西南航空 (LUV) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, my name is Shae, and I'll be your conference facilitator.

At this time I would like to welcome everyone to the AirTran Holdings Incorporated first quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Arne Haak.

Sir, you may begin your conference.

Good morning everyone.

I want to thank you for joining us today for AirTran Holdings first quarter 2006 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.

Before we get started, 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 statement that are accurate only as of April 27, 2006.

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 10-K filings for the year ended December 31, 2005.

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 reconciliation of these non-GAAP financial measures is available on our Company's website at www.airtran.com.

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

Thank you Arne, and good day, everyone.

This morning we released our first quarter 2006 numbers, reporting a net loss of $4.6 million, or $0.05 per share.

Included in the first quarter results was a credit of $4.2 million, or $0.05 per share, net of tax, related to a fuel adjustment for prior periods.

While a loss is never satisfactory, we are optimistic about the strength in second quarter revenue and bookings and the ongoing improvement in the revenue environment.

As in previous quarters, we continued to be buffeted by record high fuel prices and intense competition in the marketplace.

However, the macro forces affecting our industry continue to lead toward a restructuring, which will ultimately favor the low-cost productive carriers.

At AirTran, our mission remains the same; keep it simple, efficient and low-cost, while providing a safe and pleasant travel experience for the customers.

We have consistently followed this philosophy and it has served us well.

Just as our vision has contributed to our success, so have the hardworking and dedicated crew members who serve the customer everyday.

We are a company united in the belief that we can deliver a better product with more value and lower fares than any other carrier in the industry.

This is our goal and this is what we strive for everyday.

As we have said in prior conference calls, the industry is undergoing dramatic changes, and this remains the case today.

With the recent run-up in fuel prices, carriers with high-cost structures simply cannot continue absorbing the higher fuel costs.

Add to this mix the lack of new aircraft availability and the options for lowering costs and conserving cash become limited.

This is an ever tightening circle that will eventually reduce higher cost capacity in favor of low-cost capacity, resulting in a better match-up of price levels and consumer demand.

At the forefront of this trend are carriers such as AirTran.

Now more than ever, we believe we have in the 717s and the 737s the right aircraft at the right time and with the right costs.

This provides an advantage that allows us to offer attractive pricing in our markets.

At the same time, our low fares, combined with product amenities such as business class, assigned seating and XM satellite radio, give the customers more value than they will find elsewhere.

We think passengers like what we have to offer and we continue to see the proof of this in the growing numbers of customers who fly regularly on AirTran.

Now I’d like to talk about our metrics.

Since the 1st of the year, AirTran has taken delivery of 6 - 737-700 aircraft, 5 in the first quarter and 1 in April.

Including a 717 aircraft delivering tomorrow, our fleet totals 112 aircraft, consisting of 86 - 717s and 26 - 737s.

On a year-over-year basis, capacity as measured in available seat miles, increased 24.4%, resulting from new aircraft deliveries, offset somewhat by a decline in stage lane from 659 miles, to 646 miles.

The year-over-year reduction in stage lanes reflects the deployment of aircraft to shorter stage lanes on the East Coast, to take advantage of industry restructuring and high demand.

Traffic or revenue passenger miles increased 24.9%, resulting in a record first quarter load factor of 70.8%.

Average fare for the first quarter was up almost $8.00, to $89.00, a 9.5% increase, reflecting the improving revenue environment, driven by a 10.6% increase in yield, to $0.1305.

As a point of information, it was the first quarter of 2002 when AirTran last saw a $0.1305 first quarter yield and that was on a stage lane of nearly 100 miles shorter.

Back then, our load factor was 66.3%.

With today’s record load factor and yield, the result is much stronger unit revenue of $0.0924.

During the first quarter, AirTran served nearly 4.5 million customers, an all time record, up over 26% year-over-year.

Putting this in the perspective of the historical record, we served 1.6 million and 2.1 million customers during the first quarters of 2000 and 2001.

Over the past 6 years we have grown the total number of customers 3-fold, yet we have maintained our low-cost structure throughout that growth.

