西南航空 (LUV) 2005 Q3 法說會逐字稿

Good morning ladies and gentlemen.

My name Ian and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the AirTran Holdings Third Quarter Earnings Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speaker’s remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS].

It is now my pleasure to turn the floor over to your host Mr. Arny Hoff (ph).

Sir, you may begin your conference.

Good morning everyone.

I want to thank you for joining us today for AirTran Holdings third quarter 2005 earnings call.

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

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

And as our usual practice, we will begin by remaining you that this call may include forward-looking statements and that our actual results may differ materially from these statements.

These statements are not historical facts and instead you should consider them as time sensitive forward-looking statements that are accurate only as of October 27, 2005.

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 31, 2004.

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 www.airtran.com.

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

Thank you Arny and good morning everyone.

Today, AirTran Holdings has reported near breakeven financials results for the third quarter and net income of 3.1 million or $0.03 per share for 2005 year-to-date.

While breakeven performance is never as satisfactory by any measure, it represents the cumulative hard work and effort of everyone at AirTran during a period of challenging fuel prices and competitive changes.

For some time now, we've talked about the excess capacity in the industry, as well as the marketshare mindset of several competitors.

From our perspective, it seemed inevitable that these strategies would fail and the market would begin to achieve equilibrium at pricing levels, which would generate profitability.

However, the timeframe in which these scenarios would play out became artificially extended as a result of bankruptcy protection and unending rounds of third-party financial support.

For our part, we have stayed the course and pursued a strategy of controlled growth and continued cost reduction.

Now as industry trends are becoming clear, they are converging along the lines, which will further propel AirTran ahead of its competitors.

I would like to take a moment and review what those major trends are.

First and probably the most important is that true capacity reductions are now beginning to occur and should continue.

This has been brought about in part by recent bankruptcies and has been accelerated by record high fuel prices following the recent hurricanes.

With the impact of fuel costs on inadequate liquidity reserves, some carriers have bowed to the inevitable and are reducing flight schedules.

Others are simply parking or retiring aircraft, because they cannot afford the cash drain and still others have sought protection under the bankruptcy code.

What is different this time around is that most of this capacity reduction will become permanent.

Old fuel gasoline equipment has become obsolete at today's fuel prices and manufacturer order books are full for the foreseeable future.

Legacy carriers which otherwise would have reduced operating costs by introducing new fuel-efficient aircraft will be unable to do so due to the lack of new aircraft production in ample numbers.

Manufacturers for their part will probably not extend existing production lines as they focus on retooling for the next generation of products.

Second, the greatest change taking place and turning the most potential for returning airlines to profitability is the trend of improving revenue.

We have said for some time that to see improvements in pricing, there has to be a significant and sustained reduction in capacity.

We believe we are at the beginning of this phase and in combination with record levels of demand expect to see upward movement in pricing.

As we have indicated in our last conference call, we have seen steadily increasing unit revenue trends since May.

During the third quarter, AirTran's RASM were up 16.4% year-over-year, benefiting in part from the lesser impact of hurricanes in the third quarter of this year compared to 2004.

Nevertheless, we believe unit revenue demonstrates strong demand for our product as well as higher yields resulting from recent price increases.

Given the extent of reductions and competitive capacity to date and the further reductions to come, we believe that AirTran will experience significantly improving revenues.

Against the backdrop of these positive trends, AirTran is positioned to take delivery of additional aircraft, further strengthening the route network by increasing frequencies, connecting cities and adding new destinations.

During the third quarter, we took delivery of two 737s bringing year-to-date deliveries to 12 new aircraft.

Through October, we now have 101 new Boeing aircraft, representing the fastest growth rate to that level of any airline.

During the quarter, we also exercised options for a total of 17 737 aircrafts delivering in 2007 through 2009.

Our firm orders for the 737 now total 75 aircraft.

In the third quarter in the month of October, we announced new service to Detroit from Atlanta and new service to Minneapolis, St. Paul, and Boston from Chicago's Midway Airport commencing in December.

In addition, previously announced service to Cancun from Atlanta will also commence in December.

We are looking forward to these new markets and the opportunities they bring and the opportunity they provide to bring the AirTran product to new customers.

We often hear people say, I like AirTran, I like the new airplanes, I like the friendly service, but most of all I like the low fares.

We couldn't have said that better ourselves.

People try us for price and come back for the quality service they receive from our professional employees.

Add to that the youngest all-Boeing fleet, business class on every airplane, assigned seating, and XM Satellite Radio and we believe we have one of the best products in the industry.

