| AIRTRAN HOLDINGS INC ITEM 1A RISK FACTORS In addition to the risk factors set forth elsewhere in this annual report, including, without limitation, in Item’s 1, 7, 7a, and 9a, investors should carefully consider the following risk factors before making investment decisions regarding our securities |
| Our business is dependent on the availability and price of aircraft fuel |
| Aircraft fuel is a significant expenditure and accounted for 32dtta9 percent, 24dtta6 percent and 21dtta5 percent of our 2005, 2004 and 2003 operating expenses, respectively |
| Due to the effect of economic events on the price and availability of oil, the future availability and cost of aircraft fuel cannot be predicted with any degree of 14 ______________________________________________________________________ [53]Table of Contents [54]Index to Financial Statements certainty |
| Although we are currently able to obtain adequate supplies of aircraft fuel, it is impossible to predict the future availability or price of aircraft fuel |
| Political disruptions or wars involving oil-producing countries, changes in government policy concerning the production, transportation or marketing of aircraft fuel, changes in aircraft fuel production capacity, environmental concerns and other unpredictable events may result in fuel supply shortages and additional fuel price increases in the future |
| For 2006, if jet fuel increased dlra1 per barrel, our fuel expense, net of fuel contract arrangements, would increase approximately dlra5dtta3 million based on current and projected operations |
| Our operations are largely dependant upon the availability of fuel in the Gulf Coast |
| Our operations are largely concentrated in the Southeast United States with Atlanta being the highest volume fueling point in our system |
| In addition, over 70prca of our fuel contracts are based on prices of jet fuel produced in the Gulf Coast area |
| Any disruption to the oil production or refinery in the Gulf Coast, as a result of weather or any other disaster could have a material adverse effect on our financial condition and results of operations not only in our East Coast routes but across our network due to disruptions in supply of jet fuel, dramatic escalations in the costs of jet fuel, and/or the failure of fuel providers to perform under our fixed-price fuel purchase agreements, among other potential effects |
| Increased labor cost, employee strikes and other labor-related disruptions may adversely affect our results of operations |
| Labor costs constitute a significant percentage of our total operating costs |
| A substantial portion of our workforce is represented by labor unions and covered by collective bargaining agreements |
| Our agreement with our dispatchers, who are represented by the Transport Workers Union (“TWU”), was ratified in October 2004 and becomes amendable in January 2009 |
| Our agreement with our pilots, who are represented by the National Pilots Association (“NPA”), was ratified in August 2001 and became amendable April 2005 |
| The agreement is currently in mediation under the auspices of the National Mediation Board |
| We have four separate agreements with employee groups represented by the International Brotherhood of Teamsters (“IBT”) |
| Our agreement with our maintenance technicians and inspectors was ratified in October 2005 and becomes amendable in October 2009 |
| The agreement with our technical training instructors was ratified in March 2001 and becomes amendable in March 2006 |
| The agreement with our stores clerks was ratified in June 2001 and becomes amendable in June 2006 |
| Our agreement with our ground service equipment employees was ratified October 2001 and becomes amendable in October 2006 |
| We have a collective bargaining agreement with our flight attendants who are represented by the Association of Flight Attendants (“AFA”) |
| Our agreement with the flight attendants was ratified in June 2006 and becomes amendable in December 2008 |
| While we believe that our relations with labor are generally good, any strike or labor dispute with our unionized employees may adversely affect our ability to conduct business |
| The outcome of our collective bargaining negotiations cannot presently be determined |
| If we are unable to reach agreement with any of our unionized work groups on future negotiations regarding the terms of their collective bargaining agreements or if additional segments of our workforce become unionized, we may be subject to work interruptions or stoppages |
| 15 ______________________________________________________________________ [55]Table of Contents [56]Index to Financial Statements We have a significant amount of fixed obligations that could impair our ability to make principal and interest payments on our debt obligations and lease payments on our lease obligations |
| We have significant debt obligations and lease obligations for aircraft and operating facilities |
| We may incur substantial additional debt related to aircraft deliveries, new facilities, or facility upgrades, or to fund potential acquisitions |
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources |
| ” Our ability to make scheduled payments of principal or interest for our financing obligations depends on our future performance and financial results |
| These results are subject to general economic, financial, competitive, legislative, regulatory and other factors that are, to some extent, beyond our control |
| The amount of our debt could have important consequences to investors, including the following: • A substantial portion of our cash flow from operations must be dedicated to debt service and will not be available for operations; and • Our ability to obtain additional financing for aircraft purchases, capital expenditures, working capital or general corporate purposes could be limited |
| Our business is dependent on technology We are increasingly dependent on technology initiatives to reduce costs and to maintain and enhance customer service in order to compete in the current business environment |