In the first quarter 2006, AirTran's non-fuel unit cost increased nominally by 1.1% year-over-year, to $0.651.

Operating costs on a fuel-neutral basis were up slightly, to $0.893 from $0.890.

Operating costs, including fuel, increased 9.3%, to $0.0973 year-over-year, reflecting a 33% increase in the cost per gallon of fuel.

Included in the cost of fuel is a credit adjustment related to prior period fuel expense of $4.2 million, net of tax.

The effect of the adjustment reduced the current period’s fuel cost per gallon by approximately $0.095 per gallon.

During the first quarter, AirTran also realized a benefit of $1.3 million as a result of fuel hedging.

Average daily utilization increased 2.3%, to 11.2 hours per day, from 11.0 hours.

Utilization by fleet type was 11.1 hours for the 717, and 11.8 hours for the 737.

Reviewing our first quarter operating performance, completion factor was 99.0% .

On-time arrivals were 75.8%, and baggage claims were 3.86 per thousand.

Now I would like to review our financial performance.

Passenger revenue increased 38.1%, to $399.3 million in the first quarter, and total revenue increased 38.8%, to $416 million.

Both passenger revenue and total revenue represent all-time quarterly records for AirTran.

Looking at the individual line items of expense on a unit cost basis, salaries, wages. and benefits declined 5.3%, to $0.0213 per ASM, from $0.0225.

The continued reduction in labor unit costs primarily reflects the increased productivity from the new aircraft and greater fleet utilization.

Full-time equivalents per aircraft dropped 4.7%, from 66.4 FTEs, to 63.4 FTEs.

This represents the 10th consecutive year-over-year quarterly reduction in FTEs per aircraft.

Fuel expense on a unit cost basis rose 30.9%, to $0.0322, from $0.0246.

Excluding the effect of the fuel adjustment, first quarter 2006 fuel unit costs would have been $0.338.

The increased fuel costs resulted primarily from the significant price increases throughout the year and to a lesser extent, the growth in our fleet over the past year.

Aircraft rent on a unit cost basis declined 3.1%, to $0.0124, from $0.0128.

The reduction in aircraft rent unit costs reflects the increased number of debt financed 737s delivered since the first quarter of 2005.

At the present time, 18 – 737s are leased and 8 are mortgaged.

Distribution expense unit costs dropped 15.9%, from $0.044, to $0.037 cents per ASM.

The reduction in distribution costs primarily reflects the new rates in our GDS agreements, which were renegotiated in the fourth quarter 2005.

The trend toward lower distribution costs should continue throughout the year.

During the first quarter 2006, 59% of our revenue sales were made by AirTran.com and all internet sales increased to approximately 72%.

In addition, over 57% of our customers checked in for their flights using internet or airport technology, representing a 6 percentage point increase over the first quarter of 2005.

Maintenance, materials and repairs, unit costs increased 35.8%, to $0.091, from $0.067 for the quarter.

The increase in the unit costs primarily reflects the higher maintenance expense related to contractual increases for the 717 Rolls-Royce engine power by the hour agreement, as well as an increased number of seat checks in the first quarter.

On a cost per block-hour basis, maintenance rose from $264.10 per block hour, to $365.30 per block hour.

Landing fees and other rent unit costs were unchanged at $0.052 per ASM.

Aircraft insurance and security services declined 6.7%, from $0.0015, to $0.0014, primarily due to reductions in aircraft insurance rates for 2006.

Marketing and advertising unit costs declined 3.7%, to $0.026, from $0.027.

The reduction in marketing and advertising is due in part to the timing of advertising expenditures this year versus last.

Depreciation expense unit costs increased 16.7%, from $0.0012, to $0.0014 per ASM.

The increase in depreciation is driven mainly by the increased number of debt-financed aircraft in 2006, compared to 2005.

AirTran currently has 8 – 737s and 8 – 717s, which are being depreciated.

Other operating expense unit costs increased 11.1%, from $0.0072, to $0.008.

The increase is due primarily to professional and technical fees and passenger service costs.

