Evolution of the Airline Industry Evolution of the Airline Industry - - PowerPoint PPT Presentation

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Evolution of the Airline Industry Evolution of the Airline Industry Since Deregulation Since Deregulation g Robinson Economic Forecasting Conference at Georgia State University Robinson Economic Forecasting Conference at Georgia State


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SLIDE 1

Evolution of the Airline Industry Evolution of the Airline Industry Since Deregulation Since Deregulation g

Robinson Economic Forecasting Conference at Georgia State University November 2008 Robinson Economic Forecasting Conference at Georgia State University November 2008

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SLIDE 2

C t i f th t t t t i d h i h ld b id d “f d l ki t t t ” i l di ithi th i f th P i t

Safe Harbor

Certain of the statements contained herein should be considered “forward-looking statements,” including within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may be identified by words such as “may”, “will”, “expect,” “intend,” “indicate,” “anticipate,” “believe,” “forecast,” “estimate,” “plan, “ “guidance,” “outlook,” “could, “ “should,” “continue” and similar terms used in connection with statements regarding the outlook of AirTran Holdings, Inc., (the “Company” or “AirTran”). Such statements include, but are not limited to, statements about the Company’s: expected financial performance and operations, expected fuel costs, the revenue and pricing environment, future financing plans and needs, overall economic condition and its business plans, objectives, expectations and intentions. Other forward-looking statements that do not relate solely to historical facts include, without limitation, statements that discuss the possible future effects of current known trends or uncertainties or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. Such statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties that could cause the Company’s actual results and financial position to differ materially from the Company’s expectations. Such risks and uncertainties include, but are not limited to, the following: the Company’s ability to grow new and existing markets, the Company’s ability to maintain or expand cost advantages in comparison to various competitors, the impact of high fuel costs; significant disruptions in the supply of aircraft fuel and further significant increases to fuel prices; the Company’s ability to attract and retain qualified personnel; labor costs and relations with unionized employees generally and the impact and outcome of labor negotiations; the impact of global instability, including the current instability in the Middle East, the continuing impact of the U.S. military presence in Iraq and Afghanistan and the terrorist attacks of September 11, 2001 and the potential impact of future hostilities, terrorist attacks, infectious disease outbreaks or other global events that affect travel behavior; adequacy of insurance coverage; reliance on automated systems and the potential impact of any failure or disruption of these systems; the potential impact of future significant operating losses; the Company’s ability to obtain and maintain commercially reasonable terms with vendors and service providers and its reliance on those vendors and service providers; security-related and insurance costs; changes in government legislation and regulation; competitive practices in the industry, including significant fare restructuring activities, capacity reductions and in-court or out-of-court restructuring by p y, g g g , p y g y major airlines and industry consolidation; interruptions or disruptions in service at one or more of the Company’s hub or focus airports; weather conditions; the impact of fleet concentration and changes in fleet mix; the impact of increased maintenance costs as aircraft age and/or utilization increases; the Company’s ability to maintain adequate liquidity; the Company’s ability to maintain contracts that are critical to its operations; the Company’s fixed obligations and its ability to obtain and maintain financing for operations, aircraft financing and other purposes; changes in prevailing interest rates; the Company’s ability to operate pursuant to the terms of any financing facilities (particularly the financial covenants) and to maintain compliance with credit card agreements; the Company’s ability to attract and retain customers; the cyclical nature of the airline industry; economic conditions; risks associated with actual or potential acquisitions or other business y y; ; p q transactions including the Company’s ability to achieve any synergies anticipated as a result of such transactions and to achieve any such synergies in a timely manner, and other risks and uncertainties listed from time to time in the Company’s reports to the Securities and Exchange Commission. There may be other factors not identified above of which the Company is not currently aware that may affect matters discussed in the forward-looking statements, and may also cause actual results to differ materially from those discussed. All forward-looking statements are based on information currently available to the Company. Except as may be required by applicable law, AirTran assumes no

  • bligation to publicly update or revise any forward-looking statement to reflect actual results, changes in assumptions or changes in other

factors affecting such estimates. Additional factors that may affect the future results of the Company are set forth in the section entitled “Risk 3 factors affecting such estimates. Additional factors that may affect the future results of the Company are set forth in the section entitled Risk Factors” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2007, which is available at www.sec.gov and at www.AirTran.com.

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SLIDE 3

Historical Perspective

Industry Evolution & Change Industry Evolution & Change

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SLIDE 4

Top Airlines in 1978 – Market Share

1.

United 16.9% Domestic U.S.

2.