Judging by the increasing number of passengers who fly AirTran, our customers think so too.

And now, I would like to talk about our metrics.

During the third quarter of 2005, capacity in terms of available seat miles increased 31.1% year-over-year, a portion of which represents replacement capacity for wet lease operations, which ended in the third quarter of 2004.

Average stage length increased 6.9% from 608 miles to 650 miles, reflecting the longer haul flying from the 737 fleet.

Traffic or revenue passenger miles increased 42.8%, which drove below tech grew up to 6.2 points to 76.2%, an all-time record for AirTran.

Average fare increased 15% to $81.96 from $71.27 in the third quarter of '04.

Yield increased 6.9% to $0.1209, including the 6.9% increase in stage lengths previously mentioned.

On a stage length adjusted basis, RASM improved 20% year-over-year.

The excellent RASM performance during the quarter showed a consistent improvement year-over-year with July up 12%, August up 10%, and September up 30%.

We expect to see continued improvement in RASM and bookings throughout the fourth quarter as well.

Looking at unit costs, AirTran's non-fuel unit costs were down 2.9% from $0.0648 to $0.0629 in 2005.

While at the lower end of the guidance we provided in the last conference call, the reduction was affected by lower ASM production due to the loss defined from hurricanes Katrina and Rita as well as increased distribution costs related to the higher than expected revenue performance.

On a fuel neutral basis, unit costs declined 3.1% to $0.0838.

Operating cost per ASM including fuel for the third quarter of '05 increased 10.5% from $0.0865 to $0.0956.

This reflected a 56.5% increase in the average cost per gallon of fuel as well as a 26.5% increase in the total amount of fuel used.

Fuel burn on a year-over-year basis was up slightly by 0.9% to 686 gallons per block hour, primarily reflecting the use of the largest 737s and high demand short-haul markets.

During the third quarter of 2005, AirTran reduced its fuel costs by 13.2 million as a result of fuel hedging.

In addition, the Company has implemented an aggressive fuel conservation program consisting of single-engine taxi, fuel tankering and improved engine thrust management software.

While it is difficult to quantify the savings from these initiatives, we believe that the conservation efforts as well as a greater fuel efficiency of our all-new fleet significantly contributed to overall fuel savings.

In addition, AirTran began the installation of Blended Winglets on 737 aircraft in September.

We are also evaluating the use of Blended Winglet technology on our 717 aircraft as well.

Updating our fleet information through October, the numbers of leased and owned aircraft are 84 717s, of which 76 are leased and 8 are owned.

And 17 737s, of which 12 are leased and 5 are owned.

For the remainder of 2005, we will take delivery of one 717 and three 737s all of which will be leased.

Reviewing our operating performance, completion factor was 98.8%, on-time arrivals was 69.1%, and baggage claims per 1000 were 3.34.

Average daily utilization during the quarter rose 2.8% from 10.6 hours to 10.9 hours.

And now I would like to review our financial performance.

For the third quarter of 2005, AirTran reported a net loss of 228,000 or essentially breakeven results.

Year-to-date net income was 3.1 million or $0.03 per share.

The Company anticipates that full year tax rate will be in a range of between 35% and 37% depending on the financial performance for the remainder of the year.

Passenger revenue for the third quarter increased 52.6% to 360.4 million, an all-time record, and a 32.7% increase in passengers and a 15% increase in average fare.

Year-to-date, passenger revenue increased 36.4% to $1 billion on 12.3 million passengers, both all-time records.

We estimate that hurricanes Katrina and Rita cost the Company approximately $4 million in lost revenue during the quarter.

Looking at the individual line items of expense on a unit cost basis, salaries, wages, and benefits declined 10.1% to $0.0211 from $0.0235 per ASM.

The reduction in unit costs primarily reflects productivity gains driven by the increased numbers of aircraft and increased daily utilization.

On an FTE per aircraft basis, productivity in the third quarter was 64.2 employees per aircraft versus 71.6 employees in the year earlier period and 65.3 employees sequentially.

Aircraft fuel expense on a unit cost basis, increased 51% from $0.0217 to $0.0327.

The increased fuel unit cost reflects the higher price per gallon of a $1.93 versus $1.23 last year as well as the 0.9% increase of fuel burn per block hour.

In absolute dollars, AirTran's fuel expense increased $63.2 million of which 46.1 million was related to price, and 17.1 million was related to growth.

During the third quarter, AirTran was hedged using a combination of fixed forwards and collars for approximately 57% of its fuel consumption, a price per gallon over $1.63 raw or $1.90 including fees and taxes.

