西南航空 (LUV) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

My name is Nelson, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the AirTran Holdings, Inc. second-quarter 2006 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (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' second-quarter 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, I would like to begin by reminding you that our call may include forward-looking statements, and our actual results may vary -- differ materially from these statements.

These comments are not historical fact, and instead, you should consider them time-sensitive forward-looking statements that are accurate only as of July 27, 2006.

If you would like additional information concerning factors that could cause our actual results to vary from those in the forward-looking statements, they can be found in our form 10-K filings from the year ended December 31st, 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 a reconciliation of these non-GAAP financial measures is available on our Company's website at AirTran.com.

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

Okay.

Thank you, Arne, and good morning, everyone.

AirTran Holdings is pleased to announce an all-time record-setting quarterly profit of $32 million or $0.33 per diluted share.

We're very pleased with this performance and would like to acknowledge the contributions of all of our Crew Members in making the second-quarter our best quarter ever.

With a steadily improving revenue environment resulting in a 44% increase in passenger revenue, AirTran's unit revenue performance remains strong.

Record load factors were achieved during the second quarter even while our capacity grew in excess of 23%.

Contributing to the strong revenue picture was an equally strong yield performance reflecting the benefit of fare increases as well as growing demand for our product.

As in previous quarters, the cost of fuel remains one of our biggest challenges.

We have managed our business in this environment by raising our prices to offset some of the fuel costs while remaining dedicated to keeping our costs low.

Our growth wouldn't be possible, of course, without the increased numbers of customers who fly on us.

While our low fares are an excellent reason to try AirTran, we believe that our unique offering of amenities such as Business class; assigned seating; large, easy fit bins; and XM Satellite Radio keep the customers coming back.

In particular, we're unique among U.S. domestic carriers in offering Business class on all of our flights.

The Business class product is viewed by many of our customers as having great value, and we're proud to offer it.

In addition, we continue to enhance our product by opening new markets.

During the second quarter, we begin service to White Plains, New York from Atlanta, West Palm Beach, and Orlando and started new seasonal service between Seattle and Atlanta.

All of these markets are expected to perform well, and they will serve to further broaden our already strong route network.

During the month of June, we transitioned to the NewSkies reservation system which will result in numerous customer improvements, including better customer recognition, improved automation of the value added features of our corporate and A-plus rewards programs, improved account management, and other attractive features.

NewSkies will also bring about significant internal improvements with faster transaction processing, improved revenue management, and enhanced system upgrade capability for the future.

The conversion to the NewSkies system has been greatly anticipated, and we are the first major airline to debut this product.

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

Since the first of the year, AirTran has taken delivery of 12 737-700s, including five in the second-quarter and two in July.

In addition, we received the last two of our 717 deliveries in the second quarter for a total of 14 aircraft year to date.

Our fleet including the July deliveries now totals 87 717s and 32 737s.

On a year-over-year basis, capacity as measured in available seat miles increased 23.3% during the quarter.

The growth in capacity came primarily from aircraft deliveries and increased daily utilization as well as a 1.1% increase in stage length to 652 miles from 644 miles.

Traffic or revenue passenger miles increase 27.3%, and load factor increased to a record 78.1%, or 2.4 points better than last year.

Average fare was $94.18 or a 14.4% increase over the second quarter of 2005.

Now, on a sequential basis, commencing with the third quarter of 2005, average fares had been $81.96, $89.81, $88.99, and $94.18, or an increase of nearly 15% over the last 12 months.

The increase in average fares reflects improving revenue trends driven by a 13.2% improvement in yield to $0.1376 cents.

This was the highest quarterly yield since the second quarter of 2001, when the stage length was 16.9% less at 542 miles, and the yield was $0.16.

During the second quarter, AirTran served a record 5.4 million customers, representing a 25.9% increase over the year-earlier period.

In fact, with 218 daily departures out of Atlanta and 650 flights across the network, we have grown our second quarter enplanements nearly 133% over the last five years.

In the second quarter of 2006, AirTran's nonfuel unit costs increased slightly to $0.063 or 1.6%.

