering if you can talk at all about future growth plans?

In other words, when we sort of look at you got blocked a little bit in Chicago, and there's questions about the Wright Amendment in Dallas.

So talk a little bit if you can about where you expect to grow the network from here, is Atlanta enough?

Bill, just to step back for one second.

I think a couple of things we need to consider.

First of all we placed this aircraft order in July 1 of 2003, 50 firm and 50 option airplanes.

And at that time we had no expectation that ATA was going to restructure its Midway operation.

So we basically had a game plan laid out on what our prospects were at that time.

And the second thing is, I would say we think one of our core competencies is we're very nimble.

And we can move very, very quickly.

So from the way we plan our growth now we kind of view it in terms of scenarios, and how we really want to grow.

And we're willing to adjust our playbook as industry conditions evolve.

I think as we said before, certainly we want to remain strong in the Southeast.

Florida has been very, very important, and we want to develop the Northeast as well.

So with that in mind, let's really talk about the opportunities.

We think there are a few new cities in Atlanta.

We recently entered Sarasota and it is off to a good start.

And we announced Indianapolis, which is one of -- we think one of the potentially stronger markets in the U.S.

We also think there is some additional frequency opportunities in Atlanta as well.

A number of our markets based on performance could use additional frequencies.

Certainly there has been a lot of discussion about Dallas.

We fly today in about 6 key markets in Dallas.

We fly to Las Vegas and Los Angeles.

Several markets on East Coast.

And we think there's some opportunities there.

We think the opportunities get better in about two weeks when Delta reduces its capacity.

So we are really studying the opportunity.

We don't know whether we are going to take the city on its growth offer, but we think there are opportunities there depending on the pace that we choose.

I think finally the Northeast still remains -- contains some good prospects for us.

We think there are great prospects in Pittsburgh, ideally suited to our aircraft types.

And Philadelphia is still one of the largest markets in the U.S.

And we think Boston creates some very good prospects for us, and we're actually looking at additional gate space up there as well.

So our game plan is probably 2 or 3 or more new cities this year.

And you get some of the aircraft, as Stan mentioned, are going into replacement.

Again about one-third of our capacity is replacing either RJ flying or long haul frequencies.

We're still think the opportunities for us are pretty good.

And we think we're pretty well positioned in the Northeast.

We don't know how long the industry restruction will take place, but we think we're pretty well positioned.

Can I turn to RASM trends?

Can you talk a little bit how they were in the fourth quarter and if you have any insights on how the first quarter is shaping up thus far?

It really is hard to tell because the RASM trends for the last 2 quarters will be down, and I think particularly the first half of next year probably looks similar to what we are seeing today.

We have got double-digit capacity coming in in the first 6 months of the year.

Whether that capacity remains with fuel prices where it is at now really remains to be seen.

So I think we're going to see the unit revenue decline.

So far traffic seems to be holding up.

Bookings look pretty good, but generally the biggest problem you have with revenue declines is the capacity situation.

And US Airways' daily capacity, Delta's daily capacity, and those carriers have little or no prospect of profitability as far as we can see, especially as fuel prices continue to creep up.

Ray Neidl of Caylon Securities.

Just wondering now again addressing your potential expansion plans, it looks like US Airways may be around for a while, but nevertheless there's going to be some opportunities developing.

And I'm just wondering can you get your hands on aircraft quicker than the schedule that you announced if an opportunity comes up, Either through new aircraft or through possibly continuing your wet lease operations or even may be looking at RJ's?

The answer to that is yes.

Part of our deal with Boeing is we have firm orders which are coming in at a pretty good clip this year.

We have options and a significant number of those options are purchase rights where you can specify that you want to take an airplanes in a certain period of time.

And if Boeing has one available, you can get it.

So we have a lot of flexibility in the 737 order.

In addition, we can upgauge to 800s from 700s with 1 year's notice.

So that is a way of adding capacity without getting units.

And then lastly, as we have demonstrated in the past, we can jump on wet leases with very short notice and add capacity through wet leases;

Miami Air and RyanAir as we did last year and the year before.

