Kennedy School of Government CR14-05-1789.0 Case Program

AirTran Airways’ West Coast Service

On March 4, 2003, AirTran Airways announced new service from to the West Coast, with two daily non-stops each to Los Angeles International Airport and to Las Vegas beginning in June. The routes were a major commitment for AirTran, a rapidly growing low-cost serving the Southeast and parts of the Northeast and Mid-West. The routes were AirTran’s first to the West Coast, and were longer than the range of the aircraft in its existing fleet. Moreover, they came at a time when the airline industry was in turmoil. The major had lost a record $12 billion in 2002, and two were in bankruptcy. AirTran and two other low-cost carriers were the only sizeable airlines that were profitable, and all three were expanding rapidly. Fare wars were common as the majors and the low-cost airlines competed for traffic in a weak economy and under the threat of a possible war with Iraq. COPY

The stakes on the West Coast routes had increased with added competition from Delta and JetBlue. Delta was a major carrier whose principal hub was in Atlanta, while JetBlue was a low- cost airline based at New York’s Kennedy International Airport with long-haul routes to Florida and the West Coast. Just before AirTran was to announce its new service, JetBlue announced three daily round trips between Atlanta and the Long Beach Airport in the Los Angeles metropolitan area. And two days after AirTran’s announcement, Delta said that it would add five daily round trips to the eight it already flew from Atlanta to Los Angeles International.

AirTran’s management was concerned but not worried. They were not completely surprised by JetBlue’s entryNOT and they had expected Delta to respond by adding frequencies and matching AirTran’s low fares, although they had not anticipated so much new Delta service. Nevertheless, AirTran had been under constant attack by Delta for almost two years, and still had

This case was written by José A. Gómez-Ibáñez, Professor of Public Policy and Urban Planning, John F. Kennedy School of Government, Harvard University, on the basis of public documents and interviews with airline industry officials. The author would like to thank AirTran for its cooperation in the preparation of this case, but absolve it of responsibility for any errors in the facts. The case is intended to serve as a basis for classroom discussion and not to depict the appropriate or inappropriate handling of a policy or administrative situation. (0305) DOCopyright © 2005 by the President and Fellows of Harvard College. No part of this publication may be reproduced, revised, translated, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise) without the written permission of the Case Program. For orders and copyright permission information, please visit our website at www.ksgcase.harvard.edu or send a written request to Case Program, John F. Kennedy School of Government, Harvard University, 79 John F. Kennedy Street, Cambridge, MA 02138 AirTran Airways’ West Coast Service ______CR14-05-1789.0

made a profit of $10.7 million in 2002 while Delta lost $1.3 billion. Moreover, JetBlue offered a different type of service than AirTran, and the Atlanta-Los Angeles market was so large that it had room for two low-cost carriers plus a major. Finally, AirTran needed the West Coast routes to balance the seasonal peaks on the rest of its system, and thought the prize worth the battle.

Background on the Airline Industry

The competition between the major airlines and the low-cost carriers in 2003 had its origins in the deregulation of the airline industry 25 years earlier. From 1938 to 1978, a federal commission, the Civil Aeronautics Board (CAB), dictated the routes the airlines could fly and the fares they could charge. The CAB had been created in the 1930s on the grounds that regulation was needed to nurture the infant industry. By the 1970s, however, it was clear that the primary effect was to stifle competition, thereby increasing costs and fares. In 1978, the CAB and its powers to control routes and fares were phased out. Safety regulation was not affected and remained the responsibility of the Federal Aviation Administration (FAA).

The Majors Turn Back Low-Cost Competition (1978-1991). From 1978 to 1991, the industry went through a shakeout in which the pre-deregulation, or legacy, carriers consolidated into nine major airlines and beat off competition from all but one significant low-cost airline. In the first five years after deregulation, roughly a dozen new airlinesCOPY began service with the intention of undercutting the legacy carriers’ fares by keeping their costs low. The cost advantage of the new entrants was based partly on lower wage rates, but mainly on higher labor productivity, lean overheads and facilities, and higher load factors (the industry’s term for the percentage of seats sold). In addition, most also saved by offering “no-frills” service, with dense seating and no in- flight meal service. Most of the low-cost carriers established in the 1980s had disappeared by 1990. Some low-cost carriers were hurt by expanding too rapidly, but the principal cause of their demise was the development of a successful defensive strategy by the major legacy carriers.

The heart of the majors’ strategy was to exploit the economies of larger aircraft by building their route networks around hubs designed to serve both business and leisure passengers. The costs of building and flyingNOT an aircraft do not increase proportionally with the number of seats. Large and small aircraft require similar instruments and flight control systems, for example, so these costs can be spread over more seats in a larger plane. Large and small aircraft also require the same number of pilots, although the majors had lost some of the resulting cost savings by agreeing to pay pilots substantially more to fly “big iron.”

Hub-and-spoke route networks allowed the majors to consolidate passengers going to many different destinations on a single plane. For example, a Delta flight from Boston to its DOAtlanta hub could carry not only the local passengers bound for Atlanta but also the through passengers bound for Delta’s destinations in Florida, , California, and other points south and west of Atlanta. Passengers disliked the fact that hubs meant more connecting and fewer non-stop

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flights. But the airlines shortened the connection times by scheduling flights to meet in “banks” over the day. And the hub system also allowed the airlines to compensate by offering much more frequent departures and lower fares.

The majors had always served both business and leisure passengers on the same aircraft, which also helped increase aircraft size. Business travelers were time sensitive, and wanted convenient and frequent departures and the ability to get a seat for a last minute trip. Leisure travelers cared more about price than about departure times or leg room. An airline serving business passengers alone could offer convenient frequencies only with small planes. But by filling the planes with leisure travelers as well, they could use larger and more efficient aircraft. The business passenger cost more to serve because providing frequency and holding an inventory of seats for last minute purchase was expensive. The leisure passenger was cheaper because he or she could fill out the seats in the larger aircraft and was more willing to depart at odd hours and book in advance.

Another major innovation of the 1980s was measures to restrict access to the lowest fares to leisure travelers. The majors could not afford to match the low-cost carriers’ fares across the board. The low-cost carriers appealed mainly to leisure travelers, however, so the majors could be selective if they could keep the business and leisure markets separate. The majors experimented with restrictions on the lowest fares, such as 30- or 14-day advanceCOPY purchase of non-refundable, round-trip tickets with a Saturday night stay over. They also developed “yield management” systems to control the number of seats on a flight that were allocated to the “buckets” for different fare classes. The airlines would monitor the bookings for each flight and increase the seats allocated to the low-fare buckets only if reservations for the less restricted and more expensive fare classes were lagging behind expectations.

The hub strategy encouraged consolidation among the legacy carriers because it favored airlines with large networks. Many legacy carriers disappeared in a wave of mergers in the mid- 1980s, and several went bankrupt at the end of the decade, including such famous names as Eastern and Pan American. By 1991, the list of major legacy carriers had shrunk to nine: seven with route networks that NOTspanned the nation (American, Continental, Delta, Northwest, TWA, United, and US Airways) and two that concentrated more on the West (Alaska and America West).

The only significant low-cost carrier to survive the 1980s was . Southwest was founded in 1971 to provide service between three Texas cities. It had been exempt from CAB control because its routes did not cross state lines. After deregulation, Southwest began to gradually expand its network beyond its Texas base. The airline specialized in serving short- haul, high-density markets with high frequency service. It had high aircraft and flight crew productivity in part because it built a system of point-to-point routes, unlike the hub-and-spoke DOnetworks of the majors. As a result, Southwest’s planes did not have to wait for connecting flights to arrive before they departed, and could be turned around in as little as 30 minutes. Southwest

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also saved on maintenance and spares by having only one type of aircraft in its fleet: Boeing 737s. The service was decidedly no frills, with no advanced seat assignments. Passengers were assigned to 20-person boarding groups when they arrived at the gate, so that family groups that wanted to sit together or passengers who hated middle seats had to arrive well in advance of the flight to get into one of the first boarding groups. Southwest’s staff was famous for its enthusiasm and good cheer, however, which compensated for some of the inconvenience.

High Profits and High Business Fares (1992-2000). By the end of the 1990s, the low-cost carriers would become a major force again, encouraged in part by the high profits of the majors. Airline traffic and profits are highly sensitive to the business cycle, as both business and leisure travel fall off sharply during recessions. The airlines started the 1990s with weak traffic and losses caused by the tail end of a recession and the 1991 Gulf War. But for most of the rest of the decade the American economy was booming, and with it airline traffic and earnings (see Exhibit 1).