The Company recorded a net operating loss for the first quarter, of $4.5 million.

EBITDA, however, improved $6.7 million year-over-year.

When you adjust the first quarter 2005 and 2006 operating results to exclude fuel hedging benefits of $11.6 million and $1.3 million respectively, and exclude the effect of the fuel credit in the first quarter, AirTran’s core EBITDA improved $10.2 million year-over-year.

Looking at the balance sheet, AirTran ended the first quarter 2006, with total cash and investments of $427.2 million, of which $21.9 million was restricted.

In addition, the Company has deposits with the Boeing company, net of pre-delivery deposit financing, of $46.4 million.

Total debt increased $91.5 million from year-end 2005, to $564.1 million as of March 31, 2006, reflecting new debt related to aircraft financing and pre-delivery deposits.

And now I would like to update our guidance for 2006.

Regarding unit revenue, we believe that the shift in the Easter holiday from March to April, slowed our first quarter unit revenue growth by 3 to 4%.

This is most apparent in some of our Florida markets.

In the second quarter, our April traffic has been very strong and our May and June bookings are up as well.

We expect our second quarter year-over-year RASM improvement to be greater than the first quarter and in a range from 12 to 14%.

Capacity additions by quarter are unchanged from our earlier guidance of 20% in the second quarter, 27% in the third quarter, 23% in the fourth quarter and 23% for the full year.

Aircraft deliveries are also unchanged at 5 – 737s and 2 – 717s in the second quarter, 4 – 737s in the third quarter, and 4 – 737s in the fourth quarter.

Non-fuel unit costs came in better than expected, rising only 1.1% versus an expectation of 2 to 3%.

For the remainder of the year, our non-fuel guidance is unchanged, with an increase of 2 to 3% in the second quarter, a decrease of 2 to 3% in the third quarter, and a reduction of 1 to 2% in the fourth quarter.

For the full year we expect non-fuel unit costs to be flat to slightly down.

Our all-in fuel cost guidance is updated as follows.

For the second quarter, $2.35 to $2.40 per gallon, all-in, based on a range of crude oil prices from $70 to $75 a barrel and a crack spread assumption from $15 to $20 per barrel.

We currently have 24% of our second quarter fuel consumption under contract at prices from $2.00 to $2.05 per gallon, all-in.

The third and fourth quarters have approximately 18% under contract in the same price per gallon range.

Non-aircraft CapEx remains unchanged from our earlier guidance of $25 million for the full year.

In conclusion, we are still being challenged by high fuel prices and intense competition.

However, positive trends point toward improving revenue and increased numbers of customers flying on AirTran.

We believe that the strength of these factors will result in further top-line revenue growth.

As we continue taking delivery of new fuel-efficient aircraft, our cost structure will improve.

The 737-700s are integral to achieving lower costs, and when used to develop our existing route network, lead to higher productivity.

We believe that the combination of these three factors; revenue growth, low costs and productivity, will enable us to compete in the current environment and maintain, if not improve, our competitive advantage over other carriers.

Finally, we want to thank our customers for flying AirTran.

We are committed to delivering a better product with more value and lower fares than our competitors.

We thank our shareholders for their support and we thank our crew members, who deliver outstanding service to our customers everyday.

At this time, operator, I would like to open the call for questions.

[OPERATOR INSTRUCTIONS] Ray Neidl of Calyon Securities.

Stan, from the presentation that you gave, it sounds like going forward for the rest of the year that the maintenance expense line and the other operating expense line are going to be up significantly year-over-year.

Is that a correct assumption to make?

I’d say in the first quarter we’ve hit the high watermark.

Clearly the contract increase in the power-by-the-hour agreement went into effect in January and that remains the same for the next 2 years.

I would tell you that for the full year it’s probably going to come in in a range of around $300 to $325 per hour, which is about the 16 to 18% increase.

So the first quarter was clearly the highest.

Okay.

And Bob, you’re switching more capacity back East, getting at some of the longer haul routes or your planned growth in that area.

Jet Blue and everybody else seem to be doing the same thing.