I know you're not real enthusiastic about the RJs, but if a fleet of RJs became available, say like Independence Air, which from what I understand -- from what you have said previously that they are probably destroying the pricing structure on East Coast more so than any other airline, including US Airways.

If they could be obtained cheaply, and the stock is very cheap right now, would that be an add on where you have benefit of eliminating a carrier that is destroying the fare structure, and at the same time picking up capacity probably fairly cheaply?

I think that is a good question.

I think the answer -- we really would just say that Bob earlier, we're very nimble and we're very flexible.

The rules of the game are clearly changing.

And so I think we have to look at things that we have never looked at before with an open mind.

Having said that, we still think 717 is the best 100 seat airplane out there.

It has RJ costs -- play mile cost, pretty close to it, but far superior seat miles cost than the RJ's have.

So we still think 717 is a terrific development airplane.

But we are looking at all kind of things that we really quite frankly have not looked at before, and really wouldn't rule anything out at this point.

Now is the demise of the 717 going to upset your plans going forward?

Is there any way you could persuade Boeing to keep the line open a little bit more if you wanted additional aircraft?

No, in fact Boeing talked to us about doing just that, would we prefer to keep it going.

And our view was no, you probably should shut it down.

And that was our recommendation to Boeing.

We will end up with about 88 of these things.

We got 80 right now, which is a pretty big fleet.

We anticipated the shutdown of the line way back in 2003 when we placed our 737 order.

And 737 is going to be the airplane we grow the airline with.

We can upgauge routes like Atlanta, LaGuardia where we are capacity constrained.

We can get more capacity by upgauging the 737s.

And we can use the 737 on ranges that we couldn't do with a 717.

In regard to the 71 we also have very long-term power by the hour arrangements with 85 percent of the airplane.

So the vast majority of the airplane is covered under power by the hour arrangements.

As Stan mentioned, we just got a time extension from 18 to 24 months on our seat (ph) check.

That is a 33 percent improvement in our seat check costs.

And then lastly one nice thing about this fleet now is that we don't own many of them.

The 88 airplanes we only will own 8.

Boeing owns the rest.

And so we think that is a strong incentive for Boeing to keep the product support at a very high level, and from an economic risk standpoint we have none.

Okay.

And finally, I think in the past that you said that you can live with Southwest by just staying out of their way and taking what are their opportunities open up.

I'm just wondering Midway Airport where you lost out on your bid there, if some gates, some small amount of gates open up there, would you be interested?

And at DFW where they're making you -- I know Bob commented on this, but at DFW where they are making you an attractive offer, isn't that a little dangerous at this point with American, and possibly the Wright Amendment with Southwest changing at left (ph) field?

I think we said before the carriers who have the lowest cost eventually will win here.

And so we think our costs are pretty good.

And they're going to move down.

And that is the way you're going to compete right here.

I think that Southwest is a very big airline.

And so you can't really divide up the cities and say that is yours and that's mine.

We think in places like Pittsburgh, Philly, East in Baltimore we have done okay.

And because our costs are lower, and we think we have some brand attributes that are superior to theirs.

So our game plan is to grow where we think it makes best.

That is going to include some Southwest markets.

In Midway the reason why we were interested in Midway was because a lot of capacity was going to be removed, and we thought that was a positive.

It just didn't work out as well.

And the way we approach Dallas is we approach Dallas we are going in routes that we think are defensible if there are multiple carriers in there.

We don't believe that there is a great short-haul opportunities for us in Dallas.

We think they are more mid haul and the longer haul.

But in Midway you do see future opportunities if just a couple of gates open up?

We think it will be positive.

It is one of the bigger cities in the nation.

And so we certainly would look at it if the ATA situation does not improve.

Ray, I would just add, we don't intend to go on the markets with a big hoopla and this, that and the other as some others do.

But the fact is we are already in 10 of the top -- 6 of the top 10 cities out of DFW today.

We are the already serve them.

And they're doing pretty well.

And they will do a lot better next week when Delta exits.

Where is your gates in DFW?