The majors added to their profits by becoming ever more sophisticated in widening the gap between the fares paid by business and leisure travelers. Under CAB regulation, discounts off the standard or “walk up” coach fare rarely exceeded 25 percent. By 1992, as Exhibit 2 shows, the 10th percentile coach fare (that is the fare 10 percent of the passengers pay less than) was only half the median fare and one-quarter to one-fifth of the 90th and 95th percentile fares. By 1998, the gap had widened further so that the 90th and 95th percentile coachCOPY fares, which are typically paid by business people traveling at the last minute, were three to four times the median fare and six to eight times the 10th percentile fare. The increasing dispersion of fares was accomplished largely by raising the price of unrestricted coach seats rather than by lowering the cheapest fares. According to one estimate, the price of a business ticket increased by 79 percent in the 1990s.

The majors experimented with efforts to cut costs, although with only limited success. United, Delta, and US Airways all started low-cost subsidiaries,1 but they used employees from the carrier, so they were never really low cost, and were eventually closed down. A more successful innovation was 40-70 passenger “regional” jets. The majors had long contracted with small regional airlines to operate 19 to 40 passenger turbo-props to feed their networks from small cities. When aircraft manufacturersNOT started to offer regional jets in the early 1990s, they were used first to replace turboprops and then to substitute for mainline jets on some of the majors’ thinnest routes. The regional jets were cheaper than mainline jets largely because the pilots worked more hours and earned less per month than the majors’ pilots. Labor contracts limited the extent to which the majors could use this type of outsourcing to save costs, but all the majors employed it to some degree.

There was enough competition among the majors and with Southwest that average fares DOwere still substantially lower in real terms (net of inflation) than they had been under regulation. It

1 Shuttle by United, Delta Express, and MetroJet.

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was difficult to determine how much of the fare reduction was due to deregulation and how much to fuel prices, technology, and other forces. The most careful estimates suggested that the average fare savings attributable to deregulation climbed from 16 percent in the first year of deregulation to 31 percent in 1982, and the hovered around 25 percent during the 1990s.2 But there was a growing perception that the fare savings from deregulation were concentrated in the leisure market, while many business travelers were paying more.

Recession and Terrorism (2000-2003). The economy started to weaken in 2000 as investors grew skeptical of the promises of the Internet and technology entrepreneurs. The timing could not have been worse, as the unions at several of the major carriers had just succeeded in negotiating significant pay increases based on the industry’s record profits. Moreover, the spread of the Internet was making it easier for travelers to shop around for the best fares and terms. With traffic going down and costs going up, profits soon suffered.

The situation worsened substantially after the terrorist attacks of September 11, 2001. Traffic built back slowly in the first quarter of 2002, but the airlines competed intensely for it by discounting fares further. Added airport security meant longer check-in times and a new federal security fee of $2.50 per segment per passenger (up to $10 per round trip ticket), changes the industry feared would discourage short-haul trips.3 Congress authorized $5 billion in relief grants for the airlines plus up to $10 billion in loans, but the grantsCOPY were not enough to stem the industry’s losses and the loans were available only if an airline could convince a board that it had no other access to capital and a credible recovery plan. In March 2002, US Airways, the nation’s sixth largest carrier, filed for bankruptcy protection from creditors so it could continue to operate while it attempted to reorganize. In December 2002, , the largest carrier, followed suit.

AirTran’s Origins

Pre-merger. AirTran had its origins in two independent low-cost carriers, AirTran and ValuJet, that were among a second crop of low cost carriers that appeared in the first half of the 1990s. ValuJet was foundedNOT in 1993, and soon developed an extensive route network serving the Southeast with a fleet of used McDonald-Douglas DC-9s based in Atlanta. ValuJet’s expansion came to an abrupt halt on June 17, 1996, when one of its planes carrying 110 passengers and crew crashed into Florida’s killing all aboard. ValuJet resumed service after several months,

2 Steven A. Morrison and Clifford Winston, “The Remaining Role for Government Policy in a Deregulated Airline Industry”, in Sam Peltzman and Clifford Winston (eds.) Deregulation of Network Industries: What’s Next? (Washington, DC: Brookings Institution, 2000), pp. 1-2. DO3 The new charges were in addition to federal excises of 7.5 percent of the fare plus $3 per segment to finance the FAA and its air traffic control system plus “passenger facility charges” by airports of $3 to $4.50 per departing passenger. Airlines complained that air travel was taxed more heavily than cigarettes or alcohol.

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and the ValuJet board subsequently hired D. Joseph Corr, an airline industry veteran, to lead a turnaround.

The investigation by the National Transportation Safety Board had largely exonerated ValuJet, blaming instead a shipper of improperly marked and highly flammable cargo. Nevertheless, Corr decided that the ValuJet name was irreparably tarnished, and bought AirTran, a smaller Orlando-based airline with 10 Boeing 737s, and consolidated the two companies under the AirTran name. In addition, while ValuJet had been an all-coach, no-frills airline, Corr decided to restore , and to provide it for only $25 over the standard or unrestricted coach fare. AirTran’s planes were painted in a distinctive new teal and beige livery, with an “a” on the tail. These efforts were not enough to restore profitability, however, and AirTran survived only by eating into the proceeds of $150 million in bonds that ValuJet had sold shortly before the crash.

New Management. In January 1999, AirTran’s board recruited Joe Leonard to replace Corr as Chairman and Chief Executive Officer. Leonard had earned a degree in aerospace engineering at Auburn University before embarking on a 30-year career in the commercial airline industry, including service as Chief Operating Officer for Eastern Airlines and President and CEO of Allied Signal’s Aerospace Division. Leonard, in turn, recruited to be AirTran’s President and Chief Operating Officer. Fornaro, trained in planning at Rutgers and Harvard, had 20 years of experience in the airlines, including service as the Senior COPYVice President for Planning and Marketing first at Braniff, later at Northwest, and finally for US Airways.

AirTran was near collapse when Leonard and Fornaro arrived at the company’s Orlando Headquarters. The company had less than $10 million in cash on hand, and its revenue stream was weak and uncertain. The employees were relatively inexperienced and still demoralized by the crash, so that productivity and on-time performance was poor. The first priorities were to control the cash more closely and increase revenues while building skills, hope, and pride in the workforce.

Corr’s decision to add business class had been a break with tradition among low-cost airlines, but, after much discussion, Leonard and Fornaro decided to keep it to help recruit a business clientele and professionalizeNOT AirTran’s image. Leonard and Fornaro also decided to honor a commitment that ValuJet had made in 1995 to be the launch customer for Boeing’s new 717. The B-717 could carry up to 120 passengers (in an all-coach configuration) and had a range of 1,500 miles. The first planes were scheduled to arrive in September of 1999, and they promised to both enhance the company’s image and save costs. Boeing had provided generous terms, and the planes burned 24 percent less fuel and were simpler and easier to maintain than the DC-9s they would replace. AirTran confirmed its commitment to take delivery of 50 B-717s over five years configured DOfor 117 passengers each, with 12 seats in business class and 105 in coach.

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Route Planning and Pricing at AirTran

Route planning and pricing were central to AirTran’s prospects, and Robert Fornaro recruited Kevin Healy, a former colleague at US Airways, to be Vice President for Planning and Sales, and John Kirby and Matt Klein, also from US Airways, to serve under Healy as the Directors of Network Planning and of Yield Management, respectively. The airline industry was in constant flux, with opportunities changing daily. As Healy put it, “We have to study everything, and be ready to do anything”. But it was also important that AirTran not make too many pricing or route mistakes, because its financial resources were limited and it could not appear weak or indecisive. At any given time, Healy and Kirby had more than 50 new cities under consideration, including 3 or 4 that they thought might be next, another dozen medium-term prospects, and a couple of dozen long-term possibilities.

The Initial Route and Pricing Schemes (1999-2000). AirTran did not increase the number of (ASMs) it flew from 1999 through the first half of 2000, concentrating instead on pruning the existing network and refining its pricing structure. ValuJet had had its primary hub in Atlanta and a smaller hub at Washington’s Dulles International Airport. The Dulles operation was too limited to be effective in the presence of United and US Airways, who both had major hubs in Washington, so the new management withdrew all the Dulles service except flights to Atlanta. The Atlanta hub schedule was tightenedCOPY up to improve the service for connecting passengers by replacing nine poorly scheduled banks of flights per day with seven banks that were more clearly defined.

AirTran had always had a simplified pricing scheme, without many of the restrictions other carriers applied. AirTran never required a round trip purchase or a Saturday night stay. Advance purchase tickets were not refundable, but they could be changed or turned in for a credit for a modest fee. There were only six categories of fares:

1. Business class, 2. Unrestricted coach,NOT 3. Unrestricted but slightly discounted (10-15%) and capacity controlled coach,

4. 3-day advance purchase,

5. 7-day advance purchase, and

6. 14-day advance purchase.

AirTran’s unrestricted coach fares were roughly half or two-thirds of the unrestricted coach fares DOthe majors charged in markets where they faced little competition from low-cost carriers. AirTran’s 14-day advance purchase ticket was half to one-third the price of its unrestricted coach ticket. Business class was priced at $25 (later $35) over unrestricted coach. Seat assignments were

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available at time of purchase for business class and unrestricted coach, and 24 hours before departure for other fare classes.