| For example, we have made significant investments in our web site technology and Bye-Pass ™ check-in kiosks, and related initiatives across the system |
| The performance and reliability of our technology are critical to our ability to attract and retain customers and our ability to compete effectively |
| Any internal technology error or failure, or large scale external interruption in technology infrastructure we depend on, such as power, telecommunications or the internet, may disrupt our technology network |
| Any individual, sustained or repeated failure of our technology could impact our customer service and result in increased costs |
| Like all companies, our technology systems may be vulnerable to a variety of sources of interruption due to events beyond our control including natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers and other security issues |
| While we have in place and continue to invest in technology security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly to prevent a business disruption and its adverse financial consequences to our business |
| Covenants in our debt instruments could limit how we conduct our business, which could affect our long-term growth potential |
| Our debt instruments and financing agreements contain, or in the future may contain, covenants that, among other things, restrict our ability to: • Pay dividends and/or other distributions; • Enter into mergers, consolidations or other business combinations; and • Acquire new aircraft |
| As a result of these restrictive covenants, we may be limited in how we conduct business, and we may be unable to raise additional debt or equity financing to operate during general economic or business downturns, to compete effectively, or to take advantage of new business opportunities |
| This may affect our ability to generate revenues and make profits |
| 16 ______________________________________________________________________ [57]Table of Contents [58]Index to Financial Statements Our failure to comply with the covenants and restrictions contained in our indentures and other financing agreements could lead to a default under the terms of those agreements |
| If such a default occurs, the other parties to these agreements could declare all amounts borrowed and all amounts due under other instruments that contain provisions for cross-acceleration or cross-default due and payable |
| If that occurs, we may not be able to make payments on our debt, meet our working capital and capital expenditure requirements, or be able to find additional alternative financing on favorable or acceptable terms |
| We are subject to various risks as a result of our fleet concentration in B717s |
| While we have been adding B737s to our fleet since June 2004, our fleet currently consists primarily of B717 aircraft |
| Although we derive certain benefits in terms of reduced maintenance, training and other costs as a result, a concentration of our fleet in primarily one aircraft type may expose us to certain risks in the event of, among other things, FAA action to ground that aircraft generally if actual or suspected defects were discovered in the future unique to that aircraft |
| In January 2005, the manufacturer of the B717 announced the discontinuance of the production of B717 aircraft in 2006 |
| As a result, we expect to experience increased costs in later years in connection with parts acquisition and/or maintenance for such aircraft |
| Our operating results may suffer because of competition in the low-fare airline markets we serve |
| The airline industry in general and the low-fare sector in particular is highly competitive and is served by numerous companies |
| We may face greater competition in the future |
| Any increased competition could have a negative impact on our business and operating results |
| The profitability of our operations is influenced by economic conditions as demand for discretionary travel diminishes during economic downturns |
| The profitability of our operations is influenced by the condition of the United States economy, which may impact the demand for discretionary travel and our competitive pricing position |
| We depend heavily on the Atlanta market to be successful |
| Our business strategy has historically focused on adding flights to and from our Atlanta base of operations |
| We continue to expand the scope and growth of our route network to increase the amount of non-Atlanta flights; going from approximately 10 percent of our daily departures outside of Atlanta during 2000 to approximately 32 percent of our daily departures by year-end 2005 |
| While we have reduced our dependence on Atlanta, a non-strategic, external reduction in our share of the Atlanta market or reduced passenger traffic to or from Atlanta could have a material adverse effect on our financial condition and results of operations |
| In addition, our dependence on a primary hub and on a route network operating largely on the East Coast makes us more susceptible to adverse weather conditions and other traffic delays along the East Coast than some of our competitors that may be better able to spread these traffic risks over larger route networks |
| Our maintenance costs are expected to increase |
| Our recent maintenance expenses have been lower than what we expect to incur in the future because of the young age of our B717 and B737 aircraft fleet |
| Our maintenance costs are expected to increase as these aircraft age and utilization increases |
| 17 ______________________________________________________________________ [59]Table of Contents [60]Index to Financial Statements Our reputation and financial results could be negatively affected in the event of a major aircraft accident |
| An accident involving one of our aircraft could involve not only repair or replacement of the damaged aircraft and its consequent temporary or permanent loss from service but also significant potential claims of injured passengers and others |