Are they in the Delta terminal or are you over in terminal B?

We are in terminal B.

But would you be moving -- are you thinking about moving regardless of how many gates you (multiple speakers)

We've got to go onto the next question.

We can talk about -- (multiple speakers).

Operator, go ahead to the next caller please.

Michael Linenberg of Merrill Lynch.

Just I guess 2 quick questions.

Bob, you talked about how Atlanta could potentially use some additional frequency.

And I was intrigued by that statement given that in the next week or so we're going to see Delta really ramp up capacity in Atlanta in a lot of markets that you serve as well as other markets.

Is that -- the Atlanta additional frequency, is that more of a competitive response or are you maybe looking at their simplified fare -- new fare structure.

And the take away is that there is going to be a lot of stimulation, and therefore you need to have the capacity to really take care of those passengers?

What is driving that need for additional frequency in Atlanta?

We have a few markets that don't have ideal time of day patterns.

So a market where we have 4 flights today, we think we cover our marketplace a little bit better with 5.

And what that does is that increases our utilization in the spoke city and drives down our operating costs.

So I think generally speaking we have a tendency do better where we have more frequencies.

And again I guess I would go back and answer your question which would probably answer the value pricing question in general.

We have been competing head on with Delta for years.

And their franchise has diminished and our franchise is getting stronger.

And so there is -- a lot of times we are asked to react to statements that Delta makes.

Delta has destroyed its franchise in the Southeast with really massive losses.

Let me stop back and answer the, generally speaking, the value pricing question about the impact on AirTran.

Again we think -- we think it is one of the least issues that we face today.

The capacity on the East Coast is the primary thing that we all face.

But just to go summarize, we price about 730 markets on our system.

We had to reduce no prices in those markets.

Regarding Atlanta in general, Delta has been matching our prices for the last 4 or 5 years.

The cap of 499 is irrelevant, because that is an extremely high fare.

We don't have fares like that.

You know the exposure that AirTran and perhaps others can have is where you connect customers in other airline nonstop markets.

If you go through the math, some of those connecting markets already have low-cost carrier pricing already.

For example, LaGuardia to Orlando or Boston to Tampa, they already have very low fares.

So we not going to see any impact there.

And also in these connecting markets a good portion of our revenues is coming on the leisure end or the advanced purchasing.

The way we look at value pricing here is it could potentially impact, or have a negative impact, on 2 to 3 percent of our revenue.

It won't cost us 2 to 3 percent.

It could have a downward pressure on yield on a very small portion of the revenue.

A positive could be as they put these low fares in they're going to get rid of their corporate deals.

And that could be an opportunity for us.

As these 40 percent deals off the high fares come down, that actually creates opportunities for us in the large corporations of which have been very difficult to penetrate over the last couple of years.

So that creates an opportunity for us, because a lot of these in-house travel departments they like to talk about the 40 percent discount off the $900 fare.

And you know that is going away, because they have to pay for this somehow.

I guess my final thing I would say is our feeling is that the carriers that will be impacted by value pricing are those with high health premiums, and also those who have very large RJ operations.

RJs get hammered because they can't absorb the stimulation.

They take a direct hit -- small 50 seat airplanes take a direct hit.

And those who have liquidity issues.

Now we think the vulnerability to value pricing here is the carriers with liquidity issues, RJs.

And we think you're going to see some tough times in this industry over the next 5 or 6 months for our competitors.

It sounds like you are describing Delta.

Now my second question, and this actually follows on some of the points that you made, Bob, about just the East Coast and some of the pressures, and that being maybe the bigger issue as we move through the next couple of quarters.

What have you seen in markets maybe where you're competitive with Independence, who it is scaling back a lot of flights?

As we move into February and March what are you seeing on bookings?

And maybe you could also give a sense on what you're seeing in markets where you're competitive with US Airways?

Are you seeing share shift?

Has share shift accelerated over the past couple of months as their financial difficulties have hit headlines on a daily basis?

You know it really is too hard to tell, because we have really been in the bookings season -- the post New Year booking season for about 2.5 months.