Fuel-neutral operating costs were up less than 1% for the quarter, while total operating expenses including fuel increased 10.8%.

The significant rise in total operating expense was driven by the increased cost of fuel at $2.26 per gallon or a 33% increase in the quarter compared to last year.

During the second quarter, AirTran realized savings from fuel hedges of $5.5 million.

Average daily utilization increased 1.8% to 11.3 hours per day compared to 11.1 hours last year.

Utilization by fleet type was 11 hours for the 717 and 12.2 hours for the 737.

Looking at second-quarter operating performance, our completion factor was 99.5%.

On-time performance was 76.6%.

And baggage claims were 4.8 per 1,000 customers.

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

Passenger revenue was an all-time record $509.4 million generated by a 25.9% increase in passengers and a 14.4% increase in average fare.

Total revenue for the second quarter increased 44.2% to a record $528.2 million.

Looking at the individual line items of expense on a unit cost basis, salaries, wages, and benefits declined 1.9% from $0.0208 to $0.0204 for the quarter.

As in prior periods, the improvement in unit costs reflects the productivity gains driven by the additional aircraft and increased daily utilization.

On an FTE per aircraft basis, productivity in the second quarter was 62.1 employees per aircraft compared to 65.3 employees per aircraft last year, representing an almost 5% improvement in productivity.

Aircraft fuel expense on a unit cost basis increased 31.2% to $0.037 in the quarter compared to $0.0282 last year.

As in prior quarters, the increase was primarily driven by the rise in the price per gallon of fuel and a slight increase of 0.8% in fuel burn.

In absolute dollars, AirTran's fuel expense increased 66.9 million, of which 43.5 million was related to price and 23.4 million was related to the increased [flying from] new aircraft.

During the second quarter, AirTran was hedged using fixed forwards for approximately 34% of our fuel at a commodity price per gallon of $1.89 or $2.10 cents, including all fees and taxes.

Aircraft rent on a unit cost basis declined 3.2% to $0.0120 from $0.0124 primarily as a result of new aircraft debt financing.

During the quarter, we took delivery of two 717s and three 737s on operating leases.

Updating our fleet information, the number of leased and owned aircraft as of the end of July are 87 717s, consisting of 79 leased aircraft and eight owned aircraft, and 32 737s, of which 21 are leased and 11 are owned.

For the period of August through December of 2006, we will take delivery of six 737s, one of which will be leased and five will be owned.

Distribution expense in the second quarter decreased 10.6% from $0.0047 to $0.0042.

The reduction in distribution costs reflects the new rates in our GDS agreements negotiated in the fourth quarter of last year.

We should continue to see year-over-year declines in distribution unit costs for the remainder of the year.

During the second quarter, 56.4% of our bookings were made through AirTran.com.

In addition, over 60% of our customers checked in for their flights using the Internet or kiosks, representing a 5 percentage point increase over last year.

The increased use of Internet technology and kiosk service units has resulted in improved passenger handling, greater productivity, and customer convenience.

Maintenance materials and repairs unit costs increased 23.9% in the quarter from $0.0067 to $0.0083.

As in the first quarter, the main reason for the increased maintenance unit costs is the increased in the rate for the 717 engine Power by the Hour contract.

Maintenance cost per block hour was $345.21 versus $270.37 for the quarter.

We expect the block hour rate for the second half of 2006 will decline to a range of between $305 and $315 per block hour.

Landing fees and other rents were up 3.7% from $0.0054 to $0.0056 in the quarter.

Airport costs have been steadily rising as airport managements have sought to pass on their cost to the airlines.

In addition, our fleet growth and the highest gross weight of the 737's have also contributed to the increase in landing fees.

Aircraft insurance and security services unit costs declined 13.3% from -- $0.0015 to $0.0013 in the quarter.

The reduction in unit cost primarily reflects the year-over-year reduction in the Company's [home] liability insurance rates.

Marketing and advertising unit costs increase 19% from $0.0021 to $0.0025.