| Moreover, any aircraft accident, even if fully insured, could cause a public perception that our aircraft are less safe or reliable than other airlines, and that could have a negative effect on our business |
| The occurrence of one or more incidents or accidents involving our aircraft could have a material adverse effect on the public’s perception of us and our future operations |
| We are required by the DOT to carry liability insurance on each of our aircraft |
| We currently maintain liability insurance in amounts and of the type consistent with industry practice |
| Although we currently believe our insurance coverage is adequate, the amount of such coverage may be changed in the future or we may be forced to bear substantial losses from accidents |
| Substantial claims resulting from an accident in excess of related insurance coverage could have a material adverse impact on our business and financial results |
| We are subject to extensive regulation by the FAA, the DOT, and other governmental agencies, compliance with which could cause us to incur increased costs and negatively affect our business and financial results |
| We are subject to a wide range of governmental regulation, including regulation by the FAA A modification, suspension or revocation of any of our FAA authorizations or certificates could adversely impact our business |
| Additional laws and regulations have been proposed that could significantly increase the cost of airline operations by imposing additional requirements or restrictions on operations |
| Laws and regulations have also been considered that would prohibit or restrict the ownership and/or transfer of airline routes or takeoff and landing slots |
| Also, the availability of international routes to United States carriers is regulated by treaties and related agreements between the United States and foreign governments that are amendable |
| We cannot predict what laws and regulations may be adopted or their impact and we cannot guarantee that laws or regulations currently proposed or enacted in the future will not adversely affect us |
| The United States government currently provides insurance coverage for certain claims resulting from acts of terrorism, war or similar events |
| Should this coverage no longer be offered, the coverage that would be available to us through commercial aviation insurers may have substantially less desirable terms, result in higher costs and not be adequate to protect our risk, any of which could harm our business |
| Future acts of terrorism or escalation of US military involvement overseas could adversely affect the airline industry |
| Even if not directed at the airline industry, a future act of terrorism, the threat of such acts or escalation of United States military involvement overseas could have an adverse effect on the airline industry |
| In the event of a terrorist attack, the airline industry would likely experience significantly reduced demand |
| We cannot give assurance you that these actions, or consequences resulting from these actions, will not harm our business or the airline industry generally |
| 18 ______________________________________________________________________ [61]Table of Contents [62]Index to Financial Statements The airline industry has incurred significant losses resulting in airline restructurings and bankruptcies, which could result in changes in our industry |
| As a result of slower general economic conditions, the continuing impact of the 2001 terrorist attacks, the high price of fuel and military action in Iraq, the airline industry has experienced a decline in demand which has resulted in record financial losses |
| In response to the adverse financial results the airline industry has experienced, most airlines have taken actions in an effort to reduce losses, such as reducing capacity, reducing employee headcount, limiting service offerings, renegotiating labor contracts and reconfiguring flight schedules, as well as other efficiency and cost-cutting measures |
| Despite these actions, financial losses in the airline industry have continued through 2005 and it is foreseeable that further airline reorganizations, bankruptcies or consolidations may occur, which could serve to reduce our cost advantage |
| We cannot assure you that the occurrence of these events or potential changes resulting from these events will not harm our business or the airline industry generally |
| Major airlines are reducing their cost structures through various methods, these changes could reduce our cost advantage |
| Airline strategic combinations or industry consolidations could have an impact on our operations in ways yet to be determined |
| The strategic environment in the airline industry changes from time to time as carriers implement varying strategies in pursuit of profitability including consolidation to expand operations and increase market strength and entering into global alliance arrangements |
| Similarly, the bankruptcy or reorganization of one or more of our competitors may result in rapid changes to the identity of our competitors in particular markets, a substantial reduction in the operating costs of our competitors or the entry of new competitors into some or all of the markets we serve |
| Additionally, we have sought to acquire gates and other assets from other carriers |
| In the event we complete one or more acquisitions, we may be subject to a variety of risks including risks associated with an ability to integrate acquired assets or operations into our existing operations, higher costs or unexpected difficulties or problems with acquired assets or entities including different flight equipment, outdated or incompatible technologies, labor difficulties or an inability to realize anticipated synergies and efficiencies; whether within anticipated timeframes or at all, one or more of such risks, if realized, could have an adverse impact on our operations |
| We are unable to predict exactly what effect, if any, changes in the strategic landscape might have on our business, financial condition and results of operations |