Healy and Klein fine-tuned the pricing in several ways. To increase demand for business class, they introduced a new promotion that allowed coach passengers to upgrade to business for $25 at the gate if space were available. They also made the yield management system more forward looking. In the past, AirTran had offered lots of last-minute promotions to fill seats when demand was weak, which diluted the revenue from close-in bookings. The new system anticipated when demand would be weak and offered promotions well in advance instead of the last minute.

AirTran developed a number of other innovative marketing strategies. The airline became a leader in Internet bookings with a website that was so easy to use that it won awards from travel magazines. By 2003 more than half of AirTran’s tickets were booked over the Internet (compared to 5 to 10 percent for the majors), which saved the airline an estimated $5.50 per booking.4 AirTran’s frequent flyer program was simple and designed to offer more choices than one would expect from a small airline. Passengers saved their flight certificates, and mailed them in when they had accumulated enough in one passenger’s name for an award. A coach certificate was worth one point and a business certificate two points. Twelve points in a year (three business or six coach round trips) earned a coach round trip anywhere on the AirTran system. For 24 points AirTran would buy the passenger a round trip to any point in theCOPY on another airline. AirTran courted small businesses with a “B2B” program that allowed the enrolled companies priority in upgrades and seat reservations.

The First Network Expansions (2000-2001). By the middle of 2000, AirTran was ready to add to the cities it served. AirTran’s route strategy was shaped by the fact that Atlanta was the primary hub for Delta Airlines, and that Delta dominated Atlanta by carrying roughly 85 percent of the passengers using the airport. AirTran had been lucky to inherit a full concourse of gates at Atlanta that ValuJet had picked up after the liquidation of Eastern Airlines. But Delta was ten times larger and financially much stronger than AirTran, and AirTran did not want to provoke a fight.

Accordingly, AirTran’sNOT management set three priorities for network expansion. The first was to strengthen their Atlanta hub particularly by adding cities too small for Delta to care about or want to serve, such as Akron-Canton (Ohio), Dayton (Ohio), Flint (Michigan), Moline-Quad Cities (Iowa-Illinois), and Bloomington (Illinois). AirTran’s costs per seat mile were two-thirds those of Delta’s, so it could breakeven on a smaller load or a lower fare. And by entering with low fares, AirTran found that it often stimulated the market by as much as 100 percent. In many cases, the catchment areas of these cities were larger than one might expect because the service was low DOfare. AirTran attracted Cleveland passengers to Akron-Canton, for example, since Cleveland’s

4 The only airlines with a higher percentage of tickets booked over the Internet were JetBlue and Southwest.

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suburbs were expanding to the south towards Akron. Similarly, AirTran’s flights at Flint drew passengers from ’s affluent western suburbs.

The second priority was small cities where local governments or businesses were prepared to offer AirTran revenue guarantees or other inducements to begin service. The first two examples were Biloxi (Mississippi), where the local casino contracted for air service from various destinations, and Grand Bahamas Island, where a tourism board made a similar arrangement.

The third priority was to find profitable routes that did not involve Atlanta. In March 2000, 95 percent of AirTran’s flights were to or from Atlanta, and AirTran wanted to diversify, in part to make it less vulnerable to Delta. Diversification was hard because it meant either finding a good point-to-point route that other carriers had overlooked or building a new hub. AirTran spent a lot of time pursuing the opportunities that might be generated by a proposed merger between United Airlines and US Airways. The two carriers announced their intention merge in 2000, only to abandon the effort a year later, ostensibly because of anti-trust objections.5 AirTran decided to inaugurate service in Pittsburgh, figuring that the merged carrier would abandon or shrink that US Airways hub since it duplicated two hubs nearby. But US Airways fought back by increasing frequencies and matching fares, and AirTran discontinued most of the Pittsburgh routes shortly after United and US Airways gave up their merger proposal. COPY Despite the disappointment in Pittsburgh and the weakening economy, 2000 and the first two quarters of 2001 were highly profitable for AirTran. The airline ended 2000 with $78 million in cash on hand, and in April 2001 it retired $230 million in high-interest junk bonds that ValuJet had issued, replacing them with $180 million in bonds of its own. It had asked Boeing to buy $75 million of the new bonds, but Boeing had so much faith in the company that it took the whole offering. By the summer of 2001, AirTran was serving 34 cities (see Exhibit 4).

Delta and September 11. Delta was slow to react until June 2001, when it attacked across the board. In 27 non-stop markets that both carriers served from Atlanta, Delta matched AirTran’s conditions as well as its fares, eliminating both the round-trip purchase and Saturday night stay requirements.6 Although Delta had never served Akron-Canton to Atlanta before, it now inaugurated three daily roundNOT trips using McDonald-Douglas MD-80s with about 140 seats. It started or restored similar service to Midway Airport, Fort Walton Beach, Peoria (close to AirTran’s station at Bloomington), and other AirTran cities. Three months later, AirTran and the rest of the industry suffered a sharp drop in traffic after the terrorist attacks in New York and Washington, DC.

DO5 United stockholders had been skeptical of the merger, and their opposition helped kill the proposal. 6 Delta did not match AirTran in several important non-stop markets, including New York, Dallas, and Chicago. Delta also did not match fares and conditions for through traffic.

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AirTran reacted to these blows in part by seeking new ways to reduce costs and, after September 11, by cutting back service by 17 percent. Costs per seat-mile were cut by 8 percent between 2001 and 2002, partly by accelerating the retirement of the remaining old and fuel- inefficient B-737s and DC-9s. AirTran committed to buy additional B-717s, which Boeing made easier by agreeing to buy and lease back some of the B-717s that AirTran had already received.7 AirTran had exceptionally good relations with its unions, and these paid off when labor and management worked hard to cut back service without furloughing employees. Management took a 15-percent pay cut, while other employees, including unionized pilots and mechanics, voluntarily reduced pay, modified work rules, or shifted to part time or a four-day week. In the end, only 70 employees of a workforce of roughly 4,000 were involuntarily furloughed, and they were brought back within six months.

Delta’s retaliation hurt AirTran less than management had feared. “They were too late”, Healy explained. “We had already built up our Atlanta hub so it was very hard to take traffic away from us.” To hurt AirTran, moreover, Delta had to hurt itself even more since Delta carried the bulk of traffic to and through Atlanta and had higher costs. In November 2001, only two months after September 11, AirTran began to add cities again.

The Second Round of Expansion. Many of the priorities in the second round of expansion were the same as those in the first. AirTran placed renewed emphasisCOPY on cities where the local governments and/or businesses would provide it with revenue guarantees or other assistance. AirTran’s success with small cities was attracting attention, and it signed agreements and started service with Tallahassee, Wichita, Rochester, Pensacola, and Newport News.

In addition, AirTran continued to look for routes that did not involve Atlanta. One of the most important opportunities came in the fall of 2001, when US Airways announced that it would shutdown its MetroJet low-cost subsidiary, including its extensive Baltimore routes. Baltimore was accessible to much of the Washington metropolitan area, and AirTran assumed many of MetroJet’s old gates and routes. AirTran also began to overfly Atlanta by adding direct service to Orlando and Tampa from some of its largest northern cities, where the frequencies on the routes to Atlanta were already high. AddingNOT routes to Baltimore and direct to Florida improved the productivity of the customer service and ramp staff in stations on the periphery of AirTran’s network. By March 2003, the share of AirTran flights to or from Atlanta had dropped to 77 percent.

But priorities also changed in two ways. First, since Delta was continuing to attack most of AirTran’s Atlanta non-stop routes, there was no point in trying to pick cities that were too small for Delta. AirTran began to identify and add the largest cities within range of its B-717s that it did not already serve. Second, AirTran became increasingly concerned with adding routes where traffic peaked in the summer, to complement its Florida routes that peaked in the winter. “For DO 7 Under the new agreement with Boeing, AirTran would accept its 50th B-717 in 2002, and would add another 23 B- 717s to its fleet in 2003.

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most airlines the third quarter is the best”, Fornaro explained, “but our first two quarters are terrific while our third is weak.” (See Exhibits 7-10 for AirTran financial results.) These new priorities led AirTran to add Milwaukee, Kansas City, and Denver over the next year (see Exhibit 5). Western cities usually had traffic that peaked in the summer, as did Milwaukee, because of Wisconsin’s lakes. By March 2003, AirTran operated a fleet of 65 aircraft, all but ten new B-717s, that provided 446 daily departures to a network of 41 cities (Exhibit 6).

The Industry in 2003

The Majors. In 2003, the hot topic in the airline industry was how, or whether, the major carriers could recover. Airline profitability had always been cyclical, and the majors had been in trouble before. But most airline pundits thought this recession was more serious. The majors had gone too far in raising business fares in the 1990s, driving many business travelers to try the low- cost airlines or teleconferencing. Low cost airlines now carried almost 20 percent of all passengers, and their networks were now so extensive that there was a low-cost option for most business trips. Businesses would never be willing to pay the high fares of the 1990s again, the argument went, and without the business revenue the majors could not compete with their low-cost brethren.