Is that going to put a lot of pressure on yields in your base territory as a lot of the low-cost carriers plus Delta emphasize the East Coast now?

Ray, I don’t think so.

Actually, if we get some [advancement] by pulling down the capacity in some of those song routes, then we’re actually going to get some benefit as well, because that’s just going to take pressure off the whole East Coast of Florida.

But just to go back and really anticipate the question, our unit revenue was up about 11% in the first quarter.

Had I stood back and looked, I would have thought it would have been almost 12.

But this holiday shift is actually a very big deal for AirTran.

In the first 4 months of the year, about 53 or 54% of our traffic is going in and out of Florida.

And so, our March unit revenue improvement was actually below 10%.

I won’t give you the exact number, but our April is going to be above 20.

And so we’re going to see a significant up-tick in April and that’s going to pull the whole quarter up.

So we’re going to see our unit revenues up several points in the second quarter versus the first quarter.

Yet in terms of capacity on the East Coast, the capacity situation in Atlanta is still quite good.

A lot of our market’s capacity is down.

Some of it’s bigger planes are being replaced by RJs, but the net capacity situation is still quite good.

Capacity in Boston is down.

A lot of that is the song capacity.

Baltimore capacity for the next couple of quarters is down.

Charlotte and Philadelphia capacity is down as well.

So the supply and demand situation is still pretty good and I think everybody benefits from it.

So I think at least for the next several months, going into July, perhaps August, we see very very strong unit revenue growth ahead.

Gary Chase of Lehman Brothers.

Just a couple of quick ones.

One for Bob, you know, last quarter you had guided to double-digit RASM growth for the quarter, which you obviously hit, but since January – at least it’s our perception anyway, that the revenue environment has been accelerating.

Did anything kind of catch you by surprise on the negative side in the quarter?

Were you surprised by the magnitude of shift in Easter?

It feels like you might have done a little bit better amid what’s happening around the industry.

Well, you’ve got to look around.

The Southeast and Atlanta obviously was leading the way.

Orlando, which is our second biggest market, was only up slightly on a unit revenue basis.

We didn’t really see the capacity [hold] down in Orlando on a network basis that we had hoped.

We’ve got a lot of new capacity going into Chicago, on a year-over-year basis.

And all that stuff is startup and it’s going to take us a good 6 to 9 months or even a year for that to build, and it’s building pretty good.

I think one area that was a negative was the Philadelphia, other than Atlanta.

I think all that capacity going into Newark to Florida is having an impact on Philadelphia to Florida, at least our numbers would tell us.

Our year-over-year numbers Philly to Florida, were actually down.

The fact is, we’re still growing 24% and the fact is that new capacity is always coming in at below your average RASM rate.

And that’s always going to be the case.

The core capacity is certainly up higher than the average.

So I think in the scheme of things, I actually thought we would beat our plan.

I thought we’d get 12.

We didn’t quite get there.

But we never expected to get 15 or 16%.

Again, people have to realize, we’re growing 20%-plus a year and we’re building a route network.

So in the scheme of things, we’re pretty satisfied with the overall RASM trends and I think at least for the next 5 months it looks very good.

I would never make a call on September-October, just way too early for that.

And you feel good despite what you’re saying about the drag from the new capacity and when you consider these fuel prices, you’re still comfortable with the growth plan here?

I am.

And there are a couple of real positives that keep going forward.

There has been a number of Southwest Airline’s increases, which have been matched in the industry.

We’ve taken a few ourselves.

We don’t advertise when we take fare increases.

Telling the consumer we’re raising their prices, we never think it’s positive.

We’ve taken several fare increases as well.

Actually 1 month ago, the industry more or less will stop absorbing PFCs.

And there’s going to be an underlying revenue boost there as well.

And that’s a pretty positive trend.

So we’re seeing very very good fare increases and certainly the load factors, particularly in the second quarter, are going to be much higher than the first.

Again, if I can look at it over the next 4 or 5 months, looks quite good.

And can I just ask you to clarify two things quickly?

One is, how much did the timing of the C-checks impact the maintenance line for the quarter?