Aircraft run on a unit cost basis declined 3.3% to $0.0125 from $0.0129.

Since third quarter of 2004, AirTran has taken delivery of six 717s and eight 737s on operating leases.

Distribution expense in the third quarter increased 11.6% from $0.004 to $0.0045.

The increase in distribution expense primarily reflects the additional costs associated with the Company's record revenue performance.

AirTran has implemented a plan to reduce distribution expense going forward and recently announced a new agreement with Sabre, which among other benefits will lower the cost of travel agency bookings.

We expect to announce additional agreements in the future, which will further lower our distribution expense.

During the third quarter 2005, 58% of our bookings were made by our AirTran.com and all Internet bookings increased to approximately 72%.

In addition, 57% of our customers checked in for their flight using Internet technology or airport kiosks, which was up 1.4 points sequentially from the second quarter of the year.

Maintenance materials and repairs increased 14.7% to $0.0066 from $0.0057.

The primary reason for the change was the year-over-year increase in the 717 engine rates charged by Rolls Royce.

Maintenance cost per block hour was approximately $255 per block hour in '05 compared to 221 in the third quarter of '04.

On a sequential basis, cost per block hour was down compared to $270 per block hour in the second quarter.

Aircraft insurance and security services unit costs declined 21.7% from $0.0019 to $0.0014.

The reduction in unit costs primarily reflects lower hull and liability insurance rates for 2005.

Marketing and advertising unit costs declined 8.8% to $0.0022 from $0.0024.

The decline reflects reduced spending for new city development and more effective and less costly online advertising.

Depreciation expense unit costs increased 8.1% from $0.0012 to $0.0013, reflecting the additional owned aircraft and increased spare parts.

Other operating expense unit costs declined 4.1% from $0.0077 to $0.0074.

The decrease was due primarily to reductions in charges related to ground equipment and training.

Operating income was approximately $1.2 million and reflects a significant improvement over the third quarter 2004's operating loss of 12 million even given the 98% increase in fuel expense year-over-year.

While expense reductions contributed to this quarter's positive results, the greatest benefit came from the nearly 53% increase in revenue.

Operating margin for the third quarter was 0.3%.

Rounding out our review of unit costs, other expense net decreased 3.2% from $0.0016 to $0.0015 or approximately 600,000 primarily resulting from increased interest income in capitalized interest related to aircraft purchase deposits.

On the balance sheet, AirTran ended the third quarter with approximately $382 million in total cash, cash equivalents and short-term investments.

This compares to 342.3 million at December 31, 2004 and 376.8 million at the end of the second quarter 2005.

The increased cash balance primarily reflects the receipt in the third quarter of $51.9 million in pre-delivery deposit financing associated with aircraft delivering in 2006 and 2007.

During the fourth quarter, we anticipate closing on an additional deposit financing facility for our remaining 2007 deliveries.

Debt including current portion was 455.6 million compared to 314 million at year-end primarily reflecting the debt associated with aircraft purchases and capital leases for spare engines.

Stockholders' equity at September 30 was 344.2 million.

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

Capacity additions in the fourth quarter will be approximately 25%, which is down from previous guidance of 30% due to production delays from the Boeing strike and the recent hurricanes.

Looking at bookings, October traffic continues to reflect the strong trend that we have seen during the third quarter.

The booking for November and December also exhibit strong year-over-year gains as well.

Regarding fuel, our cost assumption is a price per gallon all in, in a range of between $2.30 and $2.35 per gallon.

This reflects an assumed price per barrel of crude at $63.50 and a crack spread of $33 per barrel jet.

Our updated hedge guidance is as follows.

We have fixed forwards consisting of in the fourth quarter, 61% of $1.69.

In 2006 approximately 16% at $1.55 and in 2007, 8% at $1.45.

In addition, we have collars for approximately 32% in the fourth quarter and 10% in calendar years 2006 and 2007.

Our non-fuel cost guidance for the fourth quarter will be up 1.5 to 2.5% year-over-year reflecting additional distribution costs related to higher revenue as well as scheduled maintenance events in the fourth quarter, which did not occur in 2004.

On a sequential basis, we expect the fourth quarter non-fuel unit costs to be lower by approximately 1% and for the full-year of 2005 down by 1 to 2%.

In 2006, we expect that non-fuel unit costs will continue to move downwards as we take deliveries of additional new 737s.

And finally, there will no changes to non-aircraft Capex of between and 20 and $25 million for the year.

In conclusion, I would like to thank our customer for flying AirTran and our hardworking and professional crewmembers for doing their very best every day.