The primary reasons for the increase in unit costs are the timing of marketing expenditures as well as certain promotional costs.

Depreciation unit costs were up 8.3% from $0.0012 to $0.0013 on a year-over-year basis, primarily due to the increased number of debt financed 737s and spare parts purchases.

Other operating expense unit costs rose 2.8% from $0.0072 to $0.0074, primarily as a result of ground handling at new locations and the installation of XM Satellite Radio on the entire fleet of aircraft.

Overall, operating income was an all-time record $54.5 million for the quarter, resulting in a 10.3% operating margin.

Looking back over time, the last period AirTran posted a double-digit operating margin was in the second quarter of 2004, when we reported 11.3%.

Our second quarter 2006 operating performance is a significant improvement over that time period, given the fact that the cost per gallon of fuel was $1.10, and has risen over 105% to $2.26 over the last two years.

EBITDA also improved significantly from 24 million to $60.7 million, or 152.5%.

Net income showed significant improvement as well, up 181.3% from 11.4 million to $32 million, resulting in a net margin of 6.1%.

Looking at the balance sheet, AirTran ended the second quarter with $438.6 million in total cash and investments, of which 25.5 million was restricted.

In addition, the Company has deposits with Boeing net of predelivery deposits or PDP financings of approximately $50 million.

Current and long-term debt increased to 609.6 million as a result of new aircraft financing and PDP debt.

Regarding liquidity, we are very pleased to announce that we have recently received commitments to finance our 2008 aircraft delivery PDP requirements, which will result in additional liquidity of approximately $61 million.

We also expect to received commitments for the permanent financings of our remaining 2007 deliveries in the near future.

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

Second-quarter capacity came in at 23.3%, which exceeded our previous guidance of 20%.

We are projecting a 27% increase in ASMs for the third quarter and 24% for the fourth quarter.

Full-year capacity growth will be close to 25%.

For 2007, we expect our capacity to increase approximately 20% based upon current delivery schedule.

Unit revenues, while strong are not likely to grow at double-digit rates during the second half, reflecting comparisons with last year's [16]% or greater improvement over 2004.

Aircraft deliveries are unchanged, with two 737s remaining in the third quarter and 4 737s coming in the fourth quarter.

Nonfuel unit costs came in better than expected, rising only 1.6% versus earlier guidance of 2 to 3%.

For the remainder of the year, we anticipate nonfuel unit costs will decline 2% to 4% in the third quarter and 3% to 5% in the fourth.

Full-year nonfuel unit costs will be down 1 to 2%.

Our fuel cost guidance before taxes and fees is as follows -- for the third quarter, we are hedged at 57.5% of our fuel at $2.15 to $2.20, and for the fourth quarter, 43.8% at $2.10 to $2.15.

Our hedge positions in the third and fourth quarter reflect a combination of fixed forwards, crude caps, and jet cracks spreads in varying amounts and prices.

Our projected fuel price per gallon including taxes and fees for the third quarter is in a range of $2.30 to $2.35, and for the fourth quarter, $2.25 to $2.30.

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

In conclusion, the challenges of higher fuel costs and increased competition remain unchanged.

The strong revenue environment and the increased numbers of customers flying AirTran are moving the needle in a positive direction.

As we have often said, the new 737s are integral to our strategy of growing revenue, lowering costs, and increasing productivity.

Our performance in the second quarter demonstrates the objectives of the strategy we envisioned when we placed our order for 100 aircraft in 2003.

The changes in the industry that we anticipated now appear to be taking hold, and while curtailing the growth of some airlines, actually favor the continuing growth of low-cost carriers.

We are building a better AirTran for the future.

And as we improve our financial and operating performance, we remain focused on delivering the service and value that our customers expect.

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

(OPERATOR INSTRUCTIONS).

Ray Neidl, Calyon Securities.

Congratulations on the quarter, guys.

Just a general softball type of question.

Why are you doing so well compared to some of your peers in the low-cost carrier sector?

Because it's generally a good economy and all prices are high, but outside of brilliant management, what are you guys doing different?

