西南航空 (LUV) 2006 Q3 法說會逐字稿

Good morning, my name is Melissa and I'll be your conference operator today.

At this time, I would like to welcome everyone to the AirTran Holdings Third 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 third quarter earnings call.

Joining us today is Stan Gadek, our Chief Financial Officer;

Bob Fornaro, our President and Chief Operating Officer, and via conference call, Joe Leonard, our Chairman and CEO.

Before we get started, I would like to begin by reminding you that this call will 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 October 26, 2006.

If you would like additional information concerning factors that could cause our actual results that varies 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 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.

During the third quarter of 2006 AirTran continued to grow its business and set new quarterly records in a number of key operating measures such as numbers of passengers, traffic levels, capacity and daily departures.

This growth was made possible by the demand for our low fares and the value people received from our product.

At the outset of the quarter, we continued to see increases in fares and improvements in year over year unit revenue performance.

On the cost side, we reduced our non-fuel unit costs, but at the same time, were challenged by record high fuel prices of over $2.38 per gallon in July; in August, Crude oil prices exceeding $75 per barrel.

By the end of August, following heightened security concerns and a major revision to allowable carry-on items, we began seeing a softening of demand, which extended into September and has recently begun to reverse.

The combination of these factors has resulted in AirTran reporting a net loss of $4.3 million or $0.05 per share.

Included in the loss is a non-cash net of tax charge of $1.5 million or $0.02 per share to record additional free ticket liability related to our successful promotion with Wendy's.

This liability will reverse to revenue as the free tickets are used.

While growth has served to enhance our bottom line in a seasonally strong period such as the second quarter when we announced record profits of $32 million, it has had a dampening effect in a shoulder period such as the third quarter.

As we continue to develop the route network, seasonal fluctuations such as these will become less pronounced resulting in more stable revenue growth.

Looking forward, we see improving booking trends and strengthened pricing.

While we do not anticipate seeing the rate of yield increases we have had over the past 12 months, we do believe that we will return to profitability in the fourth quarter.

Long term customer demand for our product remained strong because we have one of the best value offerings in the market.

Our low fares are an excellent reason to try AirTran, but it is our unique mix of amenities such as business class, assigned seating, large easy fit bins, XM Satellite Radio and caring customer service, which results in repeat business.

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

Recently, we announced new service to Stewart International Airport in Newburgh, New York as well as seasonal service to Daytona Beach.

We have also announced expanded service out of White Plains, New York to some of our most popular destinations in Florida.

All of these service improvements, including increased frequencies and new city pairings improve the product, because we are able to offer more low-fare travel options to more destinations.

We remain focused on costs and our performance in the quarter was one of our best ever, continually looking for ways to implement new technology and improve efficiency.

We recently signed an agreement to outfit an additional 37 aircraft with blended winglets, bringing the total number of winglet aircraft to 52.

These devices are one of the most cost effective initiatives we have implemented and are measurably reducing our fuel consumption and associated costs.

In another fuel saving project, we recently completed the installation of preconditioned air units at all of our gates in Atlanta.

Previously, our flight crews would run the onboard auxiliary power units while parked at the gate to air-condition the cabin.

With the installation of the new ground units, APUs are no longer used for air-conditioning resulting in significant savings in jet fuel as well as APU maintenance.

The cost of this project will be recouped in less than one year.

As we move forward into 2007, we will continue growing with new aircraft deliveries, but at a more moderate pace.

In September, we reached an agreement to reschedule eight aircraft in late 2007 and early 2008.

While the impact on 2007 capacity growth is low due to the fact that the deferrals come in the latter part of the year, we do expect to realize benefits in the third quarter 2007 shoulder period.

An added advantage is that the new delivery dates in 2009 and 2010 fill out a number of gaps which had previously existed in the original delivery schedule and now give us a more stable level of growth.

Depending upon market conditions, we may look at making further adjustment.

In fact, we are currently in discussion with a number of parties which may or may not lead to further reductions.

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

Since the beginning of the year, AirTran has taken delivery of 15 737-700s, including four in the third quarter and one in October, including the final two 717 deliveries in the second quarter, we have received a total of 17 aircraft.

Our remaining deliveries for the year consist of one 737 in November and two in December.

At that point in time, our fleet will comprise 87 717s and 38 737s for a total of 125 aircraft.

Capacity as measured in available seat miles increased 27.1% in the third quarter, primarily due to 22 new aircraft, a 2.2% increase in utilization to 11.1 hours per day and a 1.4% increase in stage length to 659 miles.