You know I would say this, even yield are lower than last year and actually bookings are -- and volumes are higher.

But it is hard to tell how does this thing will play out until you get out 2 or 3 more months.

But there certainly is a kind of a lot of panic pricing out there where carriers are having 39, $49 fares on nonstop markets.

Some carriers do that as a matter of strategy.

Some carriers do that because they've got no one on the airplanes.

And I think eventually at $49 fares, walk up fares perhaps on long haul markets, that really is going to be a catastrophe.

So I think they're hurting at this point.

But really we're not going to be able to tell until we get the 2 or 3 more months out.

Okay.

Thanks.

And good quarter.

Tony Cristello of BB&T Capital.

I guess I just wanted to focus a little bit on the cost side of things.

That seems to be where you guys are at least doing a good job in terms of continuing to drive them lower.

Are you seeing -- now that you have the 737s in your system for a while, are you seeing any benefits more than you were expecting?

Are they sort of in line with what you were expecting?

This is Stan.

I think the airplanes are probably surpassing our expectation.

The reliability is just way above 99 percent, and the cost savings that it drives is pretty significant.

We do not need to have a one for one increase in headcount with these aircraft.

Basically we're just hiring flight crews for the airplanes and minimal increases in staff at the stations.

We spent a lot of time over the years building the infrastructure and the network and now we're starting to see the power of the network as we leverage that with increased utilization of these airplanes.

So I think as we get more 737s in the you're going to see continued reduction in costs as we have laid out.

And you know we try, and I guess under promise and over deliver on the cost side, and we are conservative.

And so this cost guidance I think is achievable next year.

And we look forward to realizing it.

One other thing I will point out is that on the 737s, and this is probably a little-known fact, it is really remarkable.

The 737 burns less fuel in absolute terms, gallons and pounds, than a 717 does in the same or similar mission.

You've got 20 more seats on the airplanes, and it has a longer range.

The 717 is a great airplane.

The 737 is phenomenal.

And so with that increased -- or decreased fuel burn that we went to get and the additional seeds that is going to give us further momentum on the cost side.

And I guess with all of the wet lease aircraft now out the system, are you going to -- is that in part why you're going to also see cost savings as well going forward?

Absolutely.

And in terms of -- I guess my second question would be in terms on the flip side of that, are you seeing more or less pressure on unit revenue because of the addition of the 737s?

Not really.

I think if you are going to have to take a jump in seats, 20 seats is pretty modest.

It doesn't really -- it doesn't create a big change in the way you approach the market from an advertising or sales perspective.

So it is a pretty modest jump.

I think the issue of downward pressure on revenue was really tied to the various restructurings that we are seeing on the East Coast and the additions of pricing impact of a (indiscernible).

Again, it probably has the most downward pressure on the East Coast right now.

Gary (technical difficulty).

Could you repeat that, operator, you cut out (indiscernible)?

Just a quick question, obviously Florida as we move into towards the end of the first quarter, and of course the second, which is historically your strongest, Florida is obviously very important to you.

It is where you generate a lot of earnings.

I am just curious amid all the talk about increased capacity going in and out of Florida, what you think -- what you think of how things are shaping up there, especially as you move into the spring break season?

I think right now actually Florida is shaping up pretty good.

Even with the capacity coming in, and I think this March the demand profile for Florida should be exceptional.

We have -- it is a little more compressed because of the earlier Easter holiday, so I think you should see an exceptionally strong March versus historical years.

I guess the question for us is does the industry manage that well or not?

Normally March is a month we make very good money, and you don't have issues of share to focus on.

So we think March looks pretty good.

And I think February is probably shaping up very well.

It is just you always have to offset your seasonally weak January period.

January and September are the weakest months of the year, and this year is no different.

Is it safe to say, Bob, the November and December for Florida were pretty good as well?

I think December.

I think there's a pattern that a lot of people talk about, periods of leisure -- of strong leisure demand are right now the best peak periods for AirTran and the whole industry.

The industry is doing much better around the holiday periods, because you have a tendency of peaking.