Mostly brilliant management. (laughter)

Okay.

You know, Ray, I think first of all -- thanks for the question.

And listen, our costs are low.

They have been going down virtually every year for seven years.

And I think Stan mentioned in the guidance, they're going up slightly in the first half, they're going to start going down again.

And quite honestly, we feel keeping our costs down really is the key to everything we do at AirTran.

We drive off the cost structure.

We've had -- we've got great Crew Members.

We operate in the East Coast.

It's a tough environment, but it's also rich revenue.

So if we look at where the strengths are, I think obviously, the hub in Atlanta is especially strong right now.

We were trying to diversify the route network.

We started that early on.

We used to have 100% of our activity in Atlanta.

It's about two-thirds, so we participate in more than one place.

And we're not vulnerable having all of our eggs in one basket.

But I think the key thing is certainly we are benefited by the reduction in capacity on the East Coast.

And primarily, we keep our costs low and our goal is to make ourselves more efficient in the future.

Okay.

And Stan, a specific question for you.

I think you mentioned that you're going to start seasonal service between Seattle and Atlanta.

I'm just wondering -- does seasonal service work?

I don't recall you doing that before.

Is it going to be a policy of the airline going forward, if in fact that's what you're doing?

Well, we have to do a lot of seasonal service.

It's usually more oriented towards Florida, because in some markets to Florida, the winter demand is two to three times as high as summer demand.

And we believe, for example, in a market like Seattle, four or five months of the year, you're significantly above the average annual revenue or traffic base.

And quite frankly, given our route structure, we don't really feel compelled to stay in there during the winter.

And so, we think we're still nimble enough to take advantage of the opportunities.

Seattle is -- a plane can fly to Seattle in the summertime, and certainly, we can go to Palm Beach or Ft. Lauderdale in the winter.

So we think it's a good way to use our assets.

And quite frankly, we're sitting in high 80s, low 90%.

So you're going into the peak season and the route spools up right away.

So I think you'll see us do more of that.

Again, it's not going to be a large portion of what we do.

But tactically, we think seasonal service makes a lot of sense.

Gary Chase, Lehman Brothers.

Just a couple quick ones for Stan, and then maybe one for Bob.

Stan, last quarter I think you gave us some kind of a rule of thumb on how to get to the difference between spot fuel and the all-in costs with taxes and fees.

And I want to say it was spot plus 16% and then add $0.03.

Is that still a good benchmark for how to get between spot and what you're actually going to report on the P&L?

Yes, let me clarify that, because I think there was some confusion in terms of 16%, 15% versus $0.16, $0.15.

The way we calculate it is, the base price of the fuel or the commodity price, and then increase that for taxes by about 7 to 7.5%.

So when we were talking about $2 per gallon in the prior quarters, that would equate to about $0.14, $0.15.

And somehow that became a percent.

So you take your base price -- 7, 7.5% for taxes, and then about $0.03 to $0.05 for -- into plane fees and transportation.

And that's how you come up with your all-in price.

Thanks for clarifying that.

Can you also -- Stan, can you tell us and in the cost guidance and in the numbers we're seeing, you have accruals in there for the labor contracts you've got that are amended, correct?

We've not commented on that in the past, and won't comment on it going forward regarding labor agreements.

Okay.

I guess switching gears for Bob -- wanted to see if you could give us a little bit of commentary on how you think some of the new markets are developing, and in particular, wanted to see if you could give us a sense of kind of how long you expect that development process to take?

How long will it take these markets to mature to a place -- or at least what's your expectation there?

When do they mature to be profitable?

First of all, I think you go back -- you're never going to bat a thousand on anything brand new.

But using that as a caveat, I think you're still looking at 18 to 24 months rather than perhaps a couple of years earlier, you could spool up a route a little bit earlier.

And so I think it takes a little bit longer today than previously.

I think if you look at our network now, probably about 15 to 17% of our capacity is under a year old.

And again, it's part of our strategy to diversify the route network.

So, again, I have to say -- 18 to 24 months in kind of round numbers.