I know you gave kind of a block hour rate, but was the first quarter, in terms of run rate on maintenance, was that overstated materially by the C-check phenomenon you were describing?

No, it was primarily the contractual increases in the rates, Gary.

And as I said, the first quarter will be the high watermark for the year.

I think we had 17 C-checks, versus 6 last year.

So there’s probably $1 million or $2 million there.

That’s going to be more or less level as we go forward.

And then the power-by-the-hour [inaudible] on our engines, that’s the big increase.

But the first quarter tends to be our highest quarter for maintenance costs, because we defer maintenance in the fourth quarter as best we can and push it into the first.

And Stan, could you just tell us what you expect to pay, above and beyond spot price?

What’s the differential that we should be adding into our numbers before we consider hedges?

What’s the differential on your fuel line between what you pay at the pump and what you report on the P&L, is that still around $0.25?

The differential is from the spot price to what we report, because we report all-in.

And the way you figure it is 16% taxes and then about $0.02 to $0.03 transportation and in the plane per gallon.

So the guidance I gave in the presentation here of $2.35 to $2.40 per gallon, that’s all-in.

That includes the benefit of 24% that we have under contract in the second quarter at $2.00 to $2.05.

Currently, if you look at the spot price of Gulf Coast Jet and you do the calculation for taxes and in the plane, it comes out to be about $2.50 a gallon, before any benefit from hedges.

And the $2.00 to $2.05, that is inclusive of the 16%?

That’s correct.

That’s all-in.

Mike Linenberg of Merrill Lynch.

I guess this is a question to Joe.

If you could just update us on where talks are with your pilots?

Yes, Mike.

No different than last quarter.

We’re meeting about 2 days a month, very little progress and just kind of slugging through it.

You know, you don’t get much done in 2 days a month.

So we’re sort of status quo, as we were at the last quarter.

Okay.

My second question – and I realize this has been brought up on previous questions.

But, it’s like two stories here.

On one hand we hear very strong load factor, good revenue trends, offset by some of the items, Bob, that you brought up about startup costs and some one-time expenses or more maintenance in the first quarter.

And yet, when you look at this quarter maybe versus last quarter, you were paying $0.20 less for fuel, Independence is no longer in the market.

And yet, you add everything together and you come up with an operating margin that is going to be one of the lower margins in the industry.

And as I look out over the next couple of quarters, as I look at the AirTran story with the startup costs, are we going to continue to see AirTran lag the industry or is it just that your March quarter is so much more seasonal than your second, third and fourth quarters?

I’m really trying to get my arms around this.

And I know a lot of this has been addressed, but anything that you can say that may convince me that this has just been a very tough quarter and that the wind’s going to be at your back as we move through the year?

Again, I would go back and say, of carriers of any size, we probably have been more impacted by what happens more than any other carrier.

A 3 or 4-point shift, I guess you can say I don’t believe it or not.

Well you’ll see it when we report the second quarter, we’re going to have a – you know, we are plus-20% in April and we were below 10% in March.

And that is literally tied to the seasonality in Florida.

So that really has a big impact.

Then you go back and you talk about leading and lagging, again, a number of carriers have pulled down capacity 15 to 20%.

They’re going to get a big pop and they’re going to get a big pop one time.

At that point, then you’ve got to say, where are they going to be?

We have a relatively high growth rate.

We think our costs are under control.

We think our costs can go lower.

And so, at some point – we may not have the big rebound, because we didn’t have the big fall, like a whole lot of carriers.

So you’re comparing AirTran, who was profitable last year, to carriers that lost tons of money or carriers that were in bankruptcy.

It’s kind of a ridiculous comparison.

If you cancel your worst 15% of your routes and then put all the fare increases in, you’re going to get very very high unit revenue increases.

We are clearly not anywhere near as cyclical as a traditional legacy carrier and we don’t have the big drops.

It’s just kind of the way it is.

I guess I’m glad for that.

I’m glad we didn’t lose $50 million last year, because our numbers would look better.

In the scheme of things, I think we’re still seeing a lot of competition on the East Coast.