Your biggest issues today are getting people to fly on the Tuesdays and Wednesdays.

There remains the bigger issue for us.

And again we're down here in Florida, a lot of the attractions and a lot of the hotels are setting real records for attendance.

And just on the fare issue, you talked about simpler fares, but you've got a live experiment going where they launched this in Cincinnati in the early fall.

It was allegedly going to have some impact on how things were shaping up in Dayton.

Any color there?

No, Dayton is impacted.

In fact, because Dayton was designed to really siphon off traffic from Cincinnati.

So you would see an impact there.

But Dayton is an area where we have 4 flights to Atlanta.

That is really atypical of really what is going on in the system.

So clearly secondary markets can be impacted, but really -- it really is insignificant.

One thing I keep reading from the Delta comments, they talk a lot about traffic, but they don't talk a lot about revenue.

So if your traffic goes up 30 percent and your yields drop more than that, it ends up being revenue negative.

So that is not atypical of what we are seeing in the system.

It is not what we are seeing in Florida, and certainly not what we are seeing in Atlanta, which is where obviously we're fairly big.

Daniel McKenzie of Citigroup.

Stan, at the beginning you mentioned that AirTran probably was realizing some productivity improvements from the larger aircraft.

However, the fourth quarter unit labor costs were flat year-over-year.

And I am just wondering if you can add some color about what kind of unit labor cost trends we should expect as we move ahead?

I think you know, Dan, we do have contractual wage increases with our labor groups that kick in.

I think in general though the unit labor costs will continue to decrease as we begin getting more airplanes.

We are going to get 19 next year.

So you'll see that metric moving downward.

Okay.

And in the pas, what percent of revenues came from business travelers in the quarter?

I am just wondering how that compares year-over-year, and what might be driving that trend?

It's about 40 percent.

And you know it is probably about 20, 25 percent of customers, about 40 some odd percent of revenue.

So it's really kind of stable.

And I think obviously that is where we and others have to improve.

We need to get people booking inside of 7 days or moving up from sale fares really up the ladder.

It is not really a problem of overall fares.

We think the fares in the marketplace aren't bad.

We are just selling too many on the lower end of the fare scale.

At some point as we get more confident in the future demand we collectively will save more seats for close in flights.

We don't view the price structure as being the problem, we view the sort of sale structure as the issue.

This is Stan.

Let me go back to that question because I want to add another point to it.

Keep in mind that we're in the process of introducing the 737s, so we are going through a lot of transition training with our flight crews.

And that means you pull them off the line and they are sitting in the classroom.

As we continue to increase the number of airplanes that are flying, the training costs are going to start declining.

So that is another data point I think to keep in mind in terms of these unit cost for labor.

Sam Panella of Raymond James.

I was wondering did you receive any type of termination fee with respect to the ATA agreement?

There was a break-up fee associated with the transaction.

And it was pretty much offset by all the professional fees that we have to pay out.

And the net after-tax of that break-up fee was about $800,000.

Of the benefit?

Yes, ma'am.

And that was in the fourth quarter?

Yes, it was.

Robert Ashcroft with UBS.

Actually I tried to remove myself from the queue, so my question has been asked already.

Thank you.

David Strine of Bear Stearns.

Joe, I think you said earlier in the call that AirTran has some superior brand attributes.

Given the compression in fares in your markets, at least at the high end, do you feel you're spending enough now to communicate that to the consumer?

That is a good question.

Tad would tell us no, probably not.

I think it is a good point.

It is probably something that we need to do a better job of.

I think our message over the past 5 years has been clearly very much a retail message.

And I think as we move forward you'll see us spending more time on our attributes and trying to differentiate ourselves from other carriers, especially other low-cost carriers.

Stan, a quick question for you.

Did you -- can you tell us what principal debt payments will be in '05?

Let me come back to you with that number.

I don't have that right here.

Helane Becker with Benchmark.

These are really easy questions.

One, Stan, can you just give us the number of SGEs at the end of the year?

The second one is can you just talk about the percentage of your business travelers who upgauge to the first part of the aircraft, and how that pertains to your average fare?

