西南航空 (LUV) 2005 Q2 法說會逐字稿

Good morning, my name Juneau (ph) and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the AirTran Holdings second quarter 2005 earnings conference call.

[Operator Instructions]

I would now like to introduce Mr. Arnie Hawk, Director of Investor Relations.

Mr. Hawk, you may begin your conference.

Good morning, everyone.

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

Joining us today is Stan Gadek, our Chief Financial Officer, Bob Fornaro, our President and Chief Operating Officer, and Joe Leonard, our Chairman and CEO.

As it's our usual practice, we will begin by reminding you that this call may include forward-looking statements and our actual results may differ materially from these statements.

These comments are not historical facts and instead, you should consider them as time-sensitive, forward-looking statements that are accurate only as of July 26, 2005.

If you would like additional information concerning factors that could cause our actual results to vary from those in our forward-looking statements, they can be found in our Form 10K filings for the year ending December 31, 2004.

In addition, we will be discussing several non-GAAP financial measures that we believe are more consistent with our true operating performance and provide a more meaningful period-to-period comparison as they exclude special items.

A copy of today's press release and a reconciliation of these non-GAAP financial measures is available on our Company's website at www.airtran.com.

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

Thank you, Arnie and good morning everyone.

AirTran Holdings is pleased to once again announce a profit for the second quarter of 2005.

AirTran's net income was 11.4 million or $0.13 per share and places the Company in the black for the first half of 2005 at $3.3 million or $0.04 per share.

As in the first quarter of this year, our financial performance was challenged by continued record high fuel prices, overcapacity on the east coast, and intense price competition.

Nevertheless, beginning in May, our year-over-year unit revenue performance began to show strong improvement versus the first four months of 2005.

After a double-digit decline in April's year-over-year revenue, unit revenue has swung to the positive and our current outlook indicates the continuation of that trend.

During the second quarter, AirTran commenced new service to Richmond, Charlotte, and Indianapolis.

In addition, we announced that we have been awarded the rights to operate new international service to Cancun, Mexico, from Atlanta and Tampa, commencing in the latter part of this year.

All of these new markets reflect the continuation of our three-prong growth strategy to increase frequencies in existing market, connect the dots and open new cities.

We believe we have ample growth opportunities, which will only improve as the industry restructures.

Our underlying confidence in this view is supported by the continued strength of our load factors and the record number of customers who fly AirTran.

During the second quarter, we took delivery of two Boeing 717s and three 737s, bringing year-to-date deliveries of new aircraft to 10.

In addition, we exercised options for two 737s during second quarter of 2005 for delivery in the first quarter of 2007, increasing our total 737 firm deliveries to 58 aircraft.

The 737 fleet now totals 14 and we are on track for acquiring seven additional 737s by year-end.

As anticipated, the 737s are lower in unit costs, improving utilization and increasing productivity.

In addition, just as we experienced with the introduction of the new 717s, the 737s are changing the customer's perception of AirTran and are providing our passengers with a comfortable and enjoyable experience.

Product development is being further improved with the installation of XM Satellite Radio on our aircraft.

As of the end of the second quarter, thirty-seven 717s and nearly half of that fleet type have been outfitted with XM, and we anticipate that all of our aircraft will have the system by year-end.

Passenger feedback has been very positive, and we are pleased to offer this product.

When passengers choose AirTran, they experience a unique combination of value-added features such as online booking, check-in and seat selection, business class, and XM radio, all for a low price, and not available in combination from any other low-fare airline.

We are proud of what we offer, and our customers tell us they like the value and service they receive when flying AirTran.

And now, I'd like to talk about our metrics.

During the second quarter 2005, capacity in terms of available seat models increased 33.3% on a year-over-year basis, of which approximately half was replacement capacity for rent lease operations in the prior year.

Year-over-year stage length increased 2.9% from 626 miles to 644 miles.

Traffic or revenue passenger miles increased 33.8%, resulting in an increase in load factor of .3 points.

Average fare in the second quarter increased 6.1% to $82.34 compared to $77.58 in the second quarter last year.

Given the increase in stage length, yield declined slightly from $0.1223 to $0.1216.

Unit revenue for the second quarter was essentially flat from $0.0922 to $0.0920.

However, as I mentioned in my opening remarks, April unit revenue and yield performance was markedly down year-over-year before turning around and posting that significant improvement in May and June.

Looking at unit costs, AirTran's non-fuel unit costs were down 5.3% from $0.0655 to $0.0620.

Fuel neutral unit costs declined 5.1% from $0.0846 to$0.0803 and to pick fuel costs adjusted to reflect comparable prices for the year earlier period.