And then that's kind of an average of certain routes -- putting Seattle in seasonally, or Indianapolis, which has done very well can spool up even faster.

So it does vary.

I'd probably work on an 18-month number.

And how do you feel generally about the development flying that's out there now, Chicago in particular -- just how is that performing in the second quarter, and what's the outlook going forward there?

I think right now, we've got a lot of development going on in Boston, in Indianapolis, and Chicago.

And I think Indianapolis certainly has turned on very, very quickly.

We started in Chicago in the worst time in the year.

We went in November, December, January, February, which is probably the worst time to ever start that kind of route, but that's when the gates became available.

Second quarter was very, very good.

But I still think we're really on track at Midway.

We're at 32 departures now.

We used to be at eight about 18 months ago.

Second quarter's strong, third quarter's strong, but we're to have to go through another winter.

And I think next year at this time, we think Midway will be looking pretty good.

Michael Linenberg, Merrill Lynch.

When you ran through some of your operational metrics, your completion factor and on-time, and Atlanta usually has a tough time -- at least as you get into the summer.

Those numbers look good.

Is that a function of flying just a very young and new fleet?

Is that the fifth runway?

I mean, what's keeping those numbers up -- the performance?

Mike, this is Joe.

We made significant investments in the past 12 months to make sure that we had good operations in Atlanta.

We bought an enormous amount of ground equipment, all brand-new, put air-conditioning units in all the gates in Atlanta, which saves fuel -- doesn't improve the operation, but saves fuel.

We've added staffing to our 737s, ramp crews -- and so we made big investments.

And it's paying off.

We're up about five points year over year.

The fifth runway certainly is a big help.

Air holds, which we can measure, are down substantially year over year for planes coming into Atlanta.

It turns out the taxi time is about half of what people thought.

It was originally projected at 8 minutes.

It's taken about 4 to get it from the fifth runway into the concourse.

So a number of investments, some staffing adjustments, and some additional equipment -- and the runway; the runway is a big deal.

Okay.

And then just sort of switching gears, I guess my next question is to Bob.

Bob, when you look at the DFW market, you go back a couple of years, and my sense is that you probably had bigger aspirations than sort of where things are today.

And I've noticed that it looks like as we get into the fall, you may be cutting back some frequencies, maybe even pulling out of a market.

Is that a function of the fact that now a lot of these long-haul markets, you're now competing against Southwest -- albeit, in their case, on a one-stop basis, but they can now flood the market with fares?

Or is it just that there are better opportunities in your network or -- both in your current network or maybe new markets?

Anything on that front?

Sure.

I think it's a real good question.

And there's actually couple of things moving on.

And it really is a matter of really trying to focus on your priorities.

And we have changed some of the priorities.

First of all, our flying in Atlanta normally declines seasonally, then we will typically build it up in the spring.

But a few additional gates are coming online in Atlanta, and you're kind of in a "use it or lose it" situations, so our Atlanta activity is going to increase in September.

Second thing is, we didn't know we were going to get the five gates at Midway and when ATA [rent structure], they pulled out Indianapolis.

So we had to really make a decision -- really, where do you want to invest your money?

Because really, the key thing is the more money you invest in the marketing, the better the results are going to be.

And so we've got to kind of limit where we're spending our activity.

And right now, the priority is in Boston, where we've got in excess of 30-some-odd flights in Indianapolis and in Chicago.

Regarding Dallas, we're not going to fly Dallas-Las Vegas in this fall.

We're planning to come back next March or April.

Baltimore -- it was a route we weren't in.

We're going to stay in Baltimore, and Orlando is [fine].

In terms of priorities, you can't compete everywhere.

And I think quite frankly, with our strength in Atlanta, our strength in Florida, we're better off competing a market that provide not only business opportunities, but good access to the Florida markets as well.

And the northern markets tend to be better to Florida than markets in the southern part of the country.

Bob, on the Atlanta increase in the fall, what should we look for daily departures in September, and where are you currently?

I believe we're probably about 225 right now.

And in September, we'll be at 235 or thereabouts.