And the third one is the trend in the average fare.

I think you said the fourth quarter was higher than the full year.

Can you just talk about how that is in the first quarter?

I'm going to let Bob talk about the business class and the average fare, and which of the FTE number here.

Right now the percentage of -- operate I believe is about 50 percent, which is really not surprising.

I think one of the things that you see in this industry a lot of people like to set up in business class or first class, and they want to get there for free.

And that is certainly a pattern tied to -- it has been a big part of frequent flier programs.

And we're really no different.

And we try to create opportunities on certain fare levels to upgrade before the gate.

But a lot of things happen at the gate.

So -- and I don't really see that changing.

I think it is really just part of the way we market it.

We did take an increase in the fourth quarter on the fares.

We've gone from 50 to $70 in a few markets, and from 35 to 50 in some others.

So we have a few more tiers.

I think the general message is a customer can fly on business class at AirTran versus coach on another airline for about the same price.

And that is basically the driving message.

And we use business class really as an entree into capturing business accounts.

It is one of the ways that we can differentiate ourself because it is hard to wean a customer off another airline's first class.

So we think we have been really successful with this product.

Is there room for you to expand that further as you get a lot of the (indiscernible).

I think you have to go through the economics of taking seats out.

And we really think we are at the right option.

We don't want to add another row on a 717 because it would force us to take two rows of coach.

And so you try to find a mix of -- because there is a loss of coach revenue when you add business class seats.

So we think a 12 for us in the way we configure our airplane is the right number.

In that regard, I would just add -- this is Joe.

I would just add that our research shows that people who are likely or extremely likely to refly us has gone from 87 percent to 92 percent in the last 12 months.

So if using business class to entice people to get on the airplane we think we've have got a very high degree of acceptance and likely to come back.

Let me just follow up with your first question.

We had 5,900 full-time equivalents at the end of 2004.

And to David's earlier question, our principal payments in 2005 will be $14 million.

Jamie Baker of JP Morgan.

Bob, a question on yields.

Admittedly a lot of noise in the fourth quarter, especially at the beginning of the quarter, and arguably a lot of uncertainty in the first quarter now.

Leaving the load factor assumptions to us, and viewed sequential from the fourth to the first, do you think we should expect the same level of historic yield degradation or something better or something worse than that?

I'm trying to remember what the trend was last year at this time.

I've got a lot of numbers in my head, but I think -- let me try to answer it a slightly different way.

I think we're looking at comparable declines, maybe not as heavy as we saw last year.

And that may well because yields are already depressed.

And so we are -- I don't know, maybe I think last year was a fairly high number, maybe a couple of percentage points lower this year.

I think it is because again we are in -- have been in a downward trend of yields so far, so we are at a point where we're getting some kind of flattening in the market.

That's helpful to the guidance.

Thanks a lot.

We have reached the end of our allotted time.

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

Thanks everybody for joining the conference today.

Relative to the other airlines we think our numbers were quite good.

Relative to our expectations they're not that good, but we are in a hyper competitive environment.

Capacity is coming in, as many of you have noted.

I do think there's a flattening of yields as we move forward.

We do not have heroic RASM numbers in our 2005 business plan, nor do we have unrealistically low fuel prices in our 2005 business plan.

Having said that, if we hit our plan we expect to make money in 2005.

Obviously, the big wild card here is fuel.

But we think much more of a wild card than yields.

And we have fuel in our plan at the mid 40s per barrel range.

If it goes to 50, that will obviously affect us as it will the rest of the industry.

As some of you have noted previously, 40 is sort of the worst-case scenario.

At 50 we think it will force some folks to exit the market, which we will be a primary beneficiary.

At 30 we would make a lot of money.

And at 40 it has sort of been a survival mode.

But our costs are good.

And we're very confident in our ability to drive costs even lower in 2005.

And at the end of the day, the guy who is the low cost producer is going to win in the end.

And we think we're very well-positioned to be that carrier.

So thank you very much.

And we look forward to talking to you in April.

Thank you.

That does conclude today's teleconference.

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