Operating costs per ASM, including fuel for the second quarter of 2005, increased 6.6% from $0.0846 to $0.0902.

This primarily reflects a 54.5% increase in the average cost per gallon of fuel to $1.70, compared to $1.10 per gallon in 2004.

Fuel burn on a year-over-year basis increased approximately 1% to 671 gallons per block hour, due in part to the increased stage length and the operation of the larger 737s.

During the second quarter 2005, AirTran reduced its fuel costs by $11.2 million as a result of fuel hedging.

Average daily utilization was 11.1 hours compared to 11.0 hours in the second quarter of 2004.

Reviewing our operating performance, completion factor was 99.2%.

On-time arrivals were 75.5% and baggage claims per thousand were 3.79.

And now I'd like to review our financial performance.

For the second quarter 2005, AirTran reported net income of 11.4 or $0.13 per share and reflects a tax rate of approximately 34%.

Year-to-date net income was $3.3 million or $0.04 a share.

The company anticipates that the full-year tax rate will be in a range of between 33% and 38%, depending on the financial performance for the remainder of the year.

Passenger revenue for the second quarter increased 33% to $353.7million on a 25.3% increase in passengers and a 6.1% increase in average fare.

Year-to-date revenue increased 28.7% to $642.8 million.

Both the second quarter and first half 2005 passenger revenue represent all-time records for AirTran.

Looking at the individual line items of expense on a unit cost basis, salaries, wages, and benefits declined 9.4% from $0.0230 to $0.0208 per ASM.

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

On a full-time equivalent per aircraft basis, productivity in the second quarter was 65.3 employees per aircraft versus 72.2 employees in the year earlier period or an improvement of 10.1%.

Aircraft fuel on a unit cost basis increased 47.9% from $0.0190 to $0.0282.

The increased fuel unit costs reflect the increase in the price per gallon of fuel as well as the 1% increase in fuel burn per block hour.

In absolute dollars, AirTran's fuel expense increased $53.4 million or 97.2%. $38.2 million was related to price and $15.2 million was related to additional aircraft.

During the second quarter, AirTran was hedged using fixed forwards for approximately 44% of its fuel consumption at a price per gallon of $1.26 or $1.51 including all fees and taxes.

Aircraft rent on a unit-cost basis declined slightly by .7% to $0.0124.

Since the second quarter of 2004, AirTran has taken delivery of seven Boeing 717s and nine Boeing 737s on operating leases.

Updating our fleet information, the number of leased and owned aircraft are eight-three 717s, of which seventy-five are leased and eight are owned, and fourteen 737s, of which eleven are leased and three are owned.

For the remainder of 2005, we will take delivery of two 717s on operating leases and seven 737s, four of which will be on operating leases and three will be financed with debt.

Distribution expense in the second quarter increased slightly from $0.0046 to $0.0047 and reflects a slight increase in travel agency sales, as well as increased year-over-year bookings.

During the second quarter 2005, 54.5% of our bookings were made via airtran.com and all Internet bookings increased to 69.6%.

In addition, more than half of our customers or 55.6% checked in for their flight using internet technology or airport kiosks, which is up 4.5 points sequentially from the first quarter of the year.

Maintenance, materials, and repairs increased 5.8% from $0.0063 to $0.0067.

The primary reason for the change was the increase in 717 contractual maintenance rates.

Maintenance costs per block hour was approximately $242 in the second quarter last year compared to $270 in 2005.

The increased costs per block hour reflects the maturing of the 717 fleet but will be offset somewhat by the growing numbers of 737s under warranty.

Aircraft insurance and security services unit costs dropped 23.2% from $0.0020 to $0.0015.

The decline in unit costs reflects a reduction in hull and liability insurance rates for our 2005 fleet coverage.

Marketing and advertising unit costs declined 8% from $0.0023 to $0.0021 due to more effective utilization of online advertising and strong passenger demand.

Depreciation expense in unit costs increased 2.3% from $0.0011 to $0.0012, reflecting depreciation associated with new owned aircraft.

Other operating expense in unit costs improved 9.9% from $0.0080 to $0.0072.

The decrease in other operating expense resulted primarily from reductions in professional fees and related passenger charges.

Overall, operating income was $19.5 million, which while down 37% from the second quarter of 2004, reflects a greater than 97% increase in the cost of fuel, offset by reductions and other line items of expense and a 33% increase in revenue.

Operating margin for the second quarter was 5.3%.

Looking at other expense net, we realized an improvement of 56.5% on a unit cost basis or approximately $1.7 million in absolute dollars primarily resulting from increased interest income and capitalized interest-related purchase deposits.

Net margin for the quarter was 3.1%.

On the balance sheet, AirTran ended the second quarter with $376.8 million in total cash, cash equivalents and short-term investments.