Traffic or revenue passenger miles increased 22% resulting in a load factor of 73.2% for the quarter.

On a YTD basis, we have been able to maintain load factor while growing capacity 25%.

Average fare for the third quarter was $90.94 representing an increase of nearly $9 or 11% on a year-over-year basis.

This average fare is the best ever for a third quarter, and is exceeded only by the last quarter's average fare of $94.18 which was the all-time record high.

Yield increased 6.3% to $0.1285 year-over-year which is also our highest yield for a third quarter in the last five years.

It is even more remarkable given the fact that our stage length is 15% higher over the same five-year period

In the third quarter, we served over 5.1 million customers which is another third quarter record, and is second only to the all-time record in the second quarter of this year.

Over the past five years, our total enplanements have more than doubled by 110%, and our network now consists of 241 peak daily departures out of Atlanta, and 675 daily departures system wide.

In the third quarter 2006, AirTran's non-fuel unit cost of $0.0604 declined 4% year-over-year, and 4.1% sequentially.

YTD non-fuel unit cost was down 0.6%, which reflects the lower costs of the new 737s, as well as improvement in the overall efficiency operation.

This efficiency or productivity factor is most evident in the number of full-time equivalent employees per aircraft, which in the third quarter 2006, was 60.7 FTEs, down 5.5% from 64.2 FTEs in 2005, and down 2.3% sequentially from 62.1 FTEs in the preceding quarter.

Our third quarter FTE statistic represents our best ever performance.

Average daily utilization increased 2.2% to 11.1 hours system wide compared to 10.9 hours last year.

Utilization by fleet type was 12.0 hours or a 4.3% increase for the 737s, and 10.8 hours or a 0.9% increase for the 71s.

Looking at the third quarter operating performance, completion factor was 99.1%, on-time was 72.9%, and mishandled bags per 1000 were 6.1.

It should be noted that during September, the Atlanta Hartsfield-Jackson International Airport closed one runway for resurfacing, essentially offsetting the benefit of the new fifth runway that was completed in May.

This had the effect of causing an unusual amount of takeoff and landing delays during this period.

The airport anticipates that the closed runway will be reopened in early November.

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

Passenger revenue was a third quarter record of $467.2 million or a 29.6% improvement year-over-year due to the record average fare and total passengers.

Total revenue of $487.3 million included $19.2 million of other revenue which represents a new record in that category.

Effective October 1st, AirTran has revised its business class upgrade schedule to increase the fees by $5.00.

Business class upgrades are now $40.00, $60.00 and $80.00, and the geographic zones have been redefined based upon mileage.

We are also seeing improvements in our ancillary revenue growth such as excess baggage fees and other charges.

Looking at the individual line items of expense on a unit cost basis, salaries, wages, and benefits declined 5.7% from $0.0211 to $0.0199 in the quarter.

As in previous quarters, the improvement in unit costs reflect the continuing productivity gains being driven by the new aircraft and the higher daily utilization.

Total FTEs increased 14.4% to approximately 7,200 crew members.

Aircraft fuel on a unit cost basis, increased 19.3% to $0.0384 compared to $0.0322 in 2005.

As in previous quarters, the increase was driven by the rise in the price per gallon of fuel offset somewhat by 1.3% improvement in fuel burn from 686 gallons per block hour last year to 677 gallons per block hour in 2006.

In absolute dollars, AirTran's fuel expense increased $65.1 million of which $35.8 million was related to price increases, and $29.3 million was related to the increased number of aircraft.

During the third quarter, AirTran was hedged approximately 57.7%, using a combination of fixed forwards and jet crack and crude oil caps.

Our all-in cost of fuel was $2.33 per gallon or $2.15 before taxes and fees.

The benefit of fuel hedges in the quarter was essentially neutral due to the cost of some short-term hedges which we entered into in anticipation of a record hurricane season that never materialized.

In the prior year, we had a benefit from fuel hedging of over $13 million in the quarter.

On a per passenger basis, the cost of fuel was $37.12 per enplanement versus $28.57 in '05.

Relative to our average fare of $90.94, fuel consumed 40.8% of every revenue dollar compared to 34.9% last year.

Aircraft run on a unit cost basis, continued to decline 4% to $0.012 from $0.0125 primarily due to the increased number of debt financed aircraft.

During the quarter, we took delivery of four 737s, two of which were financed with operating leases and two with debt.

Updating our fleet information, the numbers of leased and owned aircraft, as of the end of October, are 87 717s, consisting of 79 leased and eight owned aircraft.

No change from last quarter, and no changes going forward, and 35 737s of which 22 are leased and 13 are owned.

