西南航空 (LUV) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen.

My name is Sierra and I will be your conference operator today.

At this time I would like to welcome everyone to the AirTran Holdings fourth-quarter and year end 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).

Thank you.

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

Sir, you may begin your conference.

Good morning everyone.

Thank you for joining us today.

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

Bob Fornaro, our President and Chief Operating Officer; and Joe Leonard, our Chairman and CEO.

As it is our usual practice we will 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 you should consider them as time sensitive forward-looking statements that are accurate only as of January 26, 2007.

We will also 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 the investor relations section of the Company's Website at AirTran.com.

Finally, we will also be discussing our proposed acquisition of Midwest Air Group.

I'd like to advise everyone that we will be referring to information that is contained in our earnings release this morning as well as our Form S4 registration statement.

I'd highlight that all of these documents have extensive Safe Harbor language that you should review.

Investors and security holders are urged to read these registration statements that have been filed with the SEC as well as any amendment supplements to these documents.

In addition to being available on our website, they are also available at the SEC's website which is SEC.gov or you can contact the company to obtain free copies of these documents.

With that I would like to turn the call over to Stan Gadek, our Chief Financial Officer.

Thank you Arne and good morning everyone.

Today AirTran is very pleased to report its eighth consecutive year of profitability.

As we grow the company we are winning many new customers who now make AirTran their carrier of choice.

In fact for the first time ever we flew over 20 million customers in 2006 and are setting new records for revenue and daily departures.

Throughout the year we have maintained a keen focus on a quality service and we are now seeing the results of this effort.

Our customers have seen it too and in 2006 we achieved the number four ranking on the J.D.

Power customer satisfaction survey.

We think this says a lot about the high quality of our service and appreciate the public recognition afforded by the J.D.

Power report.

Cost control has always been a cornerstone of our company.

And in the fourth quarter we achieved our lowest ever nonfuel unit costs of $0.0594.

This is the fifth consecutive year in which we have reduced unit costs and we are extremely proud of the fact that we achieved this milestone while building a quality product.

To those who say that quality service is the domain of specialty carriers, we say try AirTran and enjoy business class on every flight with free XM Satellite Radio and all-new airplanes.

And by the way, you will also love our low fares and our expanding route network.

In fact we recently announced five new destinations for 2007 and more are on the way.

Now our customers will enjoy low fares to and from Newburgh, New York, Daytona Beach, St. Louis, Phoenix and San Diego.

We have been steadily building our reputation for quality service and low fares and now we are going to bring our product to more passengers than ever before. 2006 was not without its challenges and was marked by record fuel prices, changes to security rules and increased competition.

Nevertheless, we earned record profits in the second quarter, took delivery of 22 new aircraft and commenced new service to White Plains, New York and Seattle.

In the fourth quarter our revenue came under pleasure from additional industry capacity including some of our own.

During the last summer we added gates in Atlanta in preparation for a network expansion.

Due to the use it or lose it nature of those gates in Atlanta's D Concourse, we added incremental capacity to the hub instead of seasonal reductions.

As we move into 2007 those additions are being replaced by permanent service to the new cities previously mentioned further enhancing our footprint in the Southeast.

One thing is for sure, our underlying strengths of low cost and high productivity remain solidly on track.

We are confident that this new growth will drive earnings by leveraging the infrastructure we have put in place.

Atlanta is the core of our business.

Year-over-year capacity trends are becoming more favorable as the growth in capacity during the first quarter is slowing based upon published schedules.

In fact, capacity in our Atlanta markets is up only slightly in March by far the most important month of the quarter.

As important as Atlanta is in our long-term strategic plan, we have also focused on developing new geographic sources of revenue.

This has lead to the development of a plan to acquire Midwest Air Group and establish a second hub in Milwaukee.

We are excited about this opportunity and believe that the financial returns for shareholders from a combined AirTran and Midwest are significant enough to pursue an acquisition.

We have tried to convince Midwest's management of the merits of our proposal without success.

Our intention is to do whatever it takes to complete the transaction.

The benefits to the communities, the employees and the shareholders are so overwhelmingly favorable that we cannot be persuaded to end our bid.

For two years we have analyzed and modeled a combination of the two companies and have evaluated financial performance over a range of competitive scenarios and cost assumptions.

Anyway we look at it, a merger of AirTran and Midwest makes sense and will yield substantial benefits.

Yet we are stymied by a management team that refuses to accept the premise that together we can provide greater value for all of our constituents.

While some have commented on differences between our companies the simple fact is that we are more alike than we are different.