We believe AirTran is positioned to capitalize on the positive trends, which are playing out in the industry.

Our growth strategy remains on track as we take 20 new fuel-efficient aircrafts in 2006.

Given the improving revenue environment and the demand for our product, we believe we have a unique opportunity to bring the AirTran brand to many more customers than ever before.

At AirTran, our spirit is strong and our goals are high.

We have a clear vision of the opportunities ahead and believe that our low-cost new aircraft and outstanding employees will lead AirTran to even greater levels of success.

Thank you for your interest in AirTran.

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

[OPERATOR INSTRUCTIONS].

Jim Parker, with Raymond James.

Just a couple of things here.

One Stan, your crack spread, you said you are using in the fourth quarter of $33?

Yes, that's the average Jim by months.

I believe it's $45, $35, and then $30 in December.

Now, hopefully that comes down.

But that's our estimate at this point.

It averages out to about 33 for the quarter.

And where is it now?

Well, it's been bouncing around.

I believe in the past week it's been in the $20 range.

So, we may be a little conservative in that assumption, but at this point, until we get a little more visibility on the trend of the crack spread.

This is where we are pegging it at.

Historically, it’s been in the high single-digits to 11, $12 a barrel.

So, if we get down in the range of 15 to $20, we will update our fuel guidance further.

But at this point, we are looking at 33 for the entire quarter.

But you say it's 20 currently and the refiners they are coming back on stream.

So, I don't -- I don't know why it wouldn't continue to go down and be below 20 for the quarter?

Well, the only thing I can see Jim is that depending on the inventories of automobile fuel and home heating oil, they may shift production to those distillates from aviation fuel.

So, it could bounce around.

It's not at 20; it's actually in the $20 range and upward.

So, there may be some room for adjustment here, but this is where we are at least starting out.

Okay.

Regarding RASM you gave the monthly RASM year-to-year increases for the months and September I believe is up 30%.

Two things there would appear Delta taking capacity out and than a year ago, comparing it against the hurricanes.

What would you expect for the fourth quarter, year-to-year change in RASM?

Jim, allow me take a general revenue question because obviously, probably the most important area we need to focus on.

First of all, you have to remember that the numbers were up significantly in September and you have to remember that last year we were hit very hard by hurricanes.

So, if you adjust the last year's number for the hurricane-hit which was $12 to $15 million plus the hit we had this year of 3.5 to 4, September probably would come in around 20%, give-or-take a percent on either side.

And that would have averaged down the quarter a little bit.

But going forward, given the outlook that we see, what we are seeing is approximately 13 to 15% reduction in capacity by Delta in our markets.

We are seeing reductions by US Airways; big reductions at FLYi.

I think it is probably fair to say we are looking at a RASM improvement in the third quarter of 13% plus.

You mean the fourth quarter, Bob?

Fourth quarter, excuse me.

And, as we move into the first quarter, I’m not making any revenue predictions, but the supply situation probably looks better, because a lot of competitors were adding significant amount of capacity in the first quarter and it was one of the worst as far as seasons we have seen in many, many years.

So, near-term outlook looks pretty good, 13% plus year-to-revenue increase in the fourth quarter and pretty good outlook based on the capacity going into the first quarter.

Gary Chase, Lehman Brothers.

Stan, just want to make sure we're crystal clear on the fuel guidance.

Sorry to bring you back to it.

But, have you guys locked in anything crude or the spread where you would be paying above market rates or is it all sort of caps and collars that you have got and the fuel price assumption that you have is just based on where you think the spot markets are going to be?

The fuel price assumptions based on where we believe the spot markets will be.

With respect to collars, as Katrina was going through and then Rita, we put into place some collars which were -- the ceiling would be above where the market is now.

But as the prices have come down, we have been converting some of those into fixed forwards that would give us a better price going forward.

So, we review fuel on a daily basis and depending on what we can get as opposed to what we currently have in place, we may do some swapping out which we have in the fourth quarter.

Okay, but unless something drastic happens with JET, we shouldn't expect that you are going to pay materially more than what the market prices are, at least now, right?

So it's assumption day?

Right.

I mean, we didn't lock in fixed forwards above the market.

Obviously, with everything that's happening on the east coast, you have obviously got -- the opportunity set is changing quite a bit.

Just curious if you could give us your thoughts, I mean, you have downsized Dallas a little bit.

Any thoughts on what that means for Dallas in particular for the long term or the expansion outside of Atlanta, or is it purely opportunistic and the situation now on the east coast warrants that kind of change?