There were several possibilities. One was that the majors would reduce their costs significantly. All of the majors were negotiating with their unions,COPY and several were talking about starting up low cost subsidiaries again. A few major airlines had gone bankrupt and emerged successfully and leaner in the early 1990s. But the gap between the majors and the leaders in the low-cost sector was enormous. Costs per ASM declined with flight distance, so it was important to adjust for distance when comparing companies. At comparable distances the majors were 50 to 100 percent more expensive than the best low-cost carriers (see Exhibit 11). The problems were productivity as much as wages. Southwest now paid about as much to a B-737 captain as one of the majors, but Southwest’s pilots flew 70 real hours a month while the majors’ pilots typically flew only 40 hours because of workrule and schedule constraints. Moreover, labor made up only a third of a typical major’s operating costs, so the cost savings had to come from many sources.

A second possibility was that the majors would shrink to a smaller network based largely on business travel. In this view,NOT the majors might use regional jets to maintain a relatively frequent schedule over an extensive network. Better still if the regional jets were operated under contract by a regional airline.

A final possibility was that one or more of the majors would be liquidated. United and US Airways were the prime candidates, as both were bleeding cash, United at the rate of $12 million a day. American was losing $5 million a day and preparing for bankruptcy, and Delta had a DOnegative cash flow and could not sustain itself for long without earning profits. The Other Low-cost Carriers. Another hot topic in the industry was which of the low-cost carriers had the most attractive business plan. AirTran’s strategy of offering both business and

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coach class service was unusual; most of the others offered only coach, although in different ways. Southwest was a favorite of investors, so much so that the company’s stock had a market value of $9 billion, more than the value of all the rest of the airlines combined. Southwest’s plan had remained the same, focusing on no-frills service and point-to-point routes, often from inexpensive secondary airports. But its route system was now so extensive and the frequencies on some routes so high, that passengers were increasingly making connections over its network.

The fastest rising stock in the airline industry belonged to JetBlue, which had started service in February 2000 and amazed everyone by earning a profit by the last quarter of that year. JetBlue focused on long-distance routes out of New York’s Kennedy Airport using brand new B- 757s configured with 199 coach seats. JetBlue’s seats had a 32-inch pitch, comparable to coach on the majors and Southwest8, but they were covered in leather rather than cloth. What drew the most attention, however, especially for families traveling with children, was a personal television screen at each seat with 24 channels of live TV to choose from. There was no meal service, but there were unlimited snacks and the staff was young and enthusiastic.

Yet another model that was in less favor was that of Midwest Express, a Milwaukee-based airline founded in 1984 that had pioneered an all first-class, long-distance service. Midwest Express charged prices similar to an unrestricted coach fare on a major carrier, but gave first-class service, including champagne and hot meals served on china. COPYIt operated routes from Milwaukee to both coasts, Florida, Atlanta, and Texas using a fleet of DC-9s and MD-80s configured with 84 and 116 first-class seats, respectively. Midwest Express had faired poorly in the last few years (Exhibit 13).

The low-cost carriers were beginning to compete with one another as they extended their networks. Southwest was so strong financially that most airlines, including the majors, were loath to take it on when it entered a market. Southwest had a major presence in Baltimore, and AirTran overlapped with some of Southwest’s Baltimore routes, particularly to Florida. But AirTran competed indirectly in most markets. For example, AirTran’s Boston services competed to some extent with Southwest’s Providence (Rhode Island) and Manchester (New Hampshire) service, but Southwest was not in Boston.NOT JetBlue had begun to take on Southwest in California, which was one of Southwest’s strongholds. JetBlue served New York to Los Angeles and New York to Oakland, and in October 2002 it began to serve Los Angeles to San Francisco, a short-haul market that Southwest dominated. That same fall, perhaps in retaliation, Southwest announced its first transcontinental service, from Baltimore to Los Angeles.9

DO8 AirTran’s coach seats had a 30-inch pitch while its business class seats were 40 inches apart. Delta Express, Delta’s low-cost carrier, also had coach seats with 30-inch pitch. 9 Southwest’s B-737s had a range up to 2,600 miles.

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The West Coast Decision

The Choice of Los Angeles. AirTran’s attempt to balance its winter traffic led it naturally to think of expanding west, since east-west routes peak in the summer. For a while it considered serving the West Coast with its B-717s by building an intermediate hub at Dallas-Fort Worth or Oklahoma City. In the end, it decided it would be easier to fly direct to Los Angeles, even if it had to introduce a new aircraft type into its fleet.

The Atlanta-Los Angeles market was attractive because it was huge and unstimulated. Los Angeles had one main airport--Los Angeles International—plus four secondary airports—Burbank (to the north), Ontario (to the east), Long Beach (to the south), and Orange County (further south). The local Atlanta-Los Angeles International market had as many passengers as Atlanta-Orlando, for example, but there were only eight daily Atlanta-Los Angeles non-stops (all on Delta) compared to 24 Atlanta-Orlando non-stops.10 If Atlanta-Los Angeles was stimulated with low fares and higher frequencies, the market might double. AirTran was concerned that if it didn’t enter soon, someone else might. The Atlanta-Las Vegas route offered similar stimulation potential.

The equipment problem was solved by negotiating to lease two Airbus 320s with crew and maintenance from an experienced operator. One plane would be used for Los Angeles and one for Las Vegas. The planes would have 162 seats (12 in business andCOPY 150 in coach) and be painted in AirTran colors and the crew would wear AirTran uniforms. The lease was for one year, and renewable. AirTran’s pilots agreed to let the airline contract for up to 10 percent of ASMs for service with other types of aircraft, so the company could try new services. The lease terms were very favorable, but if the routes were successful AirTran planned to use its own crews eventually, since that would save money.

Estimating Demand and Profits. John Kirby was responsible for preparing estimates of demand, fares, and profitability for new routes. Like most planners in the industry, he used a three-step process. The first step was to determine the current traffic and service on the route. The airlines had good data on passengers and fares because, in a holdover from the days of regulation, the government still requiredNOT that carriers report a sample of 10 percent of the tickets they issued. From this sample, Kirby knew that the “local” traffic—people with trips originating in Atlanta and terminating at Los Angeles International or vice versa—averaged 1550.8 passengers per day. Some of these 1550.8 passengers were travelling on Delta’s eight daily non-stops, and some were travelling over connecting flights through Dallas (on American), Phoenix (on America West), or a dozen other routings. In addition, there was an enormous potential through market. For example, the 2468 persons per day traveled between Newark and Los Angeles, many of them on non-stops DObut some on flights connecting through Atlanta and other hubs.

10 On Atlanta-Orlando, AirTran had 11 daily non-stops while Delta had 13 daily wide-body non-stops.

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The second step was to estimate how many existing passengers would use the new service by applying a “quality of service index” (QSI) model. The QSI model was another industry standby that dated from the days before deregulation. An airline’s share of a market was predicted based on the quality of service it offered relative to the total quality of service by all carriers. Quality of service was measured by weighting different types of flights according to their relative attractiveness to travelers. The weights had been developed over decades of experience, and most airlines used very similar weights. For a non-stop flight, for example, a wide-body jet (such as a B- 747) was worth 1.5 points, a standard narrow-body jet worth 1 point, a regional jet was 0.66, and a turbo-prop was only 0.18. One-stop or connecting flights were worth between 0.2 and .001 points, depending on the nature of the connection (see Exhibit 15). For example, the existing quality of service between Atlanta and Los Angeles International Airport was 14.234 QSI points. If AirTran offered two new non-stops, quality would increase to 16.234, and AirTran could expect to get 2/16.234 or 12.3 percent of the local market, which would amount to 191 passengers per day. Similarly, the existing quality of service was 15.05 from Newark to Los Angeles International and 12.904 from Los Angeles International to Newark. AirTran’s two flights would add 0.1 to each direction, which would mean it would get 0.66 percent of the westbound passengers and 0.77 percent of the eastbound passengers, for a total of 18 passengers per day. Airline planners sometimes adjusted the QSI forecasts if a carrier offered flights to many destinations from either the originating or terminating city. The idea was that passengers were likely to choose carriers with greater “presence”. But the importance of presence was thoughtCOPY to be declining with Internet search and booking.11

The third step in the analysis was to adjust for how lower fares might stimulate the market. The QSI model did not consider fares as a factor because it was developed before deregulation, when all carriers charged the same fare. AirTran’s experience was that its entry often reduced the average fare charged by 50 percent, stimulating the size of the market by 100 percent. But fares might not drop that much if they were already low because of a fare war between majors or prior entry by another low-cost carrier. The degree of stimulation was also thought to vary with the extent of the fare decline or the amount of new non-stop service, as well as with the nature of the cities involved. NOT For his baseline, or most likely, analysis of the Los Angeles route, Kirby focused on passengers using Los Angeles International Airport and assumed that AirTran would not draw significant numbers from the region’s four secondary airports. He also assumed that Delta would react by matching AirTran’s non-stop fares and by adding another daily non-stop, bringing its total to nine. Local fares would drop by only 15 percent below 2002 summer levels because they were already 25 percent below 2000 fares (due to heavy discounting since then). Kirby assumed that the stimulation of the local market would be 100 percent over summer 2002 levels because

DO11 Another adjustment often made to the QSI predictions was for “spill” for overcrowded flights. If there was a lot of variation in demand on a route by time of day or day of week, certain flights might be sold out even if the average load factor for the route was only 60 or 70 percent. The spill adjustment for the Los Angeles routes was minor.