We both share an entrepreneurial spirit which has served us well and helped us to succeed through adversity.

Together we will be stronger than the sum of the individual companies bringing together aircraft fleet synergies, distinct geographical customer bases, new aircraft deliveries, a commitment to our customers and communities and the low costs to bring low fares to more markets than ever before.

The fact that we have been unable to engage the company in any meaningful discussions to date should not be construed as anything less than a full and total commitment from AirTran to negotiate a deal.

Rather it has led us to announce a tender offer for the outstanding shares of Midwest Air Group and to take the issue directly to the owners.

We intend to press our case for greater shareholder value, greater community economic benefits and greater employee opportunities regardless of the challenges we are presented with.

We believe that the shareholders will ultimately agree with our proposition and exercise their rights as owners of the company to accept the proposal.

Finally we would like to emphasize that the cash component of the tender offer will be financed through a credit facility arranged by our financial advisers.

Midwest's existing cash balances must be retained in the business to fund the day-to-day operating expenses related to future air travel which customers have already paid for.

In fact we expect the merger will result in the release of Midwest's restricted cash based upon the improved creditworthiness of the new company.

Together we can offer a product that will be second to none among low cost carriers and one that will offer the best service attributes which customers of Midwest and AirTran have come to expect.

We look forward to bringing you further updates as to our progress as we move ahead in this acquisition which will create a truly national low cost and high-quality airline.

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

During 2006 AirTran took delivery of 20 737-700s and the last two 717s from our order.

During the fourth quarter of '06 we received six 737s with four aircraft delivering in the month of December.

Our capacity growth as measured in available seat miles increased 20.2% in the fourth quarter and 23.7% for the full year.

Average daily utilization in the fourth quarter dipped slightly to 10.9 hours per day from 11.1 hours in '05 but showed an increase from 11 hours to 11.1 hours for the full year.

Stage length for the fourth quarter and full year was essentially flat.

Traffic as measured in revenue passenger miles was up 16.1% in the fourth quarter and up 22.4% for the full year.

The result in load factors were down 2.5 points in the quarter and 0.7 points for the year.

Overall we are pleased with the load factor given the full year ASM growth of nearly 24%.

Average fare for the quarter declined to $87.74 from $89.81 a year earlier due primarily to the pressure on yields from the competitive environment in the Southeast and on the East Coast.

When taken with the load factor decline in the fourth quarter passenger unit revenue declined 7% compared to the fourth quarter of 2005.

On a full-year basis we experienced more favorable results seen at 7.9% improvement in average fare to $90.58 and a 5.2% increase in unit revenue.

We believe that fourth-quarter unit revenue was impacted by capacity in the marketplace driven in particular by the year-over-year additions in the Atlanta market both from ourselves and our competitors.

As I previously said we believe that capacity additions are slowing in the first quarter and we expect to see this trends continue.

During 2006 we served a record 20 million customers and (indiscernible) increased 14.3% for the quarter and 20.5% for the full year.

AirTran's nonfuel unit costs continued to show improvement in the fourth-quarter we recorded nonfuel unit costs of $0.0594 or a reduction of 4.1% representing our best ever quarterly performance.

On a sequential basis nonfuel unit costs declined 1.7% and for the full year decreased 1.3% to $0.0620.

As in prior periods, the continued reduction in costs is primarily related to the introduction of the new 737s which have lower direct operating costs and improve the efficiency of the overall operation.

The efficiency factor is most evident in the number of full-time equivalent employees per aircraft which in the fourth quarter of 2006 were 60.4 FTEs down 5.5% from 63.9 FTEs in 2005 and down 0.5% sequentially.

Looking at fourth-quarter operating performance, our completion factor was 99.1%; on-time arrivals were 73.3%; and baggage claims per thousand passengers was 3.89.

All of these measures show improvement over third-quarter performance which was impacted by runway closure for resurfacing in Atlanta which has now been reopened.

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

For the quarter AirTran reported a net loss of $3.3 million or $0.04 a share.

Included in these results is a $1.9 million or $0.02 per share charge to accrue for the value of additional free tickets issued under the Wendy's promotion.

This amount will reverse to revenue in the future as the tickets are used.

For the full year AirTran reported net income of $15.5 million or $0.17 per share.

Included in this amount are year-to-date accruals for free tickets of $4.2 million or $0.03 per share.

Both passenger revenue and total revenue represents all-time quarterly records for the company.

Passenger revenue was $440.2 million and an 11.7% increase over last year driven primarily by the record number of passengers.

Total revenue was up 12.7% to $461.9 million and included a record $20.8 million in other revenue.