Well, I think the real driver is -- really is profitability and Dallas, Los Angeles as an example.

We had a great summer, but you really can’t manage a business off of four months.

It takes a lot more than that.

So we have to make an assessment looking at our new route network going forward, where is the best opportunity to return a profit?

And basically that all points East of the Mississippi flying.

That's where the capacity is coming down.

That was the worst part of the industry over the last year, and it will become the best part of the industry going forward.

We know what more of what I have said, where we are going to spend our money and it is really going to be in the Southeast and some of the things we are focusing on in the Northeast.

That also means that going forward, we are not really looking at adding too much long-haul West coast flying where we think that there are better opportunities in sort of our core market.

That's our big focus right now.

Certainly in the Southeast it has been the best place to get average fares up and we just more or less implemented a fair increase over the last two days.

So, we are focused on making money and diversifying the route network where we have some strengths and certain other things can wait.

And so that's why -- again Dallas, LA, you can stay in there on principle.

We certainly can afford to stay there, but making money is more important and when we saw opportunities like Midway Boston and Midway Minneapolis which are even better fits for us, it was important for us to sort of step up and make some tough decisions.

So, again the focus will be from a capacity standpoint over the next year east of the Mississippi flying.

Ray Neidl, Calyon Securities.

Hi Bob, just to build on your answer in the previous question.

I am just wondering right now things look pretty good with Delta and bankruptcy for you, but (inaudible) with Independence air.

But I am just wondering down the road, if Delta does their bankruptcy right they are probably going to come back lean and mean as a low-class carrier and if they don't do it right, that could invite somebody like Southwest to come into Atlanta like they are doing in Philadelphia and Denver.

So, I am just wondering down the road what do you see in the Southeast, is it going to become more competitive again?

Obviously, I don't know the answer.

I can speculate which I will.

Non-fuel costs at AirTran are equal to or better than Southwest.

And you can go through all your calculations and they are very, very close.

And so we are truly a low-cost carrier.

Another thing I would point out, lowering your cost is not a one-time event.

We have reduced our non-fuel cost about 15% over the last five years.

So, we are not standing still.

If you compare where America West is or the new US Airways, they are about 30% plus higher than us.

On a non-fuel basis when you adjust for stage life(ph).

So, these carriers have a long way to go, number one; and number two, we think we can expand our cost advantages.

Again, as we get bigger where we find leverage, we now have 12 cities where we have more than 10 departures.

Five years ago we had one city.

So, we are starting to gain some strength in our route network and a number of cities, which allows us to drive down our expenses.

If, for example, Delta comes back and wants to play the mind share, the market share games, they will end up right back in the same situation.

We have gone through this over four or five years.

For the most part can't marginally (indiscernible) price your product.

We have got a better brand.

We are the only airlines that got business class on every single flight.

We have got a line of assets and we have got a lot of attributes that some of the legacy carriers don't have.

So, it's a -- we have heard it before and I think we are going to keep focusing on what we think we can control, build the route network out and keep getting the cost down.

And we’ll let everybody else talk about how they are going to come close to us.

I don't think they can get there.

The mindset that the company is not there, and I think when they are all said and done, we will have very, very sustainable cost advantages.

And Bob, in Atlanta the current benefit you are seeing in RASM.

Do you think that's more attributable to what Delta is doing or is it more likely what Independence is doing, the rapid shrinking of their system that is really helping you?

It is really hard to tell, because they are both happening simultaneously.

I think before high capacity reductions are helping, that helps push the yields up because they weren't very, very big.

So, I think if the capacity comes on a year-over-year basis by US Airways and certainly Delta;

Delta is a very big airline and we are seeing capacity cuts in some very, very significant markets.

They have been losing money in some key markets for years, and the big markets need to be profitable to make the hub profitable.

So, again a 15% reduction by Delta in key markets plays a very, very big role.

That's got to be the predominant piece going forward.

Certainly, the other ones are positive contributors as well.

Let me add two more points Bob to what you said, this is Joe.

There's one stat that everybody ought to remember and that is 87% of our customers say they are likely or extremely likely to fly us again.

Those are gangbuster numbers and nobody has any control over that except the crewmembers at AirTran Airways.

So, the other guys can do what they want.

But, if you got 87% of the people you got on the plane today saying they are going to come back.

That's a pretty strong brand statement.

And then the other thing as far as Southwest coming into Atlanta.

They aren’t at any gates.

There are not any gates for anybody on a wholesale basis in Atlanta.

So, they have a very, very hard time making any kind of penetration in Atlanta, like they are starting to do in Philly and Denver.