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travel that summer was still depressed from the aftermath of September 11 and because Los Angeles was such a popular vacation and business destination. For through traffic using Atlanta- Los Angeles, Kirby assumed that average fares were already heavily discounted to compensate for the connection, and thus would decline only slightly. He also assumed that the through market would not be stimulated because fares were not going down or service improving greatly.

The baseline forecast, shown in Exhibit 16, predicted that AirTran’s two round trips would carry a total of 591.3 passengers per day in the second quarter, of which 337.4 would be local passengers and 253.9 would be through passengers connecting at Atlanta. It would cost AirTran $24.1 million per year to operate the two Los Angeles flights, including the leases for the aircraft and crew, the cost of the new Los Angeles station, and marketing. The flights would generate $31.8 million per year in revenue on the Los Angeles-Atlanta segment, for a profit of $7.7 million and an operating margin of 24 percent, well above AirTran’s average. An additional $3.4 million in fare revenue from through passengers was allocated to the flight segments they used beyond Atlanta; including that, the profits from the new route would be $11.1 million per year.12

Kirby prepared dozens of other forecasts for the Los Angeles route to test the sensitivity of the traffic and profits to assumptions. The results suggested that AirTran would not lose money even with fairly pessimistic assumptions. Assuming and extra round trip by Delta and a 15 percent reduction in local fares and no local stimulation, for example,COPY AirTran still earned an operating profit, although just barely. Based on these forecasts, Healy, Fornaro, and Leonard approved the route.

The Announcements. Days before AirTran was set to announce the route, JetBlue announced the inauguration of three daily round trips between Long Beach Airport and Atlanta. AirTran’s management knew that JetBlue’s move was aimed against Delta. JetBlue had been eating into Delta’s lucrative traffic between New York and Florida, and Delta had announced in January the creation of a new low-cost subsidiary, Song, intended specifically to counter JetBlue. Many industry observers doubted that Song would ever have JetBlue’s low costs, since the crews would be recruited from Delta. But Delta announced that Song would start as an all-coach airline in the summer, and would phaseNOT in aircraft with individual TV monitors beginning in the fall. AirTran’s management decided to postpone announcing their Los Angeles service for two weeks, partly to revisit its strategy and partly to avoid giving the impression that it was reacting to JetBlue. Long Beach carried a fraction of the passengers traveling to or from the Los Angeles metropolitan area (Exhibit 13), and there seemed to be room for both JetBlue and AirTran in the Los Angeles-Atlanta market. On March 4, AirTran went public with its plans for its Los Angeles

DO12 AirTran followed the convention of most airlines in allocating the fares paid by through or connecting passengers to the different segments in proportion to the mileage of those segments. Thus the bulk of the through traffic revenue was allocated to the Los Angeles-Atlanta segment, which was 1946 miles while the typical segment beyond Atlanta was 500 miles.

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and Las Vegas services. Two days later, Delta announced its five new non-stops to Los Angeles International.

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Exhibit 1 Performance of the U.S. Airline Industry, 1950-2001 Passenger Revenue per Estimated Passengers miles passenger Average return on enplaned carried mile (in 2000 trip length Load factor investment Year (millions) (billions) cents) (miles) (%) (%) Before deregulation 1950 19.2 10.2 40.9 431 60.8 n.a. 1960 57.9 38.9 31.7 671 59.3 3.3 1970 169.9 131.7 21.3 775 49.6 1.5 1975 205.1 162.8 20.3 794 53.7 2.5 1978 274.7 226.8 18.4 825 61.5 13.0 After deregulation 1979 316.7 262.0 17.8 827 63.0 7.0 1980 296.9 255.2 20.7 860 59.0 5.8 1981 286.0 248.9 21.1 870 58.6 5.3 1982 294.1 259.6 19.0 883 59.0 2.7 1983 318.6 281.8 18.0 885 60.6 5.9 1984 344.7 305.1 18.2 885 59.2 9.9 1985 382.0 336.4 16.9 881 61.4 9.6 1986 418.9 366.5 15.5 875 COPY 60.3 4.9 1987 447.7 404.5 15.3 903 62.3 7.2 1988 454.6 423.3 15.9 931 63.0 11.0 1989 453.7 432.7 16.0 954 63.2 6.3 1990 465.6 457.9 15.8 984 62.4 -6.0 1991 452.3 448.0 15.2 990 63.0 -0.7 1992 475.1 478.6 14.6 1007 64.0 -9.0 1993 488.5 489.7 14.9 1002 64.0 -0.4 1994 528.8 519.2 14.1 982 66.2 5.2 1995 547.8 540.4 14.1 987 67.0 11.9 1996 581.2 578.7 14.0 996 69.3 11.5 1997 599.1 605.6 13.8 1,011 70.3 14.7 1998 612.9 618.1 13.6 1,008 70.7 12.0 1999 636.0 651.6NOT 13.2 1,025 71.0 11.1 2000 666.2 692.8 13.5 1.040 72.4 6.4 2001 622.1 651.7 12.3 1,047 70.0 -6.9 Percent change 1960-1978 +374% +483% -42% +24% +15% 1978-2000 +143% +205% -27% +26% +18% Source: Air Transport Association, Air Transport: The Annual Report of the Scheduled U.S. Airline Industry, various years. Revenue per passenger mile is deflated using the GDP deflator from Council of Economic DOAdvisers, Economic Report of the President (Washington, DC: US Government Printing Office, 2002), p. 324.

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Exhibit 2 Dispersion of Airline Coach Fares, 1992-1998 Year and length Fares by percentile (median = 100) of flight 10th 25th 50th 75th 90th 95th Short haul (750 miles or less) 1992 44 68 100 150 200 250 1995 46 71 100 150 250 300 1998 47 67 100 170 270 330 Medium haul (751-1500 miles) 1992 50 68 100 150 210 250 1995 65 77 100 150 250 300 1998 60 75 100 140 270 370 Long haul (over 1500 miles) 1992 50 67 100 140 210 240 1995 65 80 100 140 260 330 1998 56 77 100 150 290 400 Note: Excludes frequent flyer tickets. Source: Transportation Research Board, Entry and Competition in the U.S. Airline Industry (Washington, DC: National Research Council, 1999), p. 31. Exhibit 3 COPY U.S. Domestic Passenger Share by Type of Airline, 1990-2001 Majors Low-fare Regional Othera 1990 75.8% 7.0% 9.1% 8.1% 1991 75.1% 7.5% 9.4% 7.9% 1992 75.4% 7.7% 10.4% 6.5% 1993 72.6% 10.1% 10.9% 6.3% 1994 70.8% 11.6% 10.9% 6.6% 1995 68.7% 13.5% 10.7% 7.1% 1996 67.7% 13.8% 10.9% 7.5% 1997 67.6% 13.8% 11.3% 7.3% 1998 66.7% 13.9% 11.9% 7.5% 1999 65.2% NOT14.7% 12.6% 7.6% 2000 63.8% 15.5% 13.0% 7.7% 2001 61.4% 17.1% 13.7% 7.9% a Airlines that are not distinctly majors, regionals or low fare airlines, which in 2001 included Alska, Midway, Midwest Express, Aloha, America West, Hawaiian, and others. Source: Raymond James & Associates, Inc., Growth Airline Conference: The Source for Post-Deregulation Airlines DO(Raymond James Equity Research, January 30, 2003), p. 16.