This compares to $342.3 million at December 31 of 2004.

During the second quarter, AirTran closed on a financing facility for pre-delivery deposits related to 2005 deliveries of 737aircraft in the amount of $19.6 million.

We anticipate closing on an additional financing for our 2006 deliveries in the third quarter.

At the end of the second quarter 2005, AirTran had $96.3 million in deposits with the Boeing Company.

Debt, including current portion, was $354.3 million compared to $314 million at year end reflecting debt financing associated with aircraft purchases and capital leases for spare engines, offset somewhat by reductions in principle amounts outstanding.

Stockholders' equity on June 30, 2005 was $342.1 million.

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

Capacity additions will be 34% and 30% for the third and fourth quarters.

Looking at bookings, July's traffic continues to reflect gains which began in May and June.

The bookings in August and September also show continuing strength and are well ahead of 2004.

Regarding fuel, our costs assumption is a price per gallon in a range of $1.80 to $1.85, all in, including the benefit of hedges and reflects a $58 price per barrel of oil.

Our updated hedge guidance is as follows.

We have fixed forwards consisting of approximately 33% in the third quarter at $1.70 a gallon, 35% in the fourth quarter at $1.72 a gallon, 14% at $1.72 for all of 2006 and 8% at $1.69 for all of 2007.

In addition, we have collars for approximately 20% to 25% in 2005 and 10% in 2006 and 2007, which are currently above the spot price of fuel.

Our non-fuel unit cost guidance for the remainder of the year will be down 4% to 5% for Q3 and down 1% to 2% for Q4.

No changes to non-aircraft CapEx of $20 million to $25 million for the year, as well as no changes through remaining aircraft delivery schedules.

In summary, I would like to thank the ever-growing number of AirTran customers for their business.

We operate in a tough competitive environment characterized by an abundance of offerings from other airlines.

Yet we continue to attract new customers and grow because we offer a product that people want.

None of this would be possible, of course, without our employees.

They care about what they do and bring an enthusiasm for the job, which befits a growing and thriving company.

Quite frankly, we believe we have some of the best people in the industry.

Finally, we are focused on improving the financial performance of the Company.

Everyone at AirTran knows that financial success leads to personal success.

We believe that the lowest cost and most efficient producer will win and we are committed to that goal.

We thank you for your interest in AirTran and look forward to providing you with further updates in the future.

Operator, at this time, I would like to open the call for questions.

Thank you, sir.

The floor is now open for questions.

[Operator Instructions]

Our first question is coming from Mr. Michael Linenberg.

Sir, please pose your question.

I guess, a couple of questions.

Good morning, gentlemen.

Regarding the RASM in trends I know as you indicated, I think, Stan you said April was down I believe double digit and then May and June I guess, significant improvement.

Both months were up.

Can you give us a better sense, where we are looking at 3% to 4% maybe in May and June?

And was June better than May?

Yes.

My guess is, we don't normally break these out, but I think it's usually you don't see these differences within the quarter.

One thing I would tell you, along the east coast, first of all, the -- at least in our territory, April was very, very weak.

A lot of capacity came into the east coast.

Yes, we were rolling a big push by Delta.

US Airways moved a lot of capacity in the late winter and in the first quarter into the east coast.

And FlyI pushed a lot of capacity into Florida, as well.

All of that is way too much for in April when Easter was very, very early.

We are looking at revenue was down almost 13% in April.

Okay

So and we averaged about 6.5% in the next few months to be roughly flat for the quarter.

To give you a little more color on that, I think some of that capacity that really hurt the winter has come out, and some of it you have to view is as permanent.

US Airways pulled out a lot of capacity that went in in May and that had nothing to do with the merger.

FlyI pulled capacity out of Florida and moved to the west coast, so we saw some benefits there, as well.

So I think we're clearly seeing a moderating situation of capacity on the east coast.

It helps a little bit when you combine that with stronger revenue trends.

It really begins to have a very strong impact on the revenue.

Bob, do you have -- when you look into September and now Delta has indicated that they are going to pull some capacity and I think it's something on the order of about 200 flights.

It seems like a lot of it is in and out of Atlanta, both Delta, Delta Connection.

And I believe, you are going to see less with US Airways, America West and of course, Independence, also I believe is planing to pull some capacity.

As you look out into the forward schedule and looking at the third quarter, maybe in September or even October, do you have any numbers that you could share with us where Atlanta capacity, September '05 versus September '04 and Atlanta capacity AirTran markets?

I mean is there anything there you monitor that you could provide that kind of gives us a better sense of how things are trending?

I could give you some general things.

I guess, first of all, I think the FlyI capacity pulldowns will be public soon.