For November and December we will take three additional 737s.

With respect to 2007 and 2008 deliveries, we have reduced the '07 deliveries by five aircraft from 19 to 14 with no aircraft deliveries in the August through December 2007 period.

In 2008, we have reduced the first quarter deliveries by three aircraft resulting in total 2008 deliveries of 15 aircraft versus 18 previously.

The aircraft had been rescheduled for delivery commencing with three in the first quarter of 2009, and one per quarter in 2010 through the first quarter of 2011.

Distribution expense in the second quarter decreased 20% from $0.0045 to $0.0036.

The reduction reflects the new rates in our GDS agreements that went into effect in late 2005.

In addition, we recently implemented Bill Me Later as a form of payment option at the end of the third quarter, which should contribute to further reductions in distribution costs going forward.

During the third quarter, 59.4% of our bookings were made on airtran.com which represents an all-time record for bookings made directly on our website.

In addition, over 46% of our customers checked in for their flights using the internet or kiosks.

Maintenance materials and repairs unit cost increased 4.5% from $0.0066 to $0.0069.

As in prior quarters, the main reason for the higher maintenance unit cost is the rate increased in the 717 engine maintenance agreement.

Maintenance cost for block hour was $283.48 in the third quarter compared to $265.46 in the prior year.

In our last conference call, we advised that we expected to see this cost to come in between $305 and $310 per block hours.

So this quarter's performance was better than expected.

Aircraft insurance and security services unit costs declined 7.1% from $0.0014 to $0.0013.

As in prior periods, the reductions resulted primarily from the company's lower insurance rates for home liability coverage.

Marketing and advertising unit costs increased 13.6% from $0.0022 to $0.0025.

As previously mentioned, AirTran recorded a non-cash charge related for the Wendy's promotion, which will reverse the revenue.

Without this adjustment, marketing unit costs would have declined 9.1% to $0.0020.

Depreciation unit costs were up 15.4% from $0.0013 to $0.0015 primarily as a result of the increased number of debt financed aircraft, as well as additions to spare parts and ground equipment.

Other operating expense unit costs declined 4.1% from $0.0074 to $0.0071.

The primary reason for the reduction is that we are now generating more ASMs without having to proportionally add overhead.

Overall, excluding the Wendy's charge, AirTran had a small operating loss for the quarter of $1.2 million and EBITDA of $6.2 million.

On the same basis our YTD EBIT is $42.1 million, and EBITDA is $61.7 million.

Looking at the balance sheet, AirTran ended the third quarter with $392.2 million in total cash and investments of which $23.3 million was restricted.

The company also has deposits with Boeing, net of pre-delivery deposit financing of approximately $51.3 million.

Current and long-term debt including capital leases increased to $687.9 million primarily due to new aircraft and pre-delivery deposit financing.

And now I'd like to update our guidance for the remainder of the year.

Third Quarter capacity came in at 25%, which was down slightly from our prior guidance of 27% on the last conference call.

For the fourth quarter, we are projecting a 20% increase in ASMs which is also reduced from our earlier guidance of 24%.

For the full year, our capacity growth is projected to be around 23% to 24%.

For 2007 our capacity growth adjusted for the five fewer aircraft will be approximately in a range of from 18% to 20%.

The reason that the capacity reduction is not greater is that the aircraft come out in the latter part of the year.

As reflected in our previous 8-K filing, we view September as the low point in our year over year load factor performance.

October load factor will also show a decline as well, but not in the magnitude of September.

For the fourth quarter we expect year over year unit revenue performance to be flat to slightly down.

Aircraft deliveries will total four aircraft in the fourth quarter.

The reduction in third quarter non-fuel unit costs came in at the high end of our earlier guidance of down 2% to 4%.

This resulted in part from earlier recognition of cost savings in the third quarter versus the fourth.

Consequently, our fourth quarter cost guidance is revised to reflect a reduction in non-fuel unit costs, of from 2% to 4%.

For the full year, we still anticipate that our unit costs will be down 1% to 2%.

Looking at fuel, we are hedged in the fourth quarter for 47.4% at an all-in cost of $2.20 to $2.25 per gallon.

Now included in that range is also approximately $1.3 million remaining of these short-term hedges that I mentioned earlier which will timeout in October.

Our fuel outlook is based on an assumed crude oil price of $60 per barrel in a crack spread of $15 per barrel.

For 2007 we are hedged approximately 15% to 17% for the full year at an average all-in price of around $1.85 to $1.90 per gallon.

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

In conclusion, we would like to thank our new and existing customers for their business.