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Exhibit 4 AirTran Airways Summer 2001 Route Network

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Exhibit 5 AirTran Airways Route Additions Since Summer 2001

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Exhibit 6 AirTran Airways March 2003 Route Network

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Exhibit 7 Selected Financial and Operating Data for AirTran, 1997-2002

2002 2001 2000 1999 1998 1997

Financial Data (in 000s except share data) Operating revenues $733,370 $665,164 $624,094 $523,468 $439,307 $211,456 Net income (loss) 10,745 (2,757) 47,436 (99,394) (40,738) (96,663) Earnings (loss) per share 0.15 (0.04) 0.72 (1.53) (0.63) (1.72) Total assets at year-end 473,450 497,816 546,255 467,014 976,406 433,864 Long-term debt obligations 210,173 268,211 427,903 415,688 245,994 250,712 Operating Data: Revenue passengers 9,653,77 8,302,73 7,566,98 6,460,53 5,462,82 3,005,73 7 2 6 3 7 1 Revenue passenger miles (RPMs) 5,581,26 4,506,00 4,115,74 3,473,49 3,244,53 1,597,58 3 7 5 0 9 5 Available seat miles (ASMs) 8,255,80 6,537,75 5,859,39 5,467,55 5,442,23 3,017,89 9 6 5 6 4 2 Passenger load factor 67.6% 68.9% 70.2% 63.5% 59.6% 52.9% Break-even load factor 66.7% 66.3% 64.7%COPY 59.4% 61.5% 76.4% Passenger rev. in cents per RPM 12.79 14.39 14.70 14.01 12.97 12.58 Passenger rev. in cents per ASM 8.64 9.92 10.32 8.90 7.73 6.66 Operating cost in cents per ASM a 8.51 9.33 9.27 8.19 7.91 9.37 Operating cost/ASM excluding 6.64 7.20 6.87 6.94 6.59 7.75 fuela Average stage length (miles) 567 541 537 528 546 468 Average cost of fuel $ per gallon 10:36 93.85 100.89 49.95 54.87 69.00 Average daily utilization 9:54 10.18 9:54 9:42 8:25 Operating aircraft at end of 65 59 53 47 50 53 period Of which DC-9 15 29 33 35 40 43 Of which B-737 NOT0 0 4 4 10 10 Of which B-717 50 30 16 8 0 0 Source: AirTran 10K reports --a Operating cost per ASM excludes the government stabilization grants received in 2001 and 2002 as well as the special impairment of $46 million for the early retirement of B-737 and DC-9s taken in 2001. DO

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Exhibit 8 AirTran Consolidated Statement of Operations, 1999-2002 (In thousands, except per data share; year ended December 31) 2002 2001 2000 1999 Operating Revenues: Passenger $713,711 $648,486 $604,826 $486,487 Cargo 1,206 1,937 4,183 3,888 Other 18,453 14,741 15,085 33,093 Total operating revenues 733,370 665,164 624,094 523,468 Operating Expenses: Salaries, wages and benefits 203,435 159,057 137,391 120,737 Aircraft fuel 154,467 139,355 140,404 68,331 Maintenance, materials and repairs 47,288 68,670 73,238 86,374 Distribution 43,115 45,400 39,972 37,278 Landing fees and other rents 42,291 35,672 28,752 27,004 Marketing and advertising 20,967 18,468 16,412 15,643 Aircraft rent 72,690 35,363 12,616 4,869 Aircraft insurance & security services 29,323 12,511 --a --a Depreciation 17,072 28,159 23,087 28,533 Other operating 72,159 67,188 71,071a 58,952a Impairment loss/lease termination -- 46,069 - 147,735 Special charges -- 2,494 - - Government grant (640) (28,951) - - Total operating expenses 702,167 629,455 542,943 595,456 Operating Income (Loss) 31,203 35,709COPY 81,151, (71,988) Operating margin Other (Income) Expenses Interest income (2,102) (4,959) (5,602) (3,183) Interest expense 29,203 37,441 39,317 27,850 Convertible debt and discount -- 4,291 - - amortization SFAS 133 adjustment (5,857) (2,204) - - Other (income) expense, net 21,244 34,569 33,715 24,667 Income (Loss) Before Income Taxes 9,959 1,140 47,436 (96,655) and Cumulative Effect of Change in Accounting Principle Provision for income taxes (786) 3,240 - 2,739 Income (Loss) Before Cumulative 10,745 (2,100) 47,436 (99,394) Effect of Change in AccountingNOT Principle Cumulative effect of change in -- (657) - - accounting principle, net of tax Net Income (Loss) 10,745 (2,757) 47,436 (99,394) Source: AirTran 10K reports. DOa Aircraft insurance and security services are included in other operating before 2001.

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Exhibit 9 AirTran Consolidated Balance Sheets, 2000-2002 (In thousands, except per share data) 2002 2001 2000 ASSETS Current Assets: 104.151 $103,489 $78,127 Cash and cash equivalents 34,173 26,540 25,710 Accounts receivable 19,120 7,367 9,388 Spare parts, materials and supplies 9,250 8,228 10,536 Government grant receivable 4,333 - Prepaid expenses and other current assets 7,756 9,731 10,852 Total current assets 174,450 159,688 134,613

Property and Equipment Flight equipment 225,078 235,665 340,952 Less: Accumulated depreciation (22,970) (14,871) (23,300) 202,108 220,794 317,652 Purchase deposits for flight equipment 5,544 39,396 26,194 Other property and equipment 39.705 31,407 27,461 Less: Accumulated depreciation (18,433) (16,733) (16,018) 21,272 14,674 11,443 Total property and equipment 228,924 274,864 355,289 Other Assets: Intangibles resulting from business acquisition 12,286 12,286 15,080 Trademarks and trade names 21,567COPY 21,567 22,401 Debt issuance costs 8,381 9,855 5,608 Other assets 27,842 19,556 13,264 $473,450 $497,816 $546,255 Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Accounts payable $4,501 $8,231 $8,678 Accrued and other liabilities 80,155 108,269 59,859 Air traffic liability 57,180 38,457 33,765 Current portion of long-term debt 10,460 13,439 62,491 Total current liabilities 152,296 168,396 164,793 Long-term debt, less current portion 199,713 254,772 365,412 Other liabilities NOT69,556 41,241 8190 Commitments and Contingencies Stockholders’ Equity: Preferred stock, no shares issued or outstanding - - - Common stock, $.001 par value; 1,000,000 shares authorized; 69,528 and 65,823 shares outstanding at 12/31/00 and 12/31/01 respectively 71 70 66 Additional paid-in capital 187,885 186,190 151,044 Accumulated other comprehensive loss (809) (6,846) - Accumulated deficit (135,262) (146,007) (143,250) Total stockholders’ equity 51,885 33,407 7860 TotalDO liabilities and stockholders’ equity $473,450 $497,816 $546,255 Source: AirTran 10K reports

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Exhibit 10 Selected AirTran Financial Results by Quarter, 2000-2002 Year and financial data (data in 000s except per share) First quarter Second quarter Third quarter Fourth quarter 2000 Operating revenues 132,408 160,769 161,459 169,458 Operating income 11,838 31,622 17,103 20,588 Net income (loss) 2,902 22,588 8,891 13,055 Earnings (loss) per share 0.04 0.33 0.14 0.20 2001 Operating revenues 173,743 205,763 150,677 134,981 Operating income 17,932 22,485 1,766 (6,474) Net income (loss) 8,800 13,195 (10,594) (14,158) Earnings (loss) per share 0.13 0.18 (0.15) (0.20) 2002 Operating revenues 155,689 185,700 178,000 200,270 Operating income (2,932) 12,200 7,000 14.361 Net income (loss) (3,034) 5,100 500 7,503 Earnings (loss) per share (0.04) 0.07 0.01 0.11 Source: AirTran 10K and 10Q reports; 2002Q4 from AirTran press release

Exhibit 11 Cost Per Available Seat Mile (ASM) for Selected Carriers and Stage Lengths, in 2002 500 Miles 1000 Miles 2500 Miles Cents per Cents per Cents per ASM Index ASMCOPY Index ASM Index Low cost AirTran 8.8 116 7.2 111 -a -a Jet Blue 10.7 141 6.9 106 4.6 100 Southwest 7.6 100 6.5 100 5.1 111 National majors American 13.9 183 10.4 160 8.2 178 Continental 15.8 208 12.1 186 9.8 213 Delta 11.6 153 9.3 143 8.0 174 Northwest 12.8 168 9.7 149 7.9 172 United 14.9 196 11.2 172 8.9 193 US Airways 15.8 208 13.2 203 11.6 252 Others Alaska 11.8 155 8.4 129 6.0 130 American West 9.7 128 7.7 118 6.4 139 ATA 11.0 145 7.9 122 6.0 130 Frontier 10.5 138 8.1 125 6.3 137 NOT a a Spirit 10.5 138 7.5 115 - - Notes: a Costs at 2,500 miles not available for AirTran and Spirit because neither airline operates aircraft with sufficient range. Source: Estimates by Unisys R2A cost calculator as reported by Raymond James & Associates, Inc., Growth Airline Conference: The Source for Post-Deregulation Airlines (Raymond James Equity Research, January 30, 2003), DOpp. 30-31.