They may be out there now almost like a 10% to 13% cut in departures in the fall.

I believe Delta's capacity, roughly 80 departures in Atlanta in September and October, it looks like their capacity will be down on a year-over-year basis in Atlanta, at least just for a few months.

So our capacity is up, but I don't have an aggregate number.

But as we look into the next six months, the trends look favorable and again, we haven't even seen some of the shoes begin to drop.

And we are also kind of just-- we are going to be flying a little bit of capacity, a little less capacity in September as well as some evening connecting banks mid-weeks in Atlanta.

We're not going to be running like on a Tuesday, Wednesday.

So, I think you're seeing a number of things as the carriers begin to respond to the fact that fuel is very, very high.

And one other comment is, it appears with stronger revenue that even small changes in capacity are making what appears to be bigger differences than we have thought.

So I guess that the revenue trend for us certainly is pretty positive.

Hopefully we won't have the hurricane issues that we dealt with a year ago, so we have some built-in improvements there.

But our revenue outlooks over the next six months is a heck of a lot better than what we have been looking at for a very long time here.

Okay.

And then just, my second question to Stan, you mentioned you are alluded to a financing potentially occurring in the third quarter similar to the 20 million financing that you just a did related to the pre-delivery deposits.

Should we look for something that's of similar magnitude or is it-- could it be bigger and any color on that?

Yes, it will be bigger.

We will have 12 owned aircraft delivering in '06 versus '04 and '05.

So it will roughly be 3X in cash.

Okay, very good.

Thank you.

Thanks, Mike.

Thanks, Mike.

Thank you.

Our next question comes from Mr. Ray Neidl.

Sir, please pose your question.

Yes.

Just to sort of clarify the big bounce back in revenues in May and June, was it just better meet yield management on your part, or was it a combination of that in the change in your route structure or just raising prices?

And I think you said that Independence Air had been messing up prices on the east coast before.

I know you just said that they pulled some capacity out.

But they still, are they still having a big major negative effect on pricing in your territory?

The pricing impact is moderating on the east coast.

That began in May.

The fact is with fuel sitting around 60, everybody was starting to change their stripes and you have got no choice.

And so, clearly, we took some small fare increases.

But really more importantly with some -- what appears to be some solid demands, the biggest benefits are really selling up or carrying less of a discount capacity.

But Ray, we're going back to the fall season.

A lot of capacity that came in this winter, some of that I don't think will be back.

For example, last year Delta added 80 flights to the southeast.

I don't think you're going to see them going up another 80 to 1,150 departures.

I don't think that would make any sense.

And I think FlyI will be smaller in next year.

So, some of these things and US Airways has pulled capacity out and they've gotten rid of the airplanes.

And I believe there will be more to come.

So, clearly the capacity coming out, that started to come out, will be a positive for everybody.

And certainly the pricing discipline is now occurring because everybody needs to raise revenue to offset fuel.

So a couple of dynamics.

And just to build on that, my second question is, if Delta were to go into bankruptcy this fall and if the Wright amendment was to be pulled or modified in Dallas, what kind of opportunities do you think that might provide for growth for AirTran?

Well, it's hard to tell what Delta will do.

I mean, what we see is with some growth.

We still have a number of fairly sizable markets in Atlanta we don't serve.

Actually, the Wright amendment.

Love Field is a great airport and we certainly would be interested in flying into there, as well.

But I think, there are still some benefits to come because we don't know what US Air or America West are going to do on the east coast, other than they only said they're going to be pulling out some capacity.

I think the carriers when they are losing a lot of money and begin to remove capacity, things start to change pretty quickly.

So, there is a lot of upside for us just picking up the pieces on the east coast where we have been waiting for the last two years for some of this capacity to go away.

Okay, good.

Thank you.

Thank you.

Our next question comes from Sam Panella.

Please pose your question.

Good morning.

On last quarter's call, you mentioned that you may consider slowing down your capacity growth with the 737s because of high fuel prices.

Is this something you're still considering out there?

Not at this time.

This is Joe, Sam.

We talked to a number of people about laying some airplanes off, but with the strength that we have seen in May and June and moving on into the rest of the summer, we put that on the back burner, at least for the time being.

Okay.

And looking at your average fare being up year-over-year, I would think that a part of that has to do with the fact that you're now operating with the Transcon flights.

Can you give us any more information regarding how your fares are doing year-over-year and maybe, shorter haul markets?

I think most -- I think we're seeing across the board I would say in the southeast, the fares are coming up higher.

The fact is in Baltimore or Philadelphia, there is still downward pressure.

For example, in Philadelphia on fares especially to Florida.