We intend to continue our growth and are committed to bringing low fares and great value to more markets in the future.

We would also like to thank our crew members for their effort and hard work to serve the customer and win new business for AirTran.

As we look forward we see the continuing challenges of high-fuel prices, restructured legacy airlines and increased industry capacity.

We also see that the strategic plan which we put into place is achieving the objectives that we laid out, namely low-costs going lower, higher productivity and strong revenue growth.

No plan can encompass all contingencies, but good plans achieve results, and we believe we are achieving results and positioning the company for greater success in the future.

Thank you for your attention.

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

[OPERATOR INSTRUCTIONS].

Thank you.

Your first question is coming from Jim Parker with Raymond James.

Good morning, guys.

Good morning Jim.

Could you provide a bit more insight on future bookings.

I think in your press release you mentioned that you're returning to normal -- bookings look normal in mid-November.

I'm just curious -- and you did comment on October loads, but say in late November-December what do the loads look like, and also are you having to allocate more seats to lower fare buckets in order to build the loads?

Yes, Jim, good morning.

Again, going through the revenue outlook, again, certainly -- why don't we just step back for a second?

When we saw the (indiscernible) and the change, what we first saw was the customers who were booked flew, but the impact was on bookings which we began to see in late August and into September.

And we estimate somewhere in the neighborhood of $8 million to $12 million hit for us over that, say that six-week period of time.

So it certainly had an impact on our September numbers and going into October as well.

I think as we go back into, let's say, mid-November, November 15th or 20th, the booking -- bookings look reasonably similar; normal patterns to what we've seen really almost every year.

So I guess what we're seeing now is in the trough we have fallen behind on a unit revenue basis.

But we've got more normal patterns going forward as we go into a stronger, let's say, seasonality force.

And again, you have -- I think as you know, Florida and the Southeast play a big role in our network, and the weakest period of the year is late August through mid-November.

But it normalizes about November 15th or 20th.

Okay.

Second question is living in Atlanta of course I experience AirTran firsthand and Delta as well.

And of course, over the past year or maybe longer than that, AirTran has had a lot of momentum relative to Delta.

But if you look in Atlanta where I guess you get 70% of your business, there appears to be little bit of congestion, bottleneck with checking in AirTran, and then if you look at Delta they have really opened things up on kiosks, and I think they're even improving that further.

So it's a -- it appears to be a bit easier to use Delta.

What are you doing in that context to be-- remain competitive and make it easy, as easy with AirTran to get it, get checked in?

I think, Jim, you are familiar because of Atlanta.

I guess a number of things are going on.

First of all from a gate perspective, we just took on a number of gates in the D concourse.

And we actually have created more space on the airfield to really restructure our baggage handling processes because our volumes have gone up dramatically.

Again, -- right now we have on peak day, about 240 departures a day.

As -- I think over the next two months you'll see a big change in the ticketing environment.

Right now we've doubled the curbside environment, kiosk outside and we are in the process of dramatically expanding our ticket counter on our side of the concourse.

But I think by the time you go through there around Thanksgiving time you'll see a more than doubling, maybe a -- even a 70% increase in the ability to check-in.

So I think that's a -- I see a real positive.

We will catch up regarding the check-in capability.

Okay, great.

Thanks, guys.

Thank you, Jim.

Thank you.

Your next question is coming from Ray Neidl with Calyon Securities.

Yeah, guys.

To follow a little bit more up on Atlanta, Delta Airlines has indicated -- has been indicating that they're going to come out with a fairly low CASM ex-fuel; not quite as low as you guys, but something that's in the competitive range.

And I'm just wondering, going forward, are they going to become a tougher competitor in your key Atlanta market?

If so, would that influence your decision to maybe expand away from Atlanta?

Ray, I think we've been hearing a lot of that and actually I'd tell you the facts don't bear that out.

You have to remember that I believe Delta's stage length is increasing with international flying, which when it comes to what we do, that's irrelevant.

When you look at in on a domestic basis at comparable stage lengths, we think our advantages are on a 35% to 40% range, and as big as they've ever been.

So there's a lot of talk about carrier's costs going up.

The fact is, over the last five years our non-fuel costs have gone down 15%.

Second thing is I believe when they come out of bankruptcy that will be the lowest their cost will be, and they'll rise from there, and we believe our cost will go down next year.

So I think the facts don't bear it out.

I think when you put pen to pencil and look at the numbers, our advantages are very formidable.

And again, I'd challenge anybody to do that mathematics and look at the numbers.

I don't think the facts bear out the statement.

Okay.