The growth in ancillary revenues has been steadily increasing and represents a 48.8% improvement compared to the fourth quarter of 2005.

For the full year AirTran again achieved all-time record passenger revenue of $1.8 billion representing an increase of 30% resulting from a 7.9% higher average fare on a record 20 million customers.

Total revenue of $1.9 billion benefited from a 50% increase in other revenues of $73.3 million.

Looking at selected individual line items of expense on a unit cost basis, salaries, wages and benefits declined 3.3% on a unit cost basis to $0.0206 from $0.0213 in the quarter and 4.2% from $0.0214 to $0.0205 for the year.

The continued reduction in these unit costs reflects the ongoing productivity gains being realized from the new aircraft along with a high level of average daily utilization.

Aircraft fuel expense on a unit cost basis dropped 8.4% in the quarter to $0.0328 from $0.0358.

Fuel price per gallon was $2.02 and $2.19 for the fourth quarters of 2006 and 2005 respectively.

In absolute dollars our fourth-quarter fuel expense increased $15 million of which $285 million was related to increased consumption from additional aircraft offset by a reduction of $13.6 million related to lower prices.

For the full year fuel unit costs increased 17.9% to $0.0355 from $0.0301 in 2005 driven by a 20% increase in price of fuel from $1.81 per gallon to $2.17.

Fuel continues to be our largest single line item of expense representing 35.6% of operating expense in the fourth quarter and 36.5% for the full year.

AirTran was hedged 47.3% in the fourth quarter using a combination of fixed forwards in jet crack and crude oil caps.

The hedged fuel costs were $2.05 per gallon before taxes and fees and $2.22 per gallon all in.

Fuel hedges in the fourth quarter increased fuel expense by approximately $2.8 million.

For the full year fuel hedging reduced expense approximately $4 million.

Aircraft run on a unit cost basis declined 0.8% for the quarter and 3.2% for the year due to the increased numbers of debt financed aircraft.

During the quarter we took delivery of six 737s all of which were debt financed.

Updating our fleet information at year end we have a total of 127 aircraft consisting of 40 737-700s and 87 717s.

The 737 fleet consists of 22 aircraft on operating leases and 18 owned aircraft.

The 717 fleet consists of 79 operating leases and eight owned aircraft.

Looking ahead our 2007 deliveries will consist of 10 737-700 aircraft as well as two aircraft on a contingent sale anticipated to close in the second quarter.

The Company does not have any deliveries for the August through December period.

Distribution unit costs continued to show significant declines of 20% and 15.9% for the quarter and full year.

As in prior years we are seeing the cost savings from new distribution agreements as well as new form of payment programs such as bill me later.

During the quarter 61.3% of our bookings were made on AirTran.com.

In addition, 54% of our passengers checked in for their flights using other kiosks or Internet technology.

Maintenance, materials and repairs unit costs increased 10.6% to $0.0073 in the fourth quarter and increased 19.7% to $0.0079 for the full year.

The primary driver of the higher unit costs has been the year-over-year increase in 717 contract engine maintenance rates.

Maintenance cost per block hour was $301 compared to $264 for the fourth quarter and $322 compared to $266 for the full year.

Aircraft insurance and security services unit costs declined 6.7% for the quarter and full year as a result of the Company's lower insurance rates.

Marketing and advertising unit costs were down 24% to $0.0019 in the quarter and were flat for the full year of $0.0024.

Included in the fourth-quarter and full-year marketing numbers are the previously discussed free ticket adjustments.

Other operating expense unit costs declined 21.3% to $0.0059 in the quarter and 2.7% to $0.0071 for the full year.

The reduction in other expenses continues to show good control over the growth of overhead expense as the company adds aircraft.

For the fourth quarter AirTran recorded operating income of $2.5 million and a margin of 0.5% for the full year.

We earned operating income of $42.1 million resulting in a 2.2% margin.

Looking at the balance sheet, AirTran ended the year with $335 million of cash and investments of which $24.8 million was restricted.

The company also had deposits with Boeing net of predelivery financing of approximately $49.7 million.

Current and long-term debt including capital leases increased to $811.1 million primarily due to new aircraft deliveries and predelivery aircraft deposit financing.

Now I'd like to provide guidance for fiscal year 2007.

Please keep in mind that these numbers are for AirTran on a stand-alone basis.

Based on the revised delivery schedule for aircraft, capacity by quarter is forecasted to be 21% in the first quarter; 20% in the second quarter; 18% in the third quarter; 15% in the fourth quarter; and 19% for the full year.