Again, you would have expected to see increases, and certainly we're not seeing anything up in that area.

But what, generally speaking, we see a gradual strengthening of fares in going forward really across the board.

It really is basically spread out.

Again, demand is stronger and so that allows you to save more seats for closer end sales and that's probably where the magnitude of the increases are coming from.

It's just selling a few less discounts and a few more tickets closer in.

Okay.

Thank you.

Thank you.

Our next question is coming from Jamie Baker.

Please pose your question.

Hi, good morning, gentlemen.

Bob, can you give us some guidance as to how the storms affected the revenue performance in the third quarter of last year?

Perhaps storms as a percentage of the overall RASM in decline, the double-digit decline you saw last year or maybe just in terms of sheer dollars.

However, you're looking at it internally so that, we can all model around that phenomenon this year.

We've tried to forget it, but I think what we said in the third quarter was $10 million to $15 million, probably closer to the 15.

And some of it was just people who stopped flying and the impacts of bookings.

Then we also saw some negative impact into October because people just kind of froze.

So that's what -- I think last year it was about $10 million to $15 million.

We don't know whether we're going to see the impact.

Certainly we've seen a few storms already and they haven't had much impact.

That has been the good news for us.

But last year, we weren't worried about storms either.

It's still, the first one really hit us in mid-August.

So we have a long way to go.

And so, we're just keeping our fingers crossed.

The downward impact was $10 million to $15 million in the quarter.

And Bob, that's a revenue figure or is that net of the additional costs associated?

I think that's a revenue figure, if I recall.

Okay.

And as a follow-up to your surprisingly disclosed RASM guidance, and that's compliment, do you think that in any month for the remainder of this year you will witness a RASM decline?

Well, It's very, very hard to tell.

I mean, I have to go back and look at how the holidays slow up at the end of the year.

But I think certainly that Thanksgiving will be very similar to last year.

So certainly the next four or five months look pretty good. (multiple speakers) RASM is already has its focus that it will be close.

Okay.

Thank you very much.

I appreciate it.

Thank you.

Our next question comes from Gary Chase (ph).

Please pose your question.

Good morning, guys.

Good morning, Gary.

Could I just go a little bit further on the revenue question with Bob?

You sort of, think about all the things that are working in your favor in the quarter with Delta schedule, Independence cutting capacity, as you indicated in your answer to that last question, the revenue impact from the storms last year.

It kind of feels like things - and at least the way we measure it, what you would call your economic capacity growth-- not really accelerating in the third quarter versus what it was in the second.

It kind of feels like things ought to be better than what you said you were experiencing in May and June.

Are there any things in the quarter we ought to be aware of that are sort of putting pressure on the RASM comparisons or--?

Well, I think-- we don't normally go into too much detail on the individual months. ut having said that, maybe we'll break a little precedent.

We averaged about 6.5% in May and June.

We should be better in the third quarter.

Each one of them should be better.

Clearly, September has a -- October and -- I'm sorry.

Excuse me.

August and September certainly have that year-over-year benefit from hurricanes.

But again, we still have all those other issues.

We don't know what this hurricane season will bring.

And September is one of our weakest months.

So every year, it's always difficult to tell how these things will play out.

But again, I would say each one of our individual months in the quarter will look more like May and June at least, and maybe there will be some upside from some of these pulldowns.

Again, it's too early to tell.

We have just seen those pull downs in the last couple of days, so maybe we'll get lucky.

But generally, I would tell you we feel pretty good about what we see from a revenue perspective going forward.

After many quarters of downward pressure on revenue, it's starting to turn.

And a lot of the carriers who were putting the capacity in, they can't grow any more.

In fact-- Delta can't grow any more.

They can only go backwards from a capacity standpoint.

I don't see FlyI sticking with the capacity it has over the last year.

So, it's the matter of waiting to see the dominoes fall.

The way we look at the results that played out last year -- and I know it's going to be hard for you because of the storm impact and what not.

But September, even at a broader level, seemed like a really bad month for the industry.

Do you perceive that the comparisons are just particularly easy in September or is it just such a wildcard that you can't really tell this far away?

We really can't tell.

We have very, very strong bookings year-over-year.

Then last year the bookings were soft and then the hurricanes made it much, much weaker afterwards.

But right now, it's setting up, it's setting up pretty good.

We're still a long way.

But again, September is a tough month because it's a very weak leisure month and business travel seems to pick up towards the latter part of September rather than the early part of September.

So, I would say most carriers who focus mostly on domestic business, September is a wildcard.

International travel is generally completely different.

It has got a bigger booking curve.

Okay.

And just a couple things to clarify.

When you guys are talking about bookings are being up year-over-year that's book load factors?

Absolutely.