And overall on the East Cost, JetBlue and a few other people have indicated that overall capacity is actually coming down.

I guess AirTran is may be adding a little bit to that.

Do you see the situation along the East Coast, outside of Atlanta, as becoming a little bit less competitive now, going forward?

It's a little less competitive in the Northeast, particularly, say New York and Boston, where some of the changes are larger.

I think, again in general, we're seeing a little bit of capacity increases along the Eastern Seaboard.

We are seeing some increases in Atlanta in the single digits, but in the scheme of things, it's not bad.

Last year we saw some reductions in the Southeast, this year we're seeing small increases.

But I think in the scheme of things, the capacity environment is, I would just say it's okay.

Great, thank you.

Thanks Raymond.

Thank you, your next question is coming from David Strine with Bear Stearns.

Good morning, thank you.

Stan, I think you mentioned that you were in some further discussions with other parties concerning the sale or the deferral of more aircraft, and I was wondering just roughly speaking, whether the change in the ASM growth rate for '07 and '08 would be of similar magnitude to what you announced when you made your first adjustment to growth?

Well, let me just say that these discussions are very preliminary.

It's too soon to give you any guidance in terms of what they may or may not, and I want to emphasize that may not, result in.

You know, our capacity growth in 2008 would be five coming out in '07 and the three in the first part of '08 will only be around 10% or so.

So, we're having some discussions, too soon to tell, we are going to monitor demand.

We've always said that we will make adjustments as necessary to preserve our profitability and that's about all I can comment on at this point.

Yes, if we saw further reductions, I mean, I think, there is realistically in '07, perhaps you can reduce the growth by a number, maybe 2%, because a large number of our airplanes are coming in this year, and we have that annualization effect.

There is potentially another 2%, but actually when we get in to '08, that 10% number actually, it's actually a fairly big reduction, and I think, it will put us in a much better position to reduce our exposure to say, brand new markets.

And Joe, in response to your -- to Ray's question earlier, I think, you said that you expected your costs to be down in 2007.

On a non-fuel CASM basis, you know, what magnitude were you thinking?

This is Stan, we really haven't given any guidance yet on that.

But we expect to see some improvement going forward, maybe in the order of 1% to 2%, but we're still in the process of building our plan.

Okay, and then last question Stan, you mentioned CapEx -- non-aircraft CapEx number of $25 million, was that for '06 or '07?

That's '06.

And do you expect similar in '07?

Yeah, we've been running about that level for '05, '06, and again this is non-aircraft related so, we're trying to get hold of that.

Okay, thanks very much.

Thanks David.

Thank you, your next question is coming from Helane Becker with Benchmark.

Thank you very much Operator, hi, gentlemen.

Good morning Helane.

Good morning Helane.

You know, I wanted to ask you a question about Bill Me Later, and I understand how that will affect your distribution costs, but do you then have to make an allowance for potential bad debt or is there a third party that's taking the --?

(multiple speakers) without going through all the detail, the third party takes the risk and what it does is it allows us to reduce some credit card fees.

So I think, there is -- again, there is a small benefit and we are not taking on any additional exposure.

Okay, all right, I just wanted to be sure of that.

And then, my other question is with respect to the increase in the business upgrades, has -- when did that go in to affect, first, and second, if it was sort of in the September timeframe, have you noticed that there has been no change in customer acceptance of that?

I think the day, Helane, was October 1st or mid-October, just in the last two weeks.

And the actual increases per segment are small, but what we ended up doing is we moved some of the categories around.

We found a couple of segments that were relatively long stage lengths that were rented in the $35 range, so we rearranged some of the buckets.

So I think, actually the effective increase in overall upgrade costs is probably closer to $10, whereas we only went with $5 increases per bracket.

So, I mean, we think our business class value is a pretty good deal.

We haven't seen any change in the load factor, so we think it's going to be an added benefit.

Okay, thank you.

Thanks Helane.

Thanks Helane.

Thank you, your next question is coming from Michael Linenberg with Merrill Lynch.

Yeah, hi.

Good morning.

Thanks.

I guess, you know, may be this is for Bob, it's sort of a long-term strategic question with some of the smaller markets, in and out of Atlanta.

I mean, historically, some of these markets like a Daytona Beach have historically been the bread and butter for Delta, and these markets are thin, and maybe they can support one carrier, maybe two.

I know, back in the days of Eastern and Delta, you had two carriers in a lot of these markets but a lot has changed, a lot of this stuff is now sort of non-stop from other markets in addition to Atlanta.