We’re still building out our route network.

But we’re getting pretty strong unit revenue growth, with capacity increasing 25%.

It’s very hard to do.

You know, Mike, we grew revenues 38% on 24% additional capacity in our very worst quarter.

We think that’s pretty darn good and the non-fuel costs were only up 1.1% on a quarter that tends to be high in maintenance cost.

So on a relative basis, I don’t know how you can do much better than 38% revenue growth on 24% capacity growth.

I don’t disagree with the revenue metrics and how you’re outperforming.

I go straight to margins and my concern is that margins stay low or lag and don’t improve and at what point do you have to rethink about where you’re growing?

And maybe it’s a function of the network.

You listed a lot of one-timers or a lot of issues that hit you early on, so it looks like the seasonality impact is having a much bigger than normal impact.

So we’ll stay hopeful as we look forward.

Mike, I would take you back to one comment that Stan made.

He talked about what’s called core EBITDA.

Our hedging program was stronger in years past.

We saved about $11.5 million on hedging last year, versus about $1 million this year.

We’ve had to absorb that.

And so if you look at the underlying margins, they’re actually improving.

At some point, some of these things, a [few will equalize, we’re probably at the high end of the industry when you put everybody on a same fuel basis.

So it’s kind of a good news/bad news story.

We don’t have the hedging savings right now as we had a year ago, but we’re kind of making it up.

I think, going forward, I think you’re going to see some pretty good numbers out of us.

Helane Becker of Benchmark.

Could you just talk maybe a little bit about how the long-haul Western routes are doing, relative to your expectations and the outlook for that?

I’d appreciate that.

Thank you.

I guess the long-haul West routes are actually a pretty small piece of our business.

Do you have what percent they are?

Probably 8 to 9%.

And our operations to Las Vegas and Los Angeles are now moving into the fourth year and they’re pretty sound.

They’re in the black now.

So that’s good news.

San Francisco is weaker.

We just fly one flight on the off-peak.

It’s a red eye.

That’s really more on the marginal side, because geographically it’s a little bit tougher for us to get the yields we need.

In Seattle, we’re just going to fly in the summer.

Because we think we’re going to make a ton of money in the summer and we don’t need to be there in the off-peak.

We’ll let everybody else fly the off-peak.

So I think, this year, collectively, the margins on our entire West Coast operations will be positive.

Okay.

What’s this Indianapolis-San Francisco that comes in your route map?

Well, we’ve moved into Indianapolis over the past year.

We fly to Atlanta.

We fly a number of operations to Florida.

And we’re going to fly Indianapolis-San Francisco for the summer, at least, and Indianapolis-Los Angeles.

It’s a pretty good size city and there’s really no dominant carrier in Indianapolis and we think we’ve got a pretty good opportunity there.

Jamie Baker of JP Morgan Chase.

Stan, just a clarification.

Was the fuel guidance for the remainder of the year or the full-year estimate?

I think you said remainder, I just want to be sure.

No, the guidance was only for the second quarter, Jamie.

We’re setting it to the current crude ranges of $70 to $75 and crack of $15 to $20.

Hopefully it comes down in the second half, but I can’t project out beyond the second quarter.

Understood, got it.

And Bob, somewhat of a follow-up to a point you made earlier.

Your RASM gains really turned on, if you will, in the third quarter of last year.

You just mentioned seeing strength into August of this year.

Is it beyond that point your visibility simply begins to wane?

Is it because of the tougher comps or is there something on the demand side of the equation that gives you pause there?

Well, first of all, you have no bookings to really look at in a meaningful way.

I think certainly the comps do get tougher, because we may argue that revenues last year were just spectacular.

But probably really more important is, we don’t know what’s going to happen from a capacity standpoint.

If you look out from a capacity standpoint, most airlines haven’t adjusted their schedules, so you don’t really know what we’re going to see.

And so I’d say if we’re in a $70 to $75 fuel environment, will that mean more capacity pull-downs in the fourth quarter?

It is a couple of variables that are all big.

And so it really is up in the air at this point.

Okay.