Okay, great, thank you.

Mike Langberg, Merrill Lynch.

I guess, with the capacity maybe being a little bit lower in the fourth quarter of '05, what should we look for 2006 and I apologize if you gave a 2006 ASM number?

No, we didn't, Mike.

But, based on our delivery schedule, we are probably looking at between about 20 and 25% capacity growth because as you know the base of aircraft is increasing.

Closer to 25%, 24 to 25% and again part of that is reduced airplanes, but we won't be expanding the length of haul as much; as we will stay in a much more mid-haul flying sector next year versus more long-haul flying.

Okay.

And then just another question, I guess, Bob, actually to you.

When I look at that new announcement of service out of Midway.

It’s a decent amount of frequency, I mean, to the point that now you are approaching 20 daily departures out of that airport.

How many gates do you have and is there an opportunity to sub-lease some additional gates there to maybe build that up further or are you out of room now?

Well, we have a -- we got a second gate and I guess, we will be at about 17 departures in December.

It's hard to tell because I think the situation with ATA is very, very uncertain.

They have been dropping a lot of capacity, a lot of flights recently.

They do not have a lot of restrictions in terms of minimum utilization per gate, but there may be the opportunity for more gates.

I mean certainly Southwest was able to get six gates last year with the investment in ATA.

So, certainly they are going to be the long-term leader there, but even a small position in Midway, three to five gates could make a substantial difference to AirTran, because it really allows us to diversify our route portfolio.

So, we are going to keep pressing up there.

I think the situation with ATA is very, very fluid right now.

Okay.

And then just a last one, I guess, to Stan.

On the collars, you gave us the percentages.

Can you give us the high/low for fourth quarter and then '06, '07?

I am sorry, we will put that out.

I don't have that detail in front of me, but we will put it out in an 8-K for the collars.

Okay, thank you.

Haline Becker (ph), Benchmark (ph).

Stan, what was your cash position, again?

I missed that.

We ended up the quarter at 382 million in total cash.

Okay.

Thank you very much and then my other question just had to do with a comment you made about the maintenance line and costs going up because Rolls Royce is charging more.

On a go-forward basis, is that the kind of increase we need to expect to see?

Well, I think a couple of things have happened.

With respect to Rolls Royce, we had a contractual rate increase, number one, which we had anticipated.

There's also an escalation adjustment base for inflation that's tied to the cost of energy.

And while we had assumptions for that, obviously with the higher costs of energy that inflation adjustment is higher than what we would have expected.

The other factor is that we will have a number of C checks commencing in the fourth quarter on the 717s, which we tend to do in off periods of flying, obviously not over the holidays and in the first quarter as well.

But, on a full go-forward rates(ph) you are not going to see a significant spike in maintenance, particularly given the fact we are taking additional 737s next year.

Okay.

And then my last question is with respect to operations this week.

Did you say and I missed whether you are back to normal in the Florida markets now?

We should be back to normal.

We had to cancel last night about 150 departures over a numbers of days.

We operate about 600 departures a day.

I think, our biggest hit was in Fort Lauderdale and I don't have the status this morning.

We should be okay right now.

We did not have any problems at Orlando and Tampa, just high winds.

It was just the Southeast Florida where we took the primary hit over a number of days.

So, is your understanding, Bob, that Fort Lauderdale is open now?

I think we are planning on flying some flights today subject to the ability of the airport.

So, again, I don't know what's going on as I haven’t really been in the room, but our intention was to begin to operate today subject to what the airport was going to tell us this morning.

Okay, and then my last question is on Cancun with the damage that was sustained at the airport there, does that in any way affect your startup date?

Cancun is related(ph) to one flight operation for us and it certainly could.

We don't have a big investment there and with all the other opportunities that we see, if we get a sense that Cancun is materially impacted, we might delay.

But, it really is too early for us to tell.

We don't have good information right now or sometime over the next 10 days, we are going to make that decision.

As I said, I think, there's plenty of other opportunities for us domestically if we decide to delay our startup.

Great.

Okay, thank you.

Andrew O’Connor (ph), Wells Capital (ph).

Andrew O’Connor: For Stan, what are the priorities for the Company's cash going ahead, Stan?

Well, number one, we want to maintain a high balance of liquidity, obviously, in this climate with fuel prices where they are at that's paramount.

With respect to financing of the aircraft, as you know the 717s are predominantly lease financed.

And so our goal is on the 737s to the extent possible to debt finance those aircraft.

And in conjunction with that, we've been very successful in monetizing the pre-delivery deposits on the 737 aircraft.