And I thought it was interesting that when you announced that market, you know, Delta wasted no time in announcing service from Boston to Chicago Midway, which I believe, you know, here to -- prior to that announcement, it was a monopoly market of yours.

As you look at some of these smaller, thinner markets, do we look at margin pressure as a result of this?

Not only are you moving in to a smaller market where there just may be less opportunity to stimulate demand, on one hand, but then number two, you sort of have the negative offset of upsetting Delta who throws a bunch of RJs, their RJs, in maybe a market that's very important to AirTran.

Sure.

Well, if you can talk to some of those issues, because, these small markets can become a very big battle ground.

Michael, it's actually a very important question actually.

You touched on a number of points.

I guess, regarding the competition with Delta, I think, we've concluded a long time ago that we really can't predict what they're going to do.

Many years ago they ignored us, now they are in every market we have, more frequencies and realistically they're still making some of the same sounds they made years ago, back when -- push the competition around and not really focus on profitability.

But having said that, a market like Daytona is -- we're approaching that as a -- again as a seasonal market.

And we think, next year we're going to be doing more seasonal flying, until we get to a point where the growth rate comes down.

And then what we'll be doing is, we would say more year round flying but right now, we do believe that the capacity -- our growth in capacity is too high given the fuel environment.

And so therefore, we're going to do a number of tactical things over the next eight or nine months, which we believe will serve us better from a revenue perspective.

So again, that is a -- is really a seasonal market and that will be replaced by some other service once we get to the summer.

And if you go back [out here] really on the tit for tat, what we're seeing is every time we hit a market, we're seeing some reaction from Delta.

We're just going to -- we're going to ignore it.

We have no choice, and if we reacted to that stuff we'd still have 45 airplanes, and we would be going backwards, so we have to ignore it.

We think there's some good new route opportunities in Atlanta, and we're going – we're really going to take advantage of them.

That's really the way we plan to proceed.

Some of the activity with Delta is RJs.

They have really no chance of making money, and they get -- yes, relatively at some point in the environment, low cost will come in to favor, and I think that will favor us.

We think our costs will go down.

We think the other costs will go up, contrary to what everybody is saying.

So I think, ultimately for us, we'll control our destiny by managing our expenses.

Okay, and then just --

Mike, I would add to -- this is Joe, I would add to that.

You know, we've been doing seasonal service for some time.

The line of Seattle was extraordinarily positive for us this past summer, and we'll do more of that as we move along here.

Okay, we'll just -- that -- yes, Joe, you actually got to my second question which, I know the transcon markets for you historically, have maybe been more under performers.

I was curious about how the transcons had performed this summer, and I realize that the Seattle piece is part of that.

Joe, you just indicated that it was extraordinarily positive.

Are you stating that -- when you say extraordinarily positive, are you saying it was a nicely profitable market or the loads and the traffic represented a very nice ramp up which makes it look like a very promising market going forward, maybe a seasonal becoming a year-round route?

Mike, I'll tell you that the -- first of all, actually, our service to both LA and Las Vegas which are -- they are bigger ones, they are very strongly profitable there.

Okay, great.

They are real good performers.

San Francisco which is more to North, in the last -- is more in a breakeven.

Seattle in the season was very, very profitable.

We will fly Seattle next year; we may go into September and October.

But to be honest with you, we're not looking at it to fly year-round over the next two years.

Because it's very, very seasonal.

And our feeling is we're better off flying to Florida in the first quarter than flying to the Pacific Northwest.

But one of the things we do want to do is we do want to increase our exposure in Atlanta and other places to east-west routes, because the east-west routes are better in September and October than certain Florida routes.

So it is one of our goals to really -- to try to reduce some of that seasonality.

Okay.

Okay?

Okay, thank you, that's helpful.

Thanks Mike.

Thank you, your next question is coming from Gary Chase with Lehman Brothers.

Good Morning guys.

Good morning Gary.

Good morning Gary.

Just wanted to clarify a couple of things.

When you gave the revenue guidance of -- I think you said flat to maybe down slightly, can you give us a sense of sort of where September was, where October is, and, sort of, what the -- can you just give us a feel for how much ramp up you are expecting as you move into November and December, and how will that look?

Well, I think -- again, for certain competitive reasons, I don't want to give you all the details.

But in round numbers, our September number was down in the high single digits, and October is much better than that.

Again, for seasonal factors -- and we look at December, again it's certainly being positive.

It's historically a very strong month for us.

So the real swing month for us is November, and again, it really is the issue of the shoulders, a thing that makes our second quarter so strong.

It does -- it is a drag in September and October and it really isn't -- there isn't any way around it.