And then finally, Joe, you mentioned the sluggish pace of negotiation and obviously you don’t want to negotiate in public or answer the questions I’d really like to ask you.

But presumably there are specific areas in the contract where you and the pilots are significantly far apart.

Should we assume that that is primarily the issue of pay or is there some other area where a large bridge needs to be gapped?

It’s hard to say, because we don’t really have a lot of specificity at this point.

And we’re still sort of at the wish list stage, I would describe it.

We made it pretty clear that our objective is we can make adjustments in the contract to improve quality of work life and fix some mistakes that we collectively made the last time around.

But, in doing so, we want to make sure that we stay about chasm neutral.

David Strine of Bear Sterns.

My question is about the second quarter RASM guidance.

You did 11% RASM in the first quarter and you indicated that there was a 3 to 4-point hit from the Easter shift, yet the guidance for second quarter is 12 to 14% and I think, Bob, you mentioned that April looks up at least 20%.

So the question is, what are you seeing in May and June that is discouraging, either from a yield standpoint or is there just less capacity coming out than you anticipated in those months?

First of all, it is some apples and oranges.

We saw the beginning of unit revenue improvements last May and June anyway.

I think the airline began a turnaround last year at that time.

But I think we’re looking at plus-20s in an April and again, it’s possible we could be in high single-digits or low double-digits in June.

So there’s always a possibility for some upside, but it is really is too early to tell.

We said probably 13.5% is probably a good base number to work with.

It could be higher or lower, depending on how the actual bookings turn in .

But that’s a substantial difference. 2 or 3 points of RASM is a big deal and it’s not insignificant as the revenue base begins to increase.

So I think the overall numbers look pretty positive.

Okay, so there’s nothing in particular then right now that you’re seeing in your bookings for May at least, that are troubling and then June it’s a little bit less clear?

Again, the bookings look very very good.

And yield?

Yield should be up, hopefully double-digit, with some load factor improvement.

Again, trying to nail the last 1% is hard.

I said that we expect it to be a couple of points higher than the first quarter.

I understand.

I know it’s always better to under-promise and over-deliver in life.

But I just wanted to clarify that.

Thanks a lot.

[OPERATOR INSTRUCTIONS] Andrew O’Connor of Wells Capital.

Stan, you know, I missed your snapshot of the balance sheet at the end of the quarter.

I thought I heard you say total debt $564.1 million?

Yes, at the end of the first quarter, and that was up almost $92 million from year-end, strictly due to the additional aircraft financing that we took.

Okay.

And then the other line items that you ticked off?

Cash and investments was $427.2, of which $21.9 was restricted.

Okay.

And I wanted to get some more color, are you guys happy with your current capital structure?

Is it about where you’d like it to be long-term?

Well, the challenge we have coming up here or going forward is the financing of the aircraft.

So we’ve been heavily skewed towards operating leases with the 711 aircraft and we’re trying to balance that with debt financing.

And we’ve been pretty successful and there’s quite an appetite among the capital markets for the 737 aircraft.

So we’ve had no problem at all in terms of financing pre-delivery deposits, as well as long-term financing on the aircraft.

So, at least for the foreseeable future, assuming we get favorable rates and we’ve been doing that, I’d like to stay with debt financing.

Glenn Engel of Goldman Sachs.

Last year when you were sort of breakeven-ish, you were buying lots of aircraft and the idea was that since everybody else was losing money and you were breaking even, putting pressure on them would ultimately lead to higher returns.

T

his year though, it doesn’t seem like the legacy carriers are losing much money anymore.

They look fairly stable, even with oil in the high 60s, you’re still adding a lot of seats, you’re still making only a little bit of money.

So, I’m just not sure, what is the end game here?

It seems like it’s been waiting for the big guys to cut back and I’m not sure why you feel the big guys are still going to be cutting back even more than they’ve already done?

I guess maybe Joe and I will both speak.

But if you go back, first of all there’s not a lot of airlines in this industry that are growing at 20-25% a year and are growing at 11%-12% unit revenue improvement.

That’s pretty hard to do and we are actually doing that.