American 12.4% Domestic U.S. TWA 11 6% D ti / T tl ti

3.

TWA 11.6% Domestic / Transatlantic

4.

Eastern 10.8% Eastern U.S.

5.

Delta 10.0% Southeastern U.S.

5.

Delta 10.0% Southeastern U.S.

6.

Pan Am 9.0% International

7.

Western 4.4% Western U.S.

8.

Braniff 4.1% Domestic / Latin

9.

Continental 3.7% Domestic

10 National

3 4% Eastern U S

  • 10. National

3.4% Eastern U.S.

  • 11. Northwest

3.0% North & Pacific

  • 12. Allegheny (US)

1.7% Northeast

5

* Source: DOT Form 41

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SLIDE 5

Top Airlines in 1978 – Post Deregulation

1.

United Exited Chapter 11 in 2006

2.

American TWA B k t A i d b A i

3.

TWA Bankrupt: Acquired by American

4.

Eastern Liquidated

5.

Delta Exited Chapter 11 in 2007

5.

Delta Exited Chapter 11 in 2007

6.

Pan Am Bankrupt: Parceled out

7.

Western Acquired by Delta

8.

Braniff Liquidated

9.

Continental Multiple bankruptcies

10

National Acquired by Pan Am

  • 10. National

Acquired by Pan Am

  • 11. Northwest

Merged with Delta

  • 12. US Air

Multiple bankruptcies / mergers

6

* Source: DOT Form 41

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SLIDE 6

Top Airlines Today – Market Share

1.

Delta / Northwest 25.4%

2.

American 17.6% U it d 15 6%

3.

United 15.6%

4.

Continental 11.8%

5.

Southwest 9.5%

5.

Southwest 9.5%

6.

US Airways 9.1%

7.

jetBlue 3.2%

8.

Alaska 2.8%

9.

AirTran 2.5%

10 Frontier

1 3%

  • 10. Frontier

1.3%

7

* Source: DOT Form 41, 2Q08 RPMs

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SLIDE 7

What Happened?

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SLIDE 8

Events that Restructured the Industry

Mergers Mergers Deregulation Deregulation 1978 1978 PATCO PATCO 9/11 9/11 Fuel Fuel 1981 1981 2001 2001 Today Today 1978 1978 1981 1981 2001 2001 Today Today Internet Internet

9

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SLIDE 9

Many Airlines Have Struggled to Adapt

Airline Bankruptcies Since Deregulation

14 16 18 17 16 8 10 12 4 6 12 5 10 6 9 11 7 6 5 3 5 4 4 4 6 4 6 5 11 2 4 6 2 3 2 2 2 2 1 2 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

10

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SLIDE 10

Why the Failure to Adapt?

Inefficiencies carried over from regulatory environment

High costs in a commodity-like business

Cyclical business prone to excess capacity

Low barriers to entry, high to exit Inexpensive asset financing has created too much capacity

Inexpensive asset financing has created too much capacity

Too many hubs

Historically a market share focus Most mergers have not produced intended results

Temporary revenue gains

The most inefficient work rules typically survive

11 11

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SLIDE 11

U.S. Airlines “Earnings” – Actually a Cumulative Loss

$28 $30

Net Profit ($Billions)

Cumulative Loss

  • f $12 Billion

$15 $20 $25

$

$5 $10 $1 $3 $5 $10 ($6) ($7) ($6) ($4)

  • $10
  • $5

$0

Industry D l ti

($11) ($13) ($12)

  • $15

$ 1971- 1978 1979- 1989 1990- 1994 1995- 2000 2001 2002 2003 2004 2005 2006 2007 1H08

Deregulation

12

* Source: Air Transport Association

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SLIDE 12

Was Warren Buffet Right?

“…I like to think that if I’d been at Kitty Hawk in 1903 when Orville Wright took off, I would have been farsighted enough, and public spirited enough – I owed this to future capitalists – to shoot him down ” to shoot him down.