If you look at a market like Tampa, for every 100 people who fly there in March, you have 72 fly there in October.

And that -- we see that in a number of markets like Florida.

Orlando, for every 100 customers you see in March you see 85 in October and probably 68 or 70 in September.

So some of that seasonality, it does have our impact on the numbers, and historically, we have to ride out the September-October period; it is usually a struggle for us.

When you come to flat, then I take it the assumption is that November won't show a heck of a lot of improvement over October, right?

Well, I think it will be -- the back third of November tends to be pretty good.

And that's typically holiday driven.

So the early part of November is very similar to October, but you start to make it up in the last third of the month.

Okay, so to be better than flat, things would have to pick up probably pretty quickly here.

The first part of November would have to look better, is that fair?

That's correct, Gary.

Okay, I also wanted to see, Stan, if I could follow up on the fuel information you gave, and I apologize if I just didn't get this right.

But I thought you said you were hedged on an all-in basis 47% of your fuel, all-in cost of 220 to 225, right?

For the fourth quarter, correct.

Okay, did you say what you expect as on -- and then you said, our number assumes $60 crude.

Was that -- were we to take that as inclusive of the hedge if the spot market is at $60 crude and $15 crack, you're going to pay 220 to 225 in the fourth quarter, or was that just the hedged portion?

No, that's everything, it also includes taxes and fees.

So what we're saying is that at $60 barrel for crude and $15 for hedge, that's the spot market assumption that we have.

But the all-in cost for everything in the fourth quarter, including taxes and fees, is in the range of 220 to 225.

And that's what you expect to pay inclusive of your hedges and everything else --

Yes.

Okay, so that's not just the hedge portion.

You have any -- as you look out into 2007, is there any headwind from the hedge book as we sit here today?

Well, the futures are still up quite a bit, there is still a disconnect between the current timeframe and the futures price.

The -- we have noticed that that has been coming down in the last couple of weeks.

But I would say that in '07, we are only hedged at about 15%.

So we're watching what's going on in the futures market, and to the extent that we have an opportunity to lock in something favorable, we will or we'll just continue to monitor it.

But to the extent it goes down, we'll benefit.

Let me correct the price per gallon guidance for the fourth quarter including the value of the hedges; it's actually 205 to 210.

Okay, that's --

The 220 to 225 was the hedge portion only, so I apologize for that.

It was hard to get to profitable with --

yes.

RASM and -- okay.

Okay, and the 15% portion that you're hedged for 2007, I mean any sense of -- is that sort of swapped away, and there is a set price on that?

Yeah, those are the fixed forward supply contracts.

Got it.

Okay, thanks a lot guys, I appreciate it.

All right, thank you.

Thank you, once again. [OPERATOR INSTRUCTIONS].

Your next question is coming from Jamie Baker with JPMorgan.

Good morning gentlemen.

Good morning Jamie.

You know, Bob if fourth quarter RASM is going to be, as you indicated flat to down slightly, I'm wondering what it's going to take to avoid this same outcome in 2007.

I realize it's not a perfect comparison, but the last time you grew 19% and your largest competitor didn't file bankruptcy, you know, your RASM was running in the kind of down 4 to down 5% range, what's going to be different this time?

Well, I think -- maybe you got to look at two things.

Certainly, when we get to late February-March, the high growth really isn't a negative.

Assuming we have a normal [Florida] season, and also -- and really in the southeast-- in my assessment is the second quarter is also the best business environment.

Having capacity even if it's -- if you have excess capacity on a year-round basis, it tends to help you when it peaks.

So it certainly will create strength.

What happens is the deliveries basically stop when we get to August, and we go about five months, I think, we take one airplane in the back half of August through December or none.

None.

So all of a sudden, we're not adding and developing brand new routes on that leaner part of the year which begins late August and goes through mid November.

And then obviously we also slow down what goes on in '08, so again the high capacity you can get -- it's difficult right now.

It begins to improve in February, and then fortunately, the deliveries really stop in the weaker part of year.

So I -- and we're going to get a little help in that regard again, Jamie.

Okay, all right, thanks for that, I appreciate it.

Okay, thanks Jamie.

Thank you, your next question is coming from Dan Mckenzie with Credit Suisse.

Good morning.

Good morning, Dan.

I'm hoping you can provide a little more perspective on the competitive dynamic.

In particular, I'm curious about how you would sort of compare, contrast Delta today versus say, late 2001 early -- those -- these past, say, four or five years, and how they're competing against you, and then also if you could provide some perspective on how Detroit and Minneapolis are ramping up for you?

Sure.