But there are a couple of carriers that are churning, but there is a lot of carriers in bankruptcy and still have a long way to go in terms of restructuring.

When United and carriers are basing business plans on $50 oil, well oil has gone up quite a bit.

And we still don’t know what’s going to happen to Delta.

We still haven’t seen all the fleets come out of there as well.

So we think there is still some restructuring to go.

It’s just our belief.

And as long as we can continue to execute like we are with pretty good unit revenue improvements, we’re pretty comfortable going down the path that we are.

And so, again, as long as our costs are going down, if we can stay focused on that, as long as our root network is standing nicely, we feel we’re in pretty good shape.

The things that we look at, as we grow the airline, are we growing load factor?

The answer is, yes.

Are we growing cash?

The answer is, yes.

Are we growing unit revenue?

The answer is, yes.

And what’s our relative position to the industry?

And it’s still far and away, better than almost anybody out there.

And I think I would disagree with the comment that these other guys aren’t losing substantial amounts of money.

And as fuel keeps going up, their situation is only going to get worse, relative to ours.

We’ve had the lowest non-fuel cost in the industry, I believe.

So, when we look at the situation of a very strong revenue environment, the strongest we’ve had since 2001, September, so we see absolutely no reason to change our plan at this point.

So, $60 million a quarter or $90 million a quarter is not a very good number.

And these are the numbers that these guys are reporting and we’re slightly below breakeven.

The only guy that seems to be doing pretty well is Alaska and Southwest.

Buck Horn of Raymond James.

I wonder if you could clarify that $4.2 million fuel charge, I need a little color there?

And was that tax deductible at all?

It’s an adjustment coming out of an internal audit of prior period fuel expense.

So essentially, we over-expensed prior periods and now we’re correcting it in the first quarter.

Bob Machado of Prudential.

Just a quick one.

Do you remember what you added in the way of aircraft in the fourth quarter?

Let us look that up here and we’ll give it to you in a second. 6 – 737s.

David [Vanhauten] of JP Turner.

I’m just curious, given Boeing’s backlogs right now, if they’ve had any discussions with you about your future plans when the 737 options run out?

We just firmed-up all of our deliveries now through 2010.

That would put is with 100 firm 737 orders.

We had the option to firm-up some airplanes beyond 2010 and we chose not to do that at this point.

We think we’ll have the opportunity to do that later on if we choose to do so.

We’d like to get a better feel for when the new generation or new-new generation 737 is going to come out.

You don’t want to be the last guy buying the old technology.

But right now we’re done through the decade.

Okay.

Just curious, how is Midway working out?

It’s doing great.

We put a lot of capacity in there and obviously some of it’s in the development stage, but we’re very pleased with Midway.

It’s doing everything we thought it would do and it will be an important part of our airline, going forward.

At this time we have no further questions.

I would like to turn the floor back over to Joe Leonard for any closing remarks.

Thank you.

Let me just comment and say, we think we are an airline that’s very much in control.

We believe that we have a very aggressive, but controlled growth plan.

We are able to move our airplanes to where the opportunities present themselves, which we’ve done this year.

We think we’ve got a very aggressive and controlled RASM expansion, double-digit in the first quarter, double-digit in the second quarter.

And our base, as Bob pointed out earlier, is getting very big.

So when you get RASM and expansion, it’s on a very big base and you create pretty big numbers pretty fast, a 38% revenue increase on 24% capacity, we think is pretty good.

We’ve got a very very strong and growing network.

Our network in Atlanta will be up pretty close to 250 flights a day this summer.

It’s one of the biggest hubs in the United States, mainline hubs anyway.

And we have a controlled chasm, very much under control.

Non-fuel was up 1.1%.

We believe it will be flat to down for the year, as we’ve guided.

If we do that, that will be 8 years in a row that we have reduced our non-fuel chasm.

I don’t think anybody in the industry can say that.

We’ve got a very controlled fuel conservation program, new technology airplanes, financial hedges and a very very aggressive internal fuel conservation program.

Thank you.

This does conclude today’s teleconference.

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