Okay, very good.

Great quarter.

Jim Parker, Raymond James.

Good showing there in the quarter.

Stan, would you explain this pattern for maintenance per hour, how you have gone up sharply year-to-year, and then it's coming back down?

What's behind all of that?

Yes, on the 717s, we have a Power by the Hour agreement which resets biannually.

So it reset at the beginning of this year.

That is accounting for the spike in the increased maintenance costs, as well as we had some maintenance events in the first quarter to get ready for the summer months.

The reasoning the rate per block hour declined is a function of the additional aircraft that we are taking delivery of, generating more block hours as well as their maintenance costs being covered under the warranty.

So that is why it declined.

Looking forward into '07, I would expect that trend to continue just simply on the basis of the increased number of aircraft coming and the block hours flying.

But every two years, that 717 agreement resets.

Jim, we also try to push [seat checks] into the first quarter, since that is our weakest quarter.

So to the extent that we can manage it, we tend to try to pull our seat checks down in December and fly as much as we can, so that kind of stacks up some seat checks going into the first quarter.

Okay.

And Bob, a question for you regarding the transcon flying -- I think this is, what, the third year of it?

In the first year, you were hiring out using subservice.

And then last year, I guess you were still in the startup mode.

But what is the profitability on the transcon flying now versus your East Coast flying?

Well, [on average] it all varies by route.

And obviously, [strong] parts of the East Coast tend to be the large markets.

But the Las Vegas and L.A. markets for the year will be solidly profitable.

It took about a year longer than we thought, but they are really solid.

And right now, San Francisco actually has improved quite a bit, as well.

It's still below average in terms of profitability, but the signs look pretty good.

But Los Angeles and Las Vegas are very strong.

We have got more frequencies now.

I believe we have got four frequencies rather than two.

And more important, the average fares are up on the transcons quite a bit, substantially.

So we have taken advantage of the tightening supply in the East Coast markets, and we are doing a much better job of managing our revenues and anticipating those -- trying not to carry the low-end connections.

So complete turnaround -- they really began getting better last year.

They had a pretty good summer.

But this year, they were solid in the first quarter, and they looked solid going into the latter half of the year.

So the transcons I think will be part of our structure.

We expect to add more long-haul flying in the future.

But given our restructure, we are still going to be largely east of the Mississippi for quite a while.

Okay.

And Bob, how long in the future before AirTran does trans-Atlantic flying?

(laughter) After I'm gone.

I think that's a long way off.

What about a codeshare?

Well, regarding codeshares, I think -- [no one had] asked the question -- we have moved to a new system -- in fact, I think the [Navatir] system -- there are about 60-some-odd carriers on it.

And with the new system, we will be able to do complete functionality on codeshare, which is something we could not do in the past.

So I think we are going to have a lot more capabilities in the future to partner than we had in the past, because it was physically impossible two years ago to be able to really codeshare with a trans-Atlantic carrier, or even a domestic carrier.

So we have now much better opportunities in our rent system.

David Strine, Bear Stearns.

Given the nonfuel CASM guidance for the back half of the year, it looks like you are getting a little bit better traction there.

The question is to what extent do you think that progress can continue into 2007?

Dave, I think that -- there are a number of areas where you look to try to manage your expenses.

There are certain expenses that will go up, like the Power by the Hour or perhaps even landing fees.

As certain carriers here [badge] facilities, everybody else's costs go up.

Marketing -- we've made good strides over the last couple of years pushing down our marketing cost per revenue, and the distribution as well.

And the key focus needs to really be in the station environment.

That is still where the leverage is.

Our focus is to add fewer new cities and try to make them bigger.

And I think that really is the key to managing expenses.

It is -- use your gates.

I think the Southwest playbook here is the right playbook. [They] use the gates eight, nine, 10 times a day.

Our average gate utilization now is about nine per gate across our network -- get as big as you can in a city, and that allows you to keep pushing your costs down.

And I think we have got opportunity in that area.

We are getting bigger at our stations.