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Exhibit 12 Selected Financial and Operating Data for American, Delta, United and US Airways (in millions except operating margin, load factor, and cost per ASM) American a Delta 2002 2001 2000 2002 2001 2000 Passenger revenue 15,772a $17,158 a $17,846 a $12,321 $12,964 $15,657 Other revenue 1,527 1,704 1,723 984 915 1,094 Total revenue 17,299 18,963 19,073 13,305 13,879 16,741 Operating expense 20,629 21,433 18,322 14,614 b 15,481 b 15,104 Operating income (3,330) (2,470) 1,381 (1,309) (1,602) 1,637 Operating margin -16.1% -5.3% +4.1% -9.0% -8.0% +10.4% Other inc. (expense) (530) (286) (94) (693) (262) b (88) Earngs before tax & chgs (3,860) (2,756) 1,287 (2,002) (1,864) 1,549 Accounting changes (988) (100) Inc. after tax & changes (3,511) (1,762) 778 (1,272) (1,019.8) 897.8 RPMs 121,747 120,606 116,594 102,029 101,717 112,998 ASMs 172,200 174,688 161,030 141,719 147,837 154,974 Load factor 70.7% 69.0% 72.4% 72.0% 68.8% 72.9% Breakeven load factor 87.2% 79.2% 65.9% 79.6% 74.7% 64.8% Op. cost in cents/ASM 10.78 11.07 10.48 10.41 10.31 9.74 United US Airways 2002 2001 2000 2002 2001 2000 Passenger revenue $11,872 $13,788 $16,931 n.a. $7,164 $8,341 Other revenue 2,414 2,350 2,420 n.a. 1,124 928 Total revenue 14,286 16,138 19,352 6,980 8,288 9,269 Operating expense 17,123 19,909 18,698 COPY 8,290 9,971d 9,322 Operating income (2,837) (3,771) 654 (1,310) (1,683) (53) Operating margin -16.6% -18.9% +3.5% -15.8% -16.8% -0.6% Other inc. (expense) (358)c 414c (213) n.a. (169) (170) Earngs before tax & chgs (3,195) (3,357) 431 n.a. (1,852) (223) Accounting changes (10) (8) (215) n.a. Inc. after tax & changes (3,212) (2,145) 50 (1,650) (2,117) (269) RPMs 109,459 116,635 126,933 n.a. 45,979 47,012 ASMs 148,827 164,849 175,485 n.a. 66,704 66,851 Load factor 73.5% 70.8% 72.3% 71.0% 68.9% 70.3% Breakeven load factor 91.9% 90.1% 69.4% n.a. 80.8% 73.0% Op. cost in cents/ASM 11.33 11.24 10.6 12.10 12.46 12.72 Source: 2000 and 2001 from SEC 10K reports; 2002 from company press releases. a Financial statistics include AMR Eagle, a commuter subsidiary, as well as . Operating statistics exclude AMR Eagle but include TWA after April 109, 2001. b Includes stabilization grant of $634 million in 2001 and $34 million in 2002 for Delta. c Includes stabilization grant of $652NOT million in 2001 and $46 million in 2002 for United. d Includes stabilization grant of $320 million in 2001 and $??? million in 2002 for US Airways. DO

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Exhibit 13 Selected Financial and Operating Data for Southwest, JetBlue, and MidWest Express (in millions except operating margin, load factor, and cost per ASM) Southwest JetBlue 2002 est 2001 2000 2002 est 2001 2000 Passenger revenue $5,241.6 $5,408.7 $5,468.0 $607.2 $310.5 $101.7 Other revenue 19.6 9.9 3.0 Total revenue 5,425.4 5,585.2 5,649.6 626.8 320.4 104.6 Operating expense 5,085.4 4,883.1 4,628.4 527.3 293.6 125.8 Operating income 340.0 702.1 1,021.1 99.5 26.9 (21.2) Operating margin 6.3% 12.6% 18.3% 15.9% 8.4% -20.3% Pretax income 279.2 668.7 1,017.3 90.5 23.3 (21.6) Income after tax 173.0 419.9 625.2 53.1 22.9 (21.3) Income after tax and accounting changes RPMs 45,391.7 44,492.9 42,215.1 6,835.8 3,281.8 1,004.5 ASMs 68,856.7 65,295.3 59,909.9 8,240.1 4,208.3 1,371.8 Load factor 65.9% 68.1% 70.5% 83.0% 78.0% 73.2% Breakeven load factor Cost per ASM $0.074 $0.075 $0.077 $0.064 $0.070 $0.092 Midwest Express 2002 est 2001 2000 Passenger revenue $378.0 $414.2 $439.4 Other revenue 47.4 45.3 40.6 Total revenue 425.4 457.4 480.0 Operating expense 452.5 486.6 475.8 Operating income (27.1) (29.2) 4.2 COPY Operating margin -6.4% -6.4% 0.9% Other inc. (expense) (2.1) (2.0) 1.0 Pretax income (29.2) (31.2) 5.2 Income after tax (18.3) (19.6) 3.5 Income after tax and accounting changes RPMs 2,159.5 2,124.4 2,087.1 ASMs 3,586.5 3,544.1 3,410.9 Load factor 60.2% 59.9% 61.2% Breakeven load factor Cost per ASM $0.124 $0.136 $0.138 Source: Raymond James & Associates, Inc., Growth Airline Conference: The Source for Post-Deregulation Airlines (Raymond James Equity Research,NOT January 30, 2003), pp. 101, 136, and 200. DO

27 AirTran Airways’ West Coast Service ______CR14-05-1789.0

Exhibit 14 Airports in the Los Angeles Metropolitan Area Distance from Enplaned passengers Airport downtown LA 2001 2002 Los Angeles International (LAX) 17 miles southwest 61,606,204 n.a. Long Beach (LGB) 22 miles south 295.786 731,279 Ontario (ONT) 52 miles east 6,702,400 6,517,050 John Wayne/Orange County (SNA) 42 miles southwest 3,672.827 3,957,565 Burbank-Glendale (BUR) 15 miles northwest 2,250,685 n.a.

Exhibit 15 Typical Weights Used in Quality of Service Index (QSI) Analysis Type of flight Type of aircraft Direct Widebody jet Narrowbody jet Regional jet Turboprop Non-stop 1.50 1.00 0.66 0.18 One-stop 0.20 0.15 0.10 0.04 Connecting Jet to jet Jet to turbo Turbo to turbo On-line single 0.05 0.018 0.008 Off-line single 0.0025 0.0014 0.0004 On-line double 0.0025 0.002 0.001 Source: AirTran COPY

NOT DO

28 AirTran Airways’ West Coast Service ______CR14-05-1789.0

Exhibit 16: Base Case Estimates of Traffic for Los Angeles Route (For average day in 2003Q2 based on average day in 2002Q2) Flight 2500: ATL-LAX, depart 10:00, arrive 11:25 Pass. Pass. Pass. in Fare in Total Itinerary Itinerary Adjuste Adjuste origin dest. 2002Q2 2002Q2 QSI QSI pass d pass. d fare ATL LAX 775.4 209 17.234 1.000 47.4 90.0 177.7 BMI LAX 6.8 158 0.358 0.050 0.9 0.9 158.0 BUF LAX 135.9 126 1.854 0.050 3.7 3.7 126.0 BWI LAX 619.8 174 7.486 0.050 4.1 4.1 174.0 CAK LAX 8.6 173 0.726 0.050 0.6 0.6 173.0 DAY LAX 65.2 192 1.748 0.050 1.9 1.9 192.0 EWR LAX 1,193.5 213 15.150 0.050 3.9 3.9 202.4 FLL LAX 417.4 147 5.100 0.050 4.1 4.1 147.0 FNT LAX 8.5 181 0.568 0.050 0.7 0.7 181.0 GSO LAX 52.3 206 1.540 0.050 1.7 1.7 195.7 IAD LAX 674.2 293 12.980 0.050 2.6 2.6 278.4 JAX LAX 120.8 145 1.676 0.050 3.6 3.6 145.0 LGA LAX 358.8 193 4.586 0.050 3.9 3.9 183.4 MCO LAX 544.4 178 9.718 0.050 2.8 2.8 178.0 MEM LAX 115.8 227 4.508 0.050 1.3 1.3 215.7 MSY LAX 356.6 148 4.700 0.050 3.8 3.8 148.0 PHF LAX 6.3 202 0.204 0.050 1.5 1.5 202.0 PHL LAX 660.0 206 12.854 0.050 COPY 2.6 2.6 195.7 PIT LAX 207.2 195 7.154 0.050 1.4 1.4 185.3 PNS LAX 24.3 206 0.740 0.050 1.6 1.6 206.0 RDU LAX 229.8 141 3.118 0.050 3.7 3.7 141.0 SAV LAX 30.6 211 0.998 0.040 1.2 1.2 211.0 TLH LAX 12.3 204 0.480 0.040 1.0 1.0 204.0 TPA LAX 316.8 155 4.250 0.050 3.7 3.7 155.0 Total 103.7 146.5 Flight 2501: LAX-ATL depart 12:25, arrive 19:25 Pass. Pass. Pass. in Fare in Total Itinerary Itinerary Adjuste Adjuste origin dest. 2002Q2 2002Q2 QSI QSI pass d pass. d fare LAX ATL 775.4 206 17.234 1.000 43.0 90.0 175.1 LAX BMI 6.5 165 0.308 0.050 1.1 1.1 165.0 LAX BWI 641.1 170 7.372 0.050 4.3 4.3 170.0 LAX CAK NOT8.6 169 0.590 0.050 0.7 0.7 169.0 LAX DAY 64.6 189 1.348 0.050 2.4 2.4 189.0 LAX EWR 1,274.5 214 13.004 0.050 4.9 4.9 203.3 LAX FLL 418.9 141 4.900 0.050 4.3 4.3 141.0 LAX FNT 8.7 186 0.436 0.050 1.0 1.0 186.0 LAX GSO 51.9 201 1.144 0.050 2.3 2.3 191.0 LAX IAD 690.3 294 15.662 0.050 2.2 2.2 279.3 LAX JAX 121.5 145 1.300 0.050 4.7 4.7 145.0 LAX LGA 357.5 189 4.236 0.050 4.2 4.2 179.6 LAX MCO 540.2 176 7.668 0.050 3.5 3.5 176.0 DOLAX MEM 113.7 224 4.440 0.050 1.3 1.3 212.8 LAX MSY 354.1 145 4.600 0.050 3.8 3.8 145.0 LAX PHF 5.7 201 0.254 0.050 1.1 1.1 201.0