The -- if you look at the competitive environment, I guess, in certain aspects it's better because, I think, there is less capacity than there was five or six years ago that Delta's operating.

To some degree, their international strategy to take the large airplanes to put in New York does create some benefit on the East Coast that helps Delta, that helps AirTran, that helps everybody.

So from that perspective, I think, it's improved.

In terms of head to head competition, it does have its ebbs and flows.

It's intense, it's really -- it's not much different.

I think the thing that's changed the most though is, our network is much stronger than it was.

If we go back over a five or six year period of time we're sitting in Atlanta with 30 some odd planes on the ground going to key destinations.

We are very tough to compete with.

So in the scheme of things our network has improved by any measure.

And it is very, very competitive in the Southeast.

So at any given route, head to head, we are much better positioned on a macro basis on the East Coast than we were.

Regarding other routes in terms of again, Detroit, we have a number of Florida destinations coming on in the fall.

Detroit has been a pretty good start up route for us.

Florida has been strong, Atlanta is strong.

So it is really better than average.

Minneapolis, Atlanta and Florida is very good.

Minneapolis to Chicago, where we have a number of non-stops is a little slower than we had hoped because the total market -- our fares now in Midway are being matched over in O'Hare.

But I think we've been in there now, I guess about 10 months, and I think by the time we get to next year, we should be in the black in that route.

So I think, as I mentioned before, it's taking longer in a high-priced environment to have that same impact in the market.

And that's also the kind of market that the security is going to have an impact as well.

Minneapolis to Midway is a business market.

And just to give you some notes on that, in July versus the post-London incident.

The average bags per customer went up about 22% on our network.

And so we're sure [to haul] about 650 miles stage length, that had a big impact.

It clearly says that you're creating a hassle.

As we speak under the new guidelines, the average bags per customer is up about 12%.

So there is a mitigating factor there.

But one thing I would say though is the processing times and the security lines are longer.

And so we certainly have to be aware of the hassle factor in some of these business markets.

We still have a ways to go with TSA and short-haul making these processes better.

But I think overall -- Minneapolis, we're comfortable the way that is progressing as well.

And we're going to stick it out there; we're going through our second winter.

But we think by the time we get to next spring, we'll have a pretty strong route on our hands.

Okay, good.

And as a follow up, I see that the private equity is getting a little bit smarter about the space.

They've, I guess -- it appears that they've done pretty well with the less – [slower] side of the business, and so I'm just wondering from your perspective, if you could provide any pros and cons about being a private versus a publicly traded company?

Well, I -- we actually really haven't spent a lot of time on that, Dan.

Again I think our approach is we're trying to manage our assets as -- again, as best we can.

I mean, certainly -- we would have liked to have been profitable in the fourth -- in the third quarter, we aren't.

But you know the game doesn't end.

You know, you play nine innings and we're going to be profitable for the year.

And so our whole focus is really just to improve our results, diversify the network because we think there is some value to size.

It will improve our revenues if we can get there in a responsible way.

And ultimately, we [don't] spend a lot of time focusing on the private equity market, other than, you know, we do want to provide value to the shareholders any way we can.

Okay, great, thanks a lot.

Okay.

Thank you.

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

Thank you, Operator.

Obviously, we are used to doing better than we did in this quarter, but third quarter is always a struggle for us.

I think as we move into 2007 you'll see us taking some actions to strengthen the third quarter, to give us a better strategic fit.

You will certainly see us as we move forward and take advantage of tactical capabilities i.e. [moving] airplanes [running] to Daytona Beach during the peak season.

Perhaps taking that same airplane and flying it to some place like Myrtle Beach in the summertime or Seattle in the summertime.

So moving airplanes around, focus on profitability, focus on getting our costs down, which is the [technical difficulty] that we will in fact reduce our unit costs, we'll reduce it within the next year, I'm quite sure.

And Stan didn't mention it but -- I think he did mention it, our full-time equivalents [inaudible] is industry leading.

And they're consistently moving downwards, we're pretty proud of that.

And so all around, we will be profitable for this year, we will be profitable next year, we're pretty sure.

And as Bob laid it out, we've got airplanes coming in the quarters that we make money next year.

And then they pretty much stop after that.

So we're probably a little late in readjusting our orders from Boeing.

But Boeing was cooperative and we have a reallocation of airplanes that we think it's a much better and much smoother allocation of airplanes coming in.

And so we see a very bright future for AirTran.

And thanks for joining us today, we appreciate your interest.

And so long, thank you.

This concludes today's AirTran Holdings conference call.

You may now disconnect.