It's a very attractive asset from a lender standpoint.

And we have now monetized the deposits for the '05 delivery as well as '06.

We've got permanent financing commitments in place for the '06 aircraft on a debt basis and we are working on '07 now.

Andrew O’Connor: Okay.

Is it possible to take a stab at how much cash you think you will have by year-end '05?

At this point, no.

I would -- I would rather refrain from that.

Andrew O’Connor: Okay.

And then for Cancun, on the last call, you guys were trying to get authorization to fly from Orlando.

Have you had any success that way?

Given the new bilateral talks, the opportunities for Mexico in general are going to be better because we are going to allow three carriers to fly there from each city.

But, at this point, our plan will be to fly Atlanta at some point and Baltimore sometime in the spring and we are not going to go into Orlando at this point in time.

Andrew O’Connor: Okay and from Tampa?

At this point, we are not running and operating in Tampa as well.

Andrew O’Connor: All right guys, thanks very much.

I just have actually one point here if you can hear.

Fort Lauderdale is open and AirTran has a plane on the ground.

So, as far as I know, we are up and running in Fort Lauderdale right now.

I expect other carriers are in the same situation as we are.

David Strine, Bear Stearns.

Two questions, one big picture and then one perhaps for Stan on CASM.

First the big picture, a lot of focus I think rightly so on what Delta is doing, but it looks like Northwest is going to be cutting domestic capacity by levels similar to what Delta is doing.

Just want to get a feel from you strategically as to how big you think your opportunity is in those markets over the next year?

Yes, David, right now, as you are well aware, we don't have very much overlap with Northwest, but we have been adding service in Indianapolis.

We've got 10 or 12 flights in a market which we did not operate six or eight months ago and we do see some opportunities for us there.

In a couple of weeks, we begin service into Detroit and Detroit as you are well aware is one of the largest markets in the country, and we think it fits in our route network very well.

We've just announced Minneapolis to Midway.

So, certainly we are not targeting anybody.

We try to focus on routes that fit in with our network strategy and so I think you are seeing us compete in some of those markets as we speak.

The way I would also look at it is, generally speaking, capacity also has some more global impacts.

As Northwest pulls down or if they actually pull down substantially, it will fill up other carriers at higher yields and eventually that will have other knock off effects on other carriers.

So, I think it's one of those situations where it just sustains a very, very positive trend.

Our plan is really not to alter what we are trying to do based on near-term capacity changes, we are trying to stick to our core strategy and within that strategy, we will seize opportunities as they come along.

Second question for Stan, I just want to square up some comments you made with respect to CASM guidance for the fourth quarter and what you said about your Sabre-related distribution costs.

Because I think you mentioned that you are forming a new agreement with Saber, which is going to lower your distribution costs, but then later in your comments you said fourth quarter CASM guidance is going up a bit because of both maintenance as well as higher distribution costs.

How do those square up in terms of timing?

I think that the timing is that we will see the benefit of the new agreement in the fourth quarter, but given the increase in volume of revenue that's going to drive up volume variance as well on distribution.

Just to take a second on what we are working on with distribution expenses.

Sometime in June, last June, we stopped selling fares in the GDS beyond December 15 and we got into very, very heavy negotiations with most of the GDSs.

And it's something that we have been thinking about for very, very long time and we thought for us the timing was right.

And certainly with the capacity pull downs, it's a very, very good time for us to be negotiating these agreements.

Because certainly when you try to restructure these agreements you are taking revenue risks; we think revenue risk is being mitigated.

We are really thrilled with Sabre Travelocity agreement.

There will be certainly, probably another agreement announced shortly.

We are looking at G2 SwitchWorks and other avenues like that to improve our capabilities and corporate bookings.

So, I think for us, we are going to see expansions, unit expansions come down, but certainly I think we are really enhancing our revenue opportunities at a significant rate.

AirTran's reservation system is much different than what most of the other carries use.

We have a kind of web-based navitier(ph) system, it's very efficient, very, very good for training, but it doesn't have certain capabilities that traditional legacy carriers have had.

We are in the process of maintaining our cost structure, actually reducing it, but at the same time improving those revenue disadvantages we've historically faced.

So, I think on a long run this will be very, very positive, because it's great to find situations where you can drive the unit cost down and improve your revenues.

Thank you.

Glenn Engel, Goldman Sachs.

One just -- a follow up on what you just said Bob.

Your GDS costs are going to be -- they are still higher than your other channels.

So, even though your unit costs for GDS goes down, if you sell more on GDS, the overall cost per seat would go up.