Right, okay, because obviously with the capacity growth.

Another thing, Stan, you said fuel would be $1.00 to $1.85.

Was that in reference to the third quarter, the second half?

Second half we're guiding $1.80 to $1.85 per gallon.

Okay.

So that was for the entire second half.

Yeah.

And no, I assume no material differences between the third and fourth quarter, right?

Slight.

I mean we're modeling on average $58 per barrel oil price for the second half on average.

Today we're trading about $58, $59.

It may come off a little bit in the fourth quarter.

But average for the half will be $1.80, $1.85.

And I apologize just one more.

Stan, in your prepared remarks, you'd mentioned something about the 737 changing customer perception.

I mean, was there any -- I guess in what way, because you have had an all-new 717 fleet for a while now.

What is it that's changing?

Is that the capability and the range and the destinations you can hit with the 737 or is there something else that the customers are telling you in terms of feedback about the new airplane?

Well, I think there is a couple things, Gary.

This is Joe.

The first flights, we just continue to put more brand-new airplanes into our fleet.

The shuttle is going up, by the way, as we speak.

It's airborne.

Let's hope it stays there.

But just a lot of new airplanes.

On the west coast routes this time last year, we were operating some sort of medium to older A-320s.

Those are now all flying with all brand-new airplanes.

And so it's just a part of the newness and freshness of our fleet.

And then obviously, the capability of the airplane is just phenomenal, and the reliability has been everything that we were told it would be.

Its dispatch reliability is 99.3.

Completion factor on the airplane is 99.98.

So it's incredibly reliable airplane.

It's just the whole package.

And with the XM radios going in, it's another enhancement.

Great.

Thanks a lot, guys.

Thank you.

Thank you.

Thank you.

Our next question tomorrows from Glenn Engel.

Please pose your question.

Good morning.

A couple of questions, one, can you go over the pilots?

Just what do you view as the -- when you're looking at what do you think your pilot contracts are based on, which carriers and which carriers are they focusing on, what they think the best comparables are?

I don't know that we really got into comparables at this point.

Our position is we need to make sure that our unit costs don't go up.

And that we're certainly willing to make changes and adjustments to improve the quality of work life of our pilots and the financial situation of all of our employees.

We have been very generous in sharing that as the Company has grown and prospered and we will continue to do that.

But we also need to remain very productive as we have been, and so to the extent that we need to make adjustments and keep our unit costs pretty close to where they are today.

We think we'll get there.

And that's kind of our starting point.

We don't really pay much attention to some of the other airlines, what's going on there.

We pay attention to what we think we need to do to be successful here.

Our contract with our pilots today is really quite rich compared to a number of other airlines around.

When we negotiate our last contract, we gave very, very substantial increases.

Those looked like a good deal at the time.

As the other airlines have come down, we're much closer.

But we still remain much more productive.

And where are the pilots pushing?

Are they pushing on the benefits side, the productivity side, the pay side?

Well, we don't know.

We've only seen three sections from them.

We've asked them for a complete package, and thus far they have refused to give us that.

They have only actually given us three sections, which is a pretty skinny look at what they are looking to achieve.

And on the RASM performance, can you talk about how much mix, whether it's business mix or local connecting mix that's contributing to that better yield?

I think -- I mean certainly -- really the yields across the board are up a couple of percent and I think we are seeing a little bit better business mix, a few percentages.

But again, it's-- I guess that number started to turn a little bit because as your planes begin to fill up, again, you start forcing, again, less availability 14 days out.

You kind of save it.

We look at mixed, Glenn, by basically when they purchase their ticket inside of seven days.

So we are-- it's up a couple of percentage points versus last year, which is, again, the first time we've seen that number turn around in a long time.

And finally, can you talk about seasonality with the 737 and going more east west?

Should your quarterly seasonality change?

Should your second to third quarter drop be less in future years than it has been in the past?

I think it will.

I don't have a percentage for you.

Certainly the east-west routes do not fall off as much in, say, September and October as Florida does.

We're up year over year to Los Angeles and Las Vegas and I believe to San Francisco, as well.

We're pretty much going to stay with that schedule.

But they will make us a little less seasonal, but at this point it's still a small piece of our operation, so we're still really in the early phases.

But I think over time, it will reduce the seasonality somewhat as we begin to add other destinations out there.

Thank you.

Thank you, Glenn.

Thank you.

Our next question comes from Susan Donafrio.

Please pose your question.

Hi, gentlemen.

A couple of questions for you.

Number one, could you just update us on cargo trend, because cargo revenue seems to be growing?

Well, I will just give it a shot.

We had been more or less, since 9/11, really out of the freight and mail business.