13

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SLIDE 13

Challenges Facing the Industry Today

Cost: Unprecedented run up in fuel

C dit B ki i i d it’ i t dit k t

Credit: Banking crisis and it’s impact on credit markets Revenue: Weakening economy and recession Revenue: Weakening economy and recession

14 14

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SLIDE 14

Recent Fuel Volatility Has Forced Dramatic Change

147.00

130 140 150

(Cost per Barrel)

90 100 110 120 130

66.02 72.34 67.00 56.48

50 60 70 80 90

24.50 18.43 22.15 20.60 14.40 19.25 30.30 25.92 26.10 31.14 41.44 21.48 17.19 20.56 18.46

10 20 30 40 50 10 1990 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06 07 July '08 Today

15

*West Texas Intermediate at Cushing Sources: Air Transport Association, Energy Information Administration, PIRA Energy Group, Deutsche Bank

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SLIDE 15

Airlines Have Reacted Quickly to the Fuel Run Up

All airlines announced mainline domestic capacity reductions

Industry domestic capacity down approximately 10% in Q408

Delta capacity will be down 10-11% in Q408 Delta capacity will be down 10 11% in Q408

AirTran capacity will be down 6-7% in Q408 after original plans for 10% growth

Because of high fuel, airlines are probably six months in front

  • f many industries in addressing economic weakness

16 16

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SLIDE 16

Since World War Two, Ex-9/11, Annual U.S. Airline Revenue Has Only Declined Twice

25%

Annual U.S. Airline Operating Revenue Growth

(Revenue Growth)

15% 20% 25%

?

0% 5% 10%

  • 10%
  • 5%
  • 15%

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009E

17 * Source: Air Transport Association

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SLIDE 17

AirTran’s View of Today’s Challenges

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SLIDE 18

AirTran: Demonstrated Record of Adapting

  • Emerged stronger from

9/11 by lowering costs and capitalizing on legacy domestic retrenching

  • Continued to lower non-fuel unit costs to the

best in industry

  • Continued to increase revenues
  • Under new

management AirTran restores profitability in 1999 domestic retrenching

  • Capitalized on continued legacy domestic

restructuring and expanded network into the West

  • Completed re-fleeting to

all 717 fleet

  • Negotiated 737 deal at

market bottom

2000 1999 2002 2004 2006 2001 2003 2005 2007 2008

market bottom

  • Increased cash balance to

$100MM from low of $10MM in 1999

  • Successfully recapitalized

the Company with $230MM

  • Transformed business to become

highly regarded low-cost airline

  • Expanded network into Baltimore

and Florida Remained profitable post 9/11

  • Proactive response to increase in fuel from $75 to

$140 per barrel

  • Focused on reducing capacity growth, increasing

unit revenues, continuing to lower non-fuel costs, limiting fuel exposure, and successfully raising p y in debt maturities due 2Q01

  • Remained profitable post 9/11

g p y g capital

  • Low costs will allow us to further capitalize on

capacity reductions 19 19

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SLIDE 19

Strong Fundamentals: Unique Product

Business Class on every flight

Only major U.S. airline with Business Class on every flight

Assigned seating Over 150 channels of free digital XM Radio Over 150 channels of free digital XM Radio Oversized luggage bins Friendly Crew Members Broad distribution

AirTran.com

Reservations

Travel agencies

20 20

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SLIDE 20

Strong Fundamentals: #1 in Quality

Airline Quality Rating for Major Carriers

2005 2004 2003 2006 2007 AirTran JetBlue Southwest JetBlue Alaska Southwest JetBlue AirTran Independence JetBlue AirTran Frontier JetBlue AirTran Southwest 1. 2. 3 Southwest Northwest Frontier Southwest America West US Airways Independence Southwest United Frontier Northwest Southwest Southwest United Alaska 3. 4. 5. Continental Alaska United Northwest Continental AirTran America West Northwest Continental Continental United Alaska America West Northwest American 6. 7. 8. American Delta United ATA Alaska American American ATA Continental ATA

Notes: (1) Source: Wichita State University / University of Nebraska, Omaha.

9. 10.

21 21 ( ) y y (2) Based on DOT reports for on-time performance, denied boardings, mishandled baggage, and customer complaints (3) AirTran not ranked prior to 2003

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SLIDE 21

Strong Fundamentals: Low Cost Structure

(Cents Per Mile)

AirTran’s Non-Fuel Unit Cost Trend

7.00 7.25 6.50 6.75 6.00 6.25 5.75 2001 2002 2003 2004 2005 2006 2007 2008

22 * Excludes non-recurring special items * 2008 is for the first nine months ended

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SLIDE 22

Strong Fundamentals: Low Cost Structure

11

(Cents)