We have a couple with three or four flights a day, but we have got 15 or 16 cities, I believe, that we go to more than five destinations now.

And that's a key area for us, and it is one that we're going to stay focused on the future.

Wow, an the airline with a scalable business model -- amazing. (laughter) Are you still thinking about in the ballpark of 20% ASM growth for '07?

I think 20% is a good, round number.

It depends on where we deploy the airplanes.

I think the aircraft increase is 16%.

But I think the stage length may go up a little bit next year, depending where we fly the planes.

And so I would say now, I think the round number is 20% for next year.

(indiscernible) '08 --

In '08, about 15%.

And then last question -- with respect to the financing for the 37s that come in 2007, you said you are lining that up now.

Do you expect to just do straight outright purchases, or sale-leasebacks on those aircraft?

We are working on debt financing for the '07 deliveries.

And as long as the rates continue to be attractive, we will continue to pursue that.

The 737 has been a very, very good asset [in] finance. (multiple speakers)

Thanks, and good luck in the third quarter.

Jamie Baker, JPMorgan.

Bob, traditionally, like others, you have been a second-quarter airline.

The only times I think that your third quarter revenue has rivaled that of the second in fairness has been a function of maybe service disruptions at Delta, that sort of thing.

Notwithstanding your earlier RASM commentary, do you think that in this strong revenue environment you could in fact rival the second quarter absolute revenue that you produced coming into the third quarter?

Well, you know, there are a couple of things going on.

First of all, I think in terms of RASM improvement, we are really kind of looking at high single digits at this point -- but again, not double-digit.

For us to have the third quarter revenue now beat the second quarter would be very, very hard.

And September is our second-weakest month of the year.

We don't have international -- trans-Atlantic flying or Pacific flying that might bolster it.

So it would be very hard.

We have a very good September last year.

We had good RASM improvement.

And it really is -- it is a wild-card, Jamie, for us.

But I don't see it likely to have a third quarter revenues higher than second quarter.

So Stan's earlier guidance on RASM being high single digits -- I think he gave that in a second-half context.

You seem to be implying that that would be equal in both -- well, high single digit in each quarter as opposed to an average that got you to that in the second half.

I think what Stan's comment was -- we did not expect to see double digit in the second half.

I think in the third quarter, we believe we're zeroing in on a high single digit number.

Regarding the fourth quarter, it really is -- it's too early to make a comment on the fourth quarter.

Okay, fair enough.

And secondly, just curious how White Plains is doing?

White Plains -- we started it after the peak, and so it was initially slow.

Right now, it's starting to look pretty good.

We are now getting the word out.

It is a little bit harder to go out and get the word out in White Plains where you don't have all the media.

But I think that you're going to start seeing in White Plains not only our numbers looking pretty good; you are going to start to see a lot more volume at that airport. (multiple speakers) So I think by the time we get to November, December, Jamie, it's going to be looking pretty good.

Well, on a personal note, I am certainly trying to help with that one.

Kevin Crissey, UBS.

Question on your FTE per aircraft is very low, which obviously is a good thing from a cost side.

How do you feel about your personnel in terms of management depth and being able to handle the operations?

And can you give some color on where you see the future of hiring?

Yes, this is Joe.

I think we have got today the best customer service group we have ever had.

We have been constantly upgrading our talent over the past few years.

And we keep raising the bar on what it takes to get in the door.

And we have had substantial improvement in our Atlanta operations.

Everybody there that is in a key role is new this year, with substantial experience at running big operations at other airlines, much bigger than -- some of the folks that we have gotten have been running much bigger operations than we have.

And so we think we're in really good shape.

It's obviously a never-ending process of trying to upgrade management with training and development.

Part of our deal with Boeing and General Electric when we bought the 737 was the ability to use their very impressive training capabilities.

And we have sent a number of our people to those schools to improve their skills and strategic planning assets and that sort of thing.

So we think we are in the best shape we have ever been.

You know, in terms of the numbers -- philosophically, our numbers are low. our [res] system, we can train people in days rather than months with some of these legacy systems.