29 AirTran Airways’ West Coast Service ______CR14-05-1789.0

LAX PHL 665.4 203 12.686 0.050 2.6 2.6 192.9 LAX PIT 208.3 196 6.754 0.050 1.5 1.5 186.2 LAX PNS 27.6 199 0.590 0.050 2.3 2.3 199.0 LAX RDU 239.6 139 2.854 0.050 4.2 4.2 139.0 LAX SAV 29.6 209 0.708 0.040 1.7 1.7 209.0 LAX TLH 12.2 216 0.558 0.040 0.9 0.9 216.0 LAX TPA 323.2 152 3.750 0.050 4.3 4.3 152.0 Total 102.3 149.4 Flight 2502: ATL-LAX depart 20:50, arrive 22:20 Pass. Pass. Pass. in Fare in Total Itinerary Itinerary Adjuste Adjuste origin dest. 2002Q2 2002Q2 QSI QSI pass d pass. d fare ATL LAX 775.4 209 17.234 1.000 47.4 78.7 167.2 BMI LAX 6.8 158 0.358 0.050 0.9 0.9 158.0 BOS LAX 790.4 218 12.704 0.050 3.1 3.1 207.1 BUF LAX 135.9 126 1.854 0.050 3.7 3.7 126.0 BWI LAX 619.8 174 7.486 0.050 4.1 4.1 174.0 DAY LAX 65.2 192 1.748 0.050 1.9 1.9 192.0 EWR LAX 1,193.5 213 15.150 0.050 3.9 3.9 202.4 FLL LAX 417.4 147 5.100 0.050 4.1 4.1 147.0 FNT LAX 8.5 181 0.568 0.050 0.7 0.7 181.0 GPT LAX 11.5 194 0.368 0.050 1.6 1.6 184.3 GSO LAX 52.3 206 1.540 0.050 1.7 1.7 195.7 IAD LAX 674.2 293 12.980 0.050 2.6 2.6 278.4 JAX LAX 120.8 145 1.676 0.040 COPY 2.9 2.9 145.0 LGA LAX 358.8 193 4.586 0.050 3.9 3.9 183.4 MCO LAX 544.4 178 9.718 0.050 2.8 2.8 178.0 MEM LAX 115.8 227 4.508 0.050 1.3 1.3 215.7 MIA LAX 402.3 223 12.400 0.050 1.6 1.6 211.9 PBI LAX 108.4 153 1.150 0.050 4.7 4.7 153.0 PHL LAX 660.0 206 12.854 0.050 2.6 2.6 195.7 PIT LAX 207.2 195 7.154 0.050 1.4 1.4 185.3 PNS LAX 24.3 206 0.740 0.040 1.3 1.3 206.0 ROC LAX 47.2 171 1.472 0.050 1.6 1.6 162.5 RSW LAX 42.1 196 1.104 0.050 1.9 1.9 186.2 SAV LAX 30.6 211 0.998 0.040 1.2 1.2 211.0 TLH LAX 12.3 204 0.480 0.040 1.0 1.0 204.0 TPA LAX 316.8 155 4.250 0.050 3.7 3.7 155.0 Total NOT 107.6 139.1 Flight 2503: LAX-ATL depart 23:45, arrive 07:00 Pass. Pass. Pass. in Fare in Total Itinerary Itinerary Adjuste Adjuste origin dest. 2002Q2 2002Q2 QSI QSI pass d pass. d fare LAX ATL 775.4 206 17.234 1.000 43.0 78.7 164.8 LAX BMI 6.5 165 0.308 0.050 1.1 1.1 165.0 LAX BOS 790.8 221 11.950 0.050 3.3 3.3 210.0 LAX BUF 135.7 124 1.586 0.050 4.3 4.3 124.0 LAX BWI 641.1 170 7.372 0.050 4.3 4.3 170.0 LAX CAK 8.6 169 0.590 0.050 0.7 0.7 169.0 DOLAX DAY 64.6 189 1.348 0.050 2.4 2.4 189.0 LAX EWR 1,274.5 214 13.004 0.050 4.9 4.9 203.3 LAX FLL 418.9 141 4.900 0.050 4.3 4.3 141.0

30 AirTran Airways’ West Coast Service ______CR14-05-1789.0

LAX FNT 8.7 186 0.436 0.050 1.0 1.0 186.0 LAX GSO 51.9 201 1.144 0.040 1.8 1.8 191.0 LAX IAD 690.3 294 15.662 0.050 2.2 2.2 279.3 LAX JAX 121.5 145 1.300 0.050 4.7 4.7 145.0 LAX LGA 357.5 189 4.236 0.050 4.2 4.2 179.6 LAX MCO 540.2 176 7.668 0.050 3.5 3.5 176.0 LAX MEM 113.7 224 4.440 0.050 1.3 1.3 212.8 LAX MIA 405.8 221 11.668 0.050 1.7 1.7 210.0 LAX MSY 354.1 145 4.600 0.050 3.8 3.8 145.0 LAX PBI 110.3 153 0.750 0.050 7.4 7.4 153.0 LAX PHF 5.7 201 0.254 0.050 1.1 1.1 201.0 LAX PHL 665.4 203 12.686 0.050 2.6 2.6 192.9 LAX PIT 208.3 196 6.754 0.050 1.5 1.5 186.2 LAX PNS 27.6 199 0.590 0.040 1.9 1.9 199.0 LAX RDU 239.6 139 2.854 0.050 4.2 4.2 139.0 LAX ROC 47.4 169 1.404 0.050 1.7 1.7 160.6 LAX RSW 41.3 190 0.936 0.050 2.2 2.2 180.5 LAX TLH 12.2 216 0.558 0.050 1.1 1.1 216.0 LAX TPA 323.2 152 3.750 0.050 4.3 4.3 152.0 Total 120.5 156.3 Daily revenue Average fare Allocated to Flight Miles Pass. Total Segment Total Segment 2500 1,946 146.5 25,931 COPY 23,920 177 163 2501 1,946 149.4 26,225 24,166 176 162 2502 1,946 139.1 24,054 21,692 173 156 2503 1,946 156.3 26,347 23,482 169 150 Total 7,784 591.3 102,557 93,260 173 158 Assumptions: Another airline offers one additional daily round trip over 2002Q2 schedule. In local markets, fares drop 15 percent on daytime trips and 20 percent on redeye from 2002Q2 levels ( a 25 to 30 percent reduction in full fare vs. full year 2000). Local market stimulation is 100 percent for daytime trips, 75 percent for redeye. In through markets a 5 percent fare reduction but no stimulation. Exceptions are IAD where 30 percent reduction of very high fare ($223) is assumed to stimulate market by 30 percent. Also small stimulation in BMI, CAK, DAY, FNT, PHF, PNS, SAV, and TLH-WN markets. Airport codes: ATL Atlanta GPT Gulfport/Biloxi PHL Philadelphia BMI Bloomington GSO Greensboro PIT Pittsburgh BOS Boston IAD Dulles (Wash., DC) PNS Pensacola BUF Buffalo JAX Jacksonville RDU Raleigh/Durham BWI Baltimore/Wash. NOTLGA LaGuardia (NY) ROC Rochester CAK Akron/Canton MCO Orlando RSW Fort Meyers DAY Dayton MEM Memphis SAV Savannah EWR Newark MIA TLH Tallahassee FLL Fort Lauderdale PBI West Palm Beach TPA Tampa FNT Flint PHF Newport News. Other airports served by AirTran: DEN Denver ICT Wichita MLI Moline/Quad Cities DFW Dallas/Fort Worth MCI Kansas City MSP /St Paul FPO Grand Bahamas MDW Midway (Chicago) MSY New Orleans DOHOU Hobby (Houston) MKE Milwaukee MYR Myrtle Beach

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