Industry Cost Comparison

Non-Fuel Unit Costs at 734 Miles for 1H08

9 10 11 7 8 9 5 6

While legacy costs are down, gap remains large

23 23 * Excludes fuel and special items

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SLIDE 23

Strong Atlanta Hub

Burlington Burlington Seattle Seattle Portland Portland Boston Boston S F i S F i Minneapolis Minneapolis Burlington Burlington Akron/ Akron/ Canton Canton Flint Flint Moline Moline Milwaukee Milwaukee Detroit Detroit Chicago Chicago Buffalo Buffalo Rochester Rochester White Plains White Plains New York City (LGA) New York City (LGA) Harrisburg Harrisburg Philadelphia Philadelphia Newark Newark Las Vegas Las Vegas Denver Denver San Francisco San Francisco Kansas City Kansas City Wichita Wichita Bloomington Bloomington St Louis St Louis Indianapolis Indianapolis Columbus Columbus Dayton Dayton Richmond Richmond Washington, D.C. (IAD) Washington, D.C. (IAD) Newport News Newport News Los Angeles Los Angeles Pittsburgh Pittsburgh Washington, D.C. (DCA) Washington, D.C. (DCA) Baltimore Baltimore Philadelphia Philadelphia Raleigh Raleigh/

/Durham

Durham Charlotte Charlotte Dallas/Ft. Worth Dallas/Ft. Worth Memphis Memphis Gulfport/Biloxi Gulfport/Biloxi Phoenix Phoenix Los Angeles Los Angeles San Diego San Diego Pensacola Pensacola

Atlanta Atlanta

Jacksonville Jacksonville Charlotte Charlotte Charleston Charleston

  • Ft. Lauderdale
  • Ft. Lauderdale

San Antonio San Antonio West Palm Beach West Palm Beach Miami Miami Orlando Orlando New Orleans New Orleans Gulfport/Biloxi Gulfport/Biloxi Houston Houston Pensacola Pensacola Sarasota Sarasota

  • Ft. Myers
  • Ft. Myers

Tampa Tampa

24 24

San Juan San Juan Cancun Cancun

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SLIDE 24

AirTran Operates the World’s Largest LCC Hub

CAL - Houston AMR - Dallas DAL - Atlanta NWA - Minneapolis AMR - Miami LUV - Las Vegas AAI - Atlanta LCC - Charlotte UAUA - Chicago LCC - Phoenix UAUA - Denver AMR - Chicago LUV - Chicago CAL - Newark NWA - Detroit AAI - Atlanta (2000) UAUA - San Francisco LCC - Philadelphia LUV - Baltimore JBLU - New York LUV - Phoenix

225 departures in December 2008

100 200 300 400 500 600 700 800 900 1,000

Mainline Departures Regional Departures

25 25

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SLIDE 25

Flexible Strategy: Florida Point to Point

Burlington Burlington Seattle Seattle Portland Portland Boston Boston S F i S F i Minneapolis Minneapolis Burlington Burlington Flint Flint Rochester Rochester Milwaukee Milwaukee Harrisburg Harrisburg Buffalo Buffalo Chicago Chicago Detroit Detroit Akron/ Akron/ Canton Canton White Plains White Plains New York City (LGA) New York City (LGA) Newark Newark Philadelphia Philadelphia Moline Moline Las Vegas Las Vegas Denver Denver San Francisco San Francisco Los Angeles Los Angeles Dayton Dayton Columbus Columbus Pittsburgh Pittsburgh Richmond Richmond Philadelphia Philadelphia Baltimore Baltimore Washington, D.C. (DCA) Washington, D.C. (DCA) Washington, D.C. (IAD) Washington, D.C. (IAD) Newport News Newport News Charlotte Charlotte Raleigh Raleigh/

/Durham

Durham St Louis St Louis Bloomington Bloomington Indianapolis Indianapolis Kansas City Kansas City Wichita Wichita Dallas/Ft. Worth Dallas/Ft. Worth Los Angeles Los Angeles Gulfport/Biloxi Gulfport/Biloxi Charlotte Charlotte

Atlanta Atlanta

Charleston Charleston Jacksonville Jacksonville Pensacola Pensacola Memphis Memphis Phoenix Phoenix San Diego San Diego San Antonio San Antonio New Orleans New Orleans Houston Houston Gulfport/Biloxi Gulfport/Biloxi Pensacola Pensacola Orlando Orlando Tampa Tampa Sarasota Sarasota

  • Ft. Myers
  • Ft. Myers

Miami Miami

  • Ft. Lauderdale
  • Ft. Lauderdale

West Palm Beach West Palm Beach

26 26

San Juan San Juan Cancun Cancun

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SLIDE 26

Opportunistic Mindset: Baltimore Focus City

Burlington Burlington Seattle Seattle Portland Portland Boston Boston S F i S F i Minneapolis Minneapolis Burlington Burlington Rochester Rochester Akron/ Akron/ Canton Canton Detroit Detroit Flint Flint Milwaukee Milwaukee Moline Moline Chicago Chicago Buffalo Buffalo Harrisburg Harrisburg White Plains White Plains New York City (LGA) New York City (LGA) Newark Newark Philadelphia Philadelphia Las Vegas Las Vegas Denver Denver San Francisco San Francisco Columbus Columbus Richmond Richmond Bloomington Bloomington Indianapolis Indianapolis St Louis St Louis Kansas City Kansas City Wichita Wichita Los Angeles Los Angeles Pittsburgh Pittsburgh Dayton Dayton Philadelphia Philadelphia Baltimore Baltimore Raleigh Raleigh/

