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CFO Stan Gadek gave a presentation at the Goldman Sachs Transportation Conference March 22nd, at noon. I listened to the replay and I jotted down some notes, which I have listed below:

The airline industry is cyclical and it may be heading for an uptrun. AAI now has 92 aircraft - 81 717s and 11 737s. 6.35 cent non-fuel CASM is even lower than Southwest, and as more 737s are added to the fleet they will help to drive further cost savings. Another cost advantage is the very productive workforce. The 717 airplane had a 24% improvement over the gas guzzling DC-9 and the 737 has further advantages over the 717.

AAI got a good deal on the 100 aircraft order (for 737s) in Summer of 2003. Pilots agreed to the same rate of pay for the 737 as the 717, as opposed to other airlines where pilots flying larger planes get higher pay. The 737 provides a "transcontinental range" which allows an "expanded area of operations."

Airtran offers Business Class and assigned seating which help to differentiate Airtran from other low cost carriers. The Internet allows for a lower cost distribution but Travel Agents are still important and account for around 25% of distribution. XM Satelite radio is being rolled out at the rate of 2-3 planes per week. Live TV was considered but the cost - $1 per seat per departure ($117 per plane) was considered too expensive. XM Radio costs as much as a bag of pretzels (I guess per passenger) - so the perceived value is good compared to the cost. Also he mentioned something about Airtran getting some free advertising over the XM Radio network.

Balance Sheet continues to improve. More cash is better, especially now with fuel prices so high. $70 million is on deposit with Boeing and financing deals are in the works for delivery deposits for 2005 and 2006. If these financing deals are finalized that would further help liquidity.

There are still a lot of growth opportunities available. Growth will be partly to new cities and will be composed of "organic growth" (increasing frequency of flights to cities already served). Organic growth has benefits because it leverages the existing network infrastructure.

Net growth in 2005 will be around 20% (30% if you count replacing Ryanair and Air Wisconsin flights). Airtran likes Dallas (now that Delta is gone) and already has 14 flights a day and will probably add more when the time is right. They still see growth in Atlanta.

High fuel costs are the catalyst to cut excess capacity from the industry. The key fundamental is the lowest possible cost. The low cost provider will win. FLYI (Independence Air) has been depressing fares on the East Coast far more than their actual capacity would indicate, and CFO Gadek is hopeful that their negative impact on fare yields will diminish in the second half of 2005. RASM is dependent on load factor and yield - load factors are up somewhat. I don't think he said what yields were doing but it was implied that they are probably lower.

East Coast routes are very competitive right now and he said that some current capacity is "un-economic" and that high fuel prices will be the "great leveler" which will eventually force some of the excess "un-economic" capacity to withdraw. He mentioned that FLYI is getting smaller and is less of a competitive factor, USAir is also getting smaller (withdrawing some capacity) and that Northwest recently decided to ground some DC-9 planes. He said something to the effect of the fuel bill has to be paid to keep planes flying, and that this "drain on liquidity" would help reduce capacity as fuel prices remain elevated.

The one statement by CFO Gadek that I didn't like hearing was that he said that the oil price per barrel may be heading even higher and that Airtran recently put on some cashless collars between $64 and $52 a barrel. I think this means that if oil prices decline then Airtran would be obligated to pay at least $52 per barrel. (I'm not sure exactly how a "cashless collar" works but my guess is that it fixes the price to be paid between $52 and $64 a barrel). He mentioned that "fixed forwards" were no longer available right now at reasonable prices.

Airtran is currently hedged around 50% for Q2 at $1.33 per gallon and will be aiming for around a 50% hedge of fuel needs in future quarters. (I think the large increase in fuel costs so far this year have caught everyone off guard and now there is a scramble to adjust.) For Q3 25% is hedged at $1.52 and for Q4 18% is hedged at $1.47. (some of these figures may be off, I encourage investors to listen to the call themselves and possibly correct any errors I have made).

On a final note he said something to the effect that Song has not been much of a competitive threat. Airtran has newer planes which helps a lot, people like newer planes (which probably helps JetBlue as well).

My overall impression of the presentation was positive, although the fact that they are hedging further increases in fuel prices may end up costing them if the oil price drops below $50 a barrel. I guess the CFO has to strike a balance between the risks to further increases in the price of oil versus the chance that prices have just been driven up by speculation and will eventually drop.

JT :-)
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