At the time, we had a lot of DC-9s and DC-9s were very restricted and our ability to carry mail and freight was extremely limited.

We also had a lot of security restrictions.

Really we more or less phased out that operation at the end of 2001.

This year with the 737, we now have a lot more cargo capability to the west coast.

And the post office is always looking for other vendors, so we decided to get back in the business slowly because we really want to focus really on the high end, and we don't want to overly complicate the operation.

But I think the trends are healthy, and I think once we get through this year, you're going to see third quarter, similar second quarter.

Fourth quarter will be higher because that's the biggest freight and mail quarter.

And then once you get to next year, you're going to see it grow along with a system, probably at a 30% to 40% rate going forward.

Right now, again, for us it's been a new business as we, again, stopped it in late 2001 and we thought that there was a good opportunity for us this year.

Great.

And then, my other questions are capacity related.

One is, can you give us the snapshot of the capacity, kind of where it's located throughout your system?

And then if you could give us a preliminary growth number for next year?

That will be terrific.

One of the things I could probably do is probably give you a traffic distribution, which may be what I have in front of me.

Obviously, there is some double counting here.

Florida is about 45%, this is the second quarter, Atlanta about 36%, Baltimore 13% and Philadelphia about 9%.

Those are the broad categories.

Obviously, those are our biggest areas of focus.

Atlanta, we did push over 200 flights in July.

We added a few new routes.

Each one of the routes really filled up very, very well this year.

So we're pretty happy with those.

Again, our system -- our whole game plan is still focused on diversification, but we're also willing to sort of throttle that depending on what the conditions are.

I can tell you, for example, there is a real dog fight going up in Philadelphia with Southwest pushing in there, US Airways.

A very, very competitive market.

We don't get mentioned much, but our unit revenues in the first quarter in most of those Philadelphia markets are well ahead of Southwest and better than US Airways in most markets that we go head to head with.

But the rate of growth in Philadelphia, we're going to wait and see because there is going to be a lot of money spent up there over the next two years.

Next year.

Again, in terms of next year, we have about 17 airplanes coming.

I think you'll see some increase in Atlanta.

I think we'll see increases in Baltimore and Philadelphia, and perhaps some additional west coast capacity.

Really finally, we are beginning to look at the Caribbean because we have airplanes that are capable of flying to the Caribbean.

We have announced Cancun and we may enter another route or two to that, because given our east coast strength, the supply-demand in those markets is a little bit better right now than most of Florida.

And so we think those routes are a natural for us, just like other carriers have announced their success in those markets.

We think we'll do pretty well.

We're looking at about 25% to 30% RASM growth next year in aggregate.

Great.

Okay.

Well, thanks so much.

thank you our next question comes from David Strine.

Please pose your question.

Thanks good morning.

On KASM guidance, it looked like the 3Q guidance weakened a bit from last time around.

I was wondering what particularly is driving that change?

David, as we mentioned, we're going to have a little reduction in the September schedule which will reduce ASM growth a little bit, and that's basically to fine tune our revenue production there in the third quarter.

So this really -- no other significant event that's causing the reduction in the KASM guidance other than a slightly reduced schedule.

At the end of the quarter, what was the headcount or FTE count?

Let us pull it up for you here.

David, in regard to the pulldown in September, while it has a slightly adverse effect on the KASM, it will be P&L positive.

While you're looking for that, maybe you could just give some insight on Charlotte specifically.

You ramped up there.

How is that in particular doing?

How are the bookings there?

We ramped it up in the second quarter and it coincided with a very strong traffic period, so it looks very, very good.

And again, the --

Is that stimulation or share stealing?

I think it's both.

It's too hard to tell right now.

And again, given the strong summary, you certainly won't know.

You will get a better view as you move into the fourth quarter.

But there is not a lot of low-fare capacity in Charlotte.

I think we think our timing was right.

We've got a strong operation in Atlanta.

We have had 200 flights a day.

So we can -- we opened up Charlotte to a lot of low fare markets that previously had very, very high fares.

This is important and we also started a Baltimore service and that did pretty good, as well.

So we've had some of our best new city startups this year, again going back in Sarasota, Indianapolis, Richmond.

Indianapolis has been great.

We're pretty pleased, how the new cities have gone this year.

David, the head count number at the end of the second quarter was 6,246.

Thank you very much.

Thank you.

Our next question comes from Helane Becker.

Please pose your question.

Thank you very much, operator.

Hi, everybody.

Good morning.

Good morning

Stan, I know you gave the cash position and I missed it, and so maybe you could tell me again.

I'm sorry.

The handout I have doesn't have a balance.

And then, my second question is for Joe.

You were in Washington a lot with respect to access to gate space in Washington, Washington National?