/Durham

Durham Charlotte Charlotte Washington, D.C. (DCA) Washington, D.C. (DCA) Washington, D.C. (IAD) Washington, D.C. (IAD) Newport News Newport News Dallas/Ft. Worth Dallas/Ft. Worth Memphis Memphis Gulfport/Biloxi Gulfport/Biloxi Pensacola Pensacola

Atlanta Atlanta

Los Angeles Los Angeles Phoenix Phoenix San Diego San Diego Charlotte Charlotte Charleston Charleston Jacksonville Jacksonville Houston Houston San Antonio San Antonio Gulfport/Biloxi Gulfport/Biloxi New Orleans New Orleans Pensacola Pensacola Miami Miami

  • Ft. Lauderdale
  • Ft. Lauderdale

West Palm Beach West Palm Beach Orlando Orlando Tampa Tampa

  • Ft. Myers
  • Ft. Myers

Sarasota Sarasota

27 27

San Juan San Juan Cancun Cancun

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SLIDE 27

Successful Diversification of Network

Burlington Burlington Seattle Seattle Portland Portland Boston Boston S F i S F i Minneapolis Minneapolis Burlington Burlington Flint Flint Rochester Rochester Milwaukee Milwaukee Chicago Chicago Detroit Detroit Akron/ Akron/ Canton Canton White Plains White Plains New York City (LGA) New York City (LGA) Newark Newark Philadelphia Philadelphia Moline Moline Harrisburg Harrisburg Buffalo Buffalo Las Vegas Las Vegas Denver Denver San Francisco San Francisco Los Angeles Los Angeles Dayton Dayton Columbus Columbus Pittsburgh Pittsburgh Richmond Richmond Philadelphia Philadelphia Baltimore Baltimore St Louis St Louis Bloomington Bloomington Indianapolis Indianapolis Kansas City Kansas City Wichita Wichita Charlotte Charlotte Raleigh Raleigh/

/Durham

Durham Washington, D.C. (DCA) Washington, D.C. (DCA) Washington, D.C. (IAD) Washington, D.C. (IAD) Newport News Newport News Dallas/Ft. Worth Dallas/Ft. Worth Los Angeles Los Angeles Gulfport/Biloxi Gulfport/Biloxi

Atlanta Atlanta

Pensacola Pensacola Memphis Memphis Phoenix Phoenix San Diego San Diego Charlotte Charlotte Charleston Charleston Jacksonville Jacksonville San Antonio San Antonio New Orleans New Orleans Houston Houston Gulfport/Biloxi Gulfport/Biloxi Pensacola Pensacola Orlando Orlando Miami Miami

  • Ft. Lauderdale
  • Ft. Lauderdale

West Palm Beach West Palm Beach Tampa Tampa Sarasota Sarasota

  • Ft. Myers
  • Ft. Myers

28 28

San Juan San Juan Cancun Cancun

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SLIDE 28

AirTran Responded Quickly and Decisively

Reduced growth

Deferred 36 planned aircraft deliveries

Agreements to sell / return 11 aircraft

Reduced costs

Closed three cities

Cut non-aircraft CAPEX by 50%

Raised cash

Arranged over $375MM in financing / credit facilities

Limit fuel exposure

Active and disciplined hedging program

Increase revenues

Significant changes in ancillary revenues Fare increases

29 29

Fare increases

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SLIDE 29

Atlanta Has the Best of All Worlds in Aviation

World’s busiest airport

More flights to more destinations than any other airport in the world

Large global carrier in Delta / Northwest AirTran and the world’s largest low cost hub High level of competition forces efficiency and quality

R lt i i th i f G i b i

Result is an economic growth engine for Georgia business

30 30

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SLIDE 30

Summary

2008 has been a difficult year AirTran has moved quickly and decisively AirTran has moved quickly and decisively Fundamentals remain strong Fundamentals remain strong Positioning the company to return to profitability and

capitalize on opportunities

Airlines are six months in front of this current economic problem

AirTran is better positioned for this challenge

31 31