Wouldn't it?

If that was the answer(ph) we would be thrilled, because, I think there's some real good opportunities for us in the corporate side.

Most of the corporate booking vehicles are historically tied to the GDSs and I think it really gives us a good entries into those.

We don't actually mind selling a business type fare across the tradition channel, because the revenue is substantial.

The difficulty is selling a leisure ticket or very low fare ticker across these channels.

It’s very, very hardly to make money.

Our hope is that of getting our costs down in general, but we are actually positioning ourselves in some of these corporate channels in a better way than we ever have before.

Key focus would be the unit cost number.

The unit cost number is right where we are focusing.

Second question on the yield side in the third quarter and pricing in general, can I assume that Delta is still not giving you much of a fare gap?

And that if I looked at the third quarter yield is up by 8%.

Is that fares or is that business mix, is it field management or all of the above?

It's clearly everything.

I think Delta is still very competitive and I think they always will be, that is just the way business works.

But we are seeing increases in -- yield increases really in all areas.

Certainly, fare increases we took a couple of bucks more than once and that's positive.

I think the biggest avenue is probably that the average fare of our sales is coming up and again, 70% of our business comes direct.

So, we have a retail model.

We will continue to do sales.

We are doing sales at a higher level.

That is very, very positive.

And we are slowly moving customers up into the higher fare bucket, which we had been on a downward trend for several years.

That's really the last piece, I think, you are aware of when we took our fare increase yesterday or two days ago, it was in the seven, three-day and walk-up area, which we think if industry low factors stay high, collectively the industry will be pushing customers into those higher price buckets.

It's very, very broad based and I think you are going to continue to see the same activity going forward.

Going forward though probably it's pushing customers into higher buckets and higher fare sales would probably be the key focus, now that we have just taken a fare increase.

Is your mix connecting local change very much?

It's still about the same.

Most of the capacity changes are really impacting what's going on in the fourth quarter and beyond.

What was going on in the first quarter and the third quarter, it's really that we are still 40 some percent local in Atlanta.

We are seeing certainly firming in the connecting yield, which is a real positive since the connecting yields have been in a downward decline for two solid years.

And the business mix, which we measure as customers booking within seven days that revenue was in the low 40s, which is up slightly from last year.

Final thing on service, your lost bags(ph) still one of the best in the industry but in the on-time and complaints that sort of fell down in the past, can you talk about that?

Sure, I can.

I think the primary – it’s primarily related to Atlanta and 70% of our departures are in Atlanta and as you are well aware probably the next 20% in places like Philadelphia, LaGuardia and Boston.

But, we had -- it was really weather-driven.

If you look at the results for the Atlanta airport over a 90-day period from June through August, the entire airport operated in the low 60s.

And you can’t operate significantly different than what that airport is operating at.

I mean, the airport this summer very, very prone to ground stops because it basically is at capacity.

So, if you have any haze, any bad weather or thunderstorms near by, you get into a ground stop scenario, which pushes your flights later all through the day.

And so that was a real big driver.

The previous summer we finished in the high 70s, this year significantly less; and that drives things like complaints.

Philosophically, our strategy is to complete our flights and connect the bags.

So, we could have actually beat that on-time number.

We think we would have provided worst service to the customer.

So, again, we are not going to cancel flights to improve the on-time position by two or three points.

It's just not the right thing to do.

Let me add, Bob.

We have got a major effort to improve our performance for next summer internally, but more important -- much more important than that is the fifth runway opening up in Atlanta.

It's scheduled to open in May.

We have sat down with the FAA and there is not one period once that runway opens, there's not one period throughout the day where we will reach capacity at the airport or even come to close to the capacity at the airport, even under IFR conditions.

And that was with Delta schedule as of late summer.

So, the fact that they are pulling capacity down will only make that situation better.

I think you will see a radical change in the Atlanta's airport performance from last year to next year.

Thank you.

At this time we no further questions, I would like to turn it back to Mr. Joe Leonard for any closing remarks.

Okay, thanks for your attention this morning.

We appreciate your interest in AirTran.

As you can tell we a little upbeat here, we think that we've been waiting for about five or six years here, trying to get ourselves positioned for, we are now in a very, very good position to take advantage of it.

We believe we've got the right planes at the right location, at the right time, at the right cost.

And so we think, barring any unforeseen disasters that may be out there we should have going into 2006, we should be in a position to really start building a base for our Company and thank you for your attention.

Good day.

This concludes today's AirTran Holdings conference call.

You may now disconnect your lines and have a great day.