You're cutting out a little bit, Helane.

Is that better?

Yes.

Okay.

So you have been in Washington a lot and you kind of have good relationships up there.

Can you just kind of, address how you feel and what you think about the pension reform that the legacy airlines are pushing so aggressively that you yourself don't need and how you feel that might change the competitive landscape, if at all?

Yeah.

You are right in that I have spent a lot of time in Washington and my record is about 0 for 4,000, I think.

Oh, no.

No, I think, first of all, this whole notion of airline pension relief is a misnomer.

It's a bailout for Northwest Airlines and Delta Airlines.

There are only two airlines that want this, only two airlines pushing for it and only two airlines that need it.

So, one of the issues we have been dealing with in Washington is to get people to stop calling it airline pension relief because it's not.

And I was up with six other airlines last week making the rounds, making sure that people involved in this understood that, that the airlines, quote, are not pushing for this.

I think it's very -- there are two things.

I mean, you can't be against people's pensions.

And the consequences are pretty severe here.

So, while it doesn't make any economic sense or policy, government policy sense to bail these two airlines out, something is going to happen.

And what we have been pushing for is please do not give these people an interest-free loan for 25 years.

That really grossly changes the competitive environment and gives them a gross unfair advantage.

So if you're going to bail them out, do like you did with the ATSB and require them to put up collateral, have any commercial - a commercial loan, not an interest-free loan, and put some consequences on it like they did with the -- with the ATSB.

If you remember, when the ATSB was set up, it applied to every airline equally.

Some people chose to apply for it, and they couldn't qualify.

Some people, like America West, did qualify and got the loan and the taxpayers have done quite well with that deal.

They had to give up a third of the company to get the loan.

And some carriers like ourselves chose not to avail ourselves of it.

It's kind of interesting that Delta's CEO was an industry spokesman at that time, and they never sought to get an ATSB loan, nor did Northwest.

So there was a mechanism there that they could have availed themselves to that they chose not to do, and now they are up trying to get, in essence, a 25-year interest-free loan.

And so that's our position.

It's not only our position, it's the position of the Air Carrier Association and a number of independent airlines, some of which are very vocal and some of which are quite quiet, but nonetheless active.

So, there is only two working on this and that's sort of our official position is go ahead and help to the extent that you need the help, but make it a commercial loan and not an interest-free loan.

Okay.

Thanks.

Helane, the cash balance at the end of the second quarter was $376.8 million.

Thank you.

Thank you.

Our last question is coming from Andrew O'Connor (ph).

Please pose your question.

Good morning gentlemen.

I would like to know, Joe, perhaps it was you.

Can you expand on the new service to be offered to Cancun?

How many flights initially and I'm assuming they all originate from Atlanta.

Any other color you can share?

This is Bob.

We're going to fly at least one daily from Atlanta and weekends to Tampa, at this point.

We applied for Orlando.

That will probably end up in a route case between three carriers and it's only two routes.

We don't know when that will be decided or not.

So for now, we're planning on Atlanta and Tampa right now.

Okay.

And then we should look for this to begin in the fourth quarter, is that right?

Correct.

Right.

Sometime in December.

And then, Bob, it sounds like you intend to use Cancun as a springboard to other destinations in the Caribbean.

Can you give me a sense of timing and what the next destinations might be?

Thanks so much.

I don't want to get specific on certainly on destinations.

Again, we think Cancun is -- it's a very, very popular destination and there is a number of them.

And so we fly the Grand Bahamas, which is a very small one.

Cancun is a very large one.

We have no particular timetable, but it's probably likely we will add one to two Caribbean points over the next couple of years using 73s.

Thanks very much.

Thank you.

At this time, I'd like to turn the floor back over to Mr. Joe Leonard for any closing statements or comments.

Okay.

Thank you, operator.

And thanks for attending our conference this morning.

I think you can tell that we're feeling a little more bullish than we have in the last few years.

It's really the first time in about two years that we have actually been taking our revenue forecasts up.

We continue to make progress, good progress on our non-fuel costs.

And I think we'll continue to do that as we move forward.

I personally want to thank all of the employees of our company that just do a sensational job.

And have really offered a product that people like, and I spent a few days, a couple of weeks ago in Atlanta calling on customers, and I can tell you that we had some extraordinarily low on customers and the reason for that is they like our agents and they like our flight attendants, they like the people they come into contact with every day.

And so it's the superb service we're giving that's helping us move forward.

And we do believe that this cycle is probably nearing its end and we are looking at better revenue environment and a better capacity environment as we move forward.

So thanks for attending this morning.

And we'll talk to you next quarter.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

Please disconnect your lines at this time and have a wonderful day.