The simple fare structure -- you don't drive all that revenue accounting activity that you see at a whole bunch of other carriers.

The station environment is critical.

Our crews are efficient.

I think philosophically, all around the board, we have always had a philosophy of trying to be as efficient as we can.

We outsource where appropriate, and if we get to a certain size in the station, we'll take it over.

We tend to be very, very flexible about how we handle each one of those items.

And again, it is not a new thing.

We have been doing it for a lot of years.

If you look at the maintenance operation, we have not been able to find any airline that even approaches the few number of deferred items that we have on our fleet.

We believe we're absolutely industry leading, and by a significant margin.

The guys do a great job of cleaning the airplanes up every night.

(OPERATOR INSTRUCTIONS).

Daniel McKenzie, Credit Suisse.

Good morning.

I'm wondering if you could provide some further color on revenues -- just with respect to business revenues as a percent of total revenues and perhaps also on a bookings basis as well?

Sure.

Again, a couple of items in a -- again, we kind of view business revenue are really tied to ticket purchases.

But I think the business revenue was up a couple of points really year-over-year, which really reflects the fact that I think it's probably a combination of strong demand, but us reserving more seats close in.

So the business mix is actually -- is up.

So again, that's a real positive.

Again, looking at bookings, as we entered the third quarter [book] -- second quarter looked strong -- we're looking at very strong bookings for August and September.

I mean, it's shaping up very, very nicely.

Remember, September is still a seasonally softer month, so we like what we see.

Again, we have to remember that last year, we had a [16.5]% RASM improvement in both the third and fourth quarter.

So we see improvements on top of those strong numbers last year.

I think all around, again, the revenue environment is positive.

Our focus is on getting the average fare up.

We certainly have room down the road with load factors.

Our load factors are several points less than some of the legacy carriers.

We have flexibility there.

If fare softens, though -- either way right now, our focus is trying to get average fare up.

And so far, we have been able to do that like many of our competitors.

And you mentioned that the business mix was up a couple of points.

Can you share what that business mix was?

Again, the way we -- [inside], it's probably in the mid-40s right now versus the low 40s year ago.

And again, we would kind of define that as tickets in the seven-day range or so, revenue in the seven-day range.

And looking forward to 2007, any color you can provide on, say, the number of new cities that you would plan to start service to?

Probably more -- I think this year -- is it two cities?

Seattle is a seasonal, and White Plains, permanent.

Our thinking is we'll add more, but we don't really have a number at this point.

But we suspect it will be -- it will certainly come back to Seattle -- it will be more than this year.

Typically, Dan, we do three to five.

Last year, we did five.

This year, we've only done two.

So we sort of stay in that range on a multiyear basis.

Got it.

And then just one last quick question here.

There's a lot of headline news about -- the cooling real estate market in Florida has been cited as one particular area that's been particularly hot.

Are you seeing any impact of that on your business currently looking ahead?

Not really.

Again, you hear a lot of conflicting indicators.

Certain statistics from the census -- you see Florida is going very, very fast, and Georgia as well. (multiple speakers) contrast that with worries -- there's nothing that we can see in any of our numbers that tell us there's a slowdown or an increase.

It's just generally right now pretty strong.

The state report says there's about 1,000 people a day moving into Central Florida.

Okay, great -- thanks a lot, and very nice quarter.

(multiple speakers) I would now like to turn the call back over to Joe Leonard for closer remarks.

Thanks.

Obviously, we're pretty pleased with the quarter.

We want to thank all of our Crew Members here.

They're doing a great job.

One of the things we don't talk about is our marketing research, which indicates that we have extraordinarily strong perception by our customers. 87% of our customers say they are likely or extremely likely to fly us again.

And as long as you keep those up, then the financials will take care of themselves.

So real thanks to our folks who do a great job out on the line every day, and we appreciate their efforts.

So we'll see you next quarter.

Thank you.

Thanks for attending.

Thank you.

This does conclude today's AirTran Holdings, Inc. second-quarter 2006 earnings conference call.

You may now disconnect your lines, and have a wonderful day.