Aircraft deliveries will be five in the first quarter; three in the second quarter; two in the third; none in the fourth; and a total of 10 aircraft for the full year.

Nonfuel unit costs are expected to be down 3.5% in the first quarter and down between 3 to 3.5% for the full year.

Our fuel hedged positions for 2007 including all taxes and fees by quarter are for the first quarter approximately 25% at $1.85 to $1.90 per gallon; in the second quarter approximately 22% again at $1.85 to $1.90 a gallon; in the third and fourth quarters approximately 23% at $1.90 to 1.95 per gallon.

And for the full year it's approximately 23% at $1.85 to $1.90 a gallon.

Our best estimate for jet fuel prices in the first quarter are in a range of $1.85 to $1.90.

If you apply the fuel curve for 2007 for the full year and factor in the hedges the revised forecast of price of fuel will be between $1.85 and $1.90 in the first half and $1.90 to $1.95 in a second half all in.

Annual fuel consumption for the year is projected to be approximately 360 to 370 million gallons.

Fuel expense sensitivity due to changes in price will be approximately plus or minus $9 million for every $1 per barrel change in crude or crack spread.

Non aircraft capital expenditures will be approximately 30 to $35 million.

In conclusion, we once again wish to thank our customers for flying AirTran.

We are working hard to offer quality service and believe that more and more people are making AirTran their carrier of choice.

We also want to thank our crew members who offer their best to the customers everyday and have helped to put us near the top of the J.D.

Power customer satisfaction survey.

We look forward to completing our bid to acquire Midwest Air Group and are excited about the prospects of bringing together two great companies in creating a quality low-cost national airline.

The opportunities for expanded air service and the resultant economic stimulus will benefit Milwaukee and the surrounding region.

In addition, the projected $60 million in annual synergies which will result from the merger are significant and will be accretive to AirTran earnings.

Most exciting are the prospects for an enhanced product which will combine the very best of AirTran and Midwest service.

We intend to raise the bar among low-cost carriers and our customers will be the ultimate winners enjoying more destinations at lower fares with better service than ever before.

These are exciting times in our industry; the opportunities for success have never been greater for those who are willing to step up and challenge the status quo.

We have the strategic plan to do this and we took forward to bringing you future updates as we go forward.

Operator, with that I'd like to open the call for questions.

(OPERATOR INSTRUCTIONS) Ray Neidl from Calyon Securities.

I guess the important thing is when you gave us guidance for the fourth quarter there was increased competition in your core area in the East Coast.

Going forward you are saying you are seeing some reductions in that area but are we still going to see a lot more competition coming from a revitalized Delta coming out of bankruptcy in April and JetBlue putting more capacity on the East Coast as they pull back from Transcon?

Good morning, Ray.

I think you mentioned two airlines and I think realistically I think the JetBlue capacity really impacts more Boston and New York to Florida and it's not particularly relevant to our overall unit revenues.

But if you look at what's going on in terms of capacity again the capacity really in Atlanta and really in the Southeast really peaked around November.

Right now there's about 8% less capacity projected for March 2007 versus the month of November.

And so what we saw in the fourth quarter was all-in capacity increases in Atlanta of about 10% or so.

Those numbers in March and April are down to about 3 -- 2% to 3%.

And we just got some information on April last night and it looks like in April Delta will be down in AirTran markets on a year-over-year basis.

So I think the supply situation for both the competition and the way we are changing our schedules is starting to look a lot more favorable.

Bob, it's a small amount of capacity but Express Jet is going into point-to-point service I guess some of it in the Southeast.

Will that have any affect on AirTran or their pricing?

I would doubt it.

I understand they are going to showing their hand in February.

I would be surprised if anybody would be going into Atlanta.

As an example, 50 seat RJs, you're talking high prices and high cost.

We saw who was it -- FLYi had that strategy.

They didn't last very long.

I think (indiscernible) went to point-to-point markets such as Tallahassee to New Orleans, it's irrelevant to us.

It's not what we focus on.

Quite frankly no concern about what they are doing.

Okay, good.

Thank you.

Michael Linenberg from Merrill Lynch.

Just I guess two questions.

One regarding the mechanics behind the tender offer here.

Sort of where do things stand I think as I recall there was a contingency that you would only proceed if there was an elimination of the poison pill and the Midwest Board I guess they've spoken.

I'm not sure if the fat lady has sung yet.

But where do things stand as it seems like they continue to keep that poison pill in place?

What are your options is maybe what I'm trying to get to assuming that remains in place?

Mike, this is Stan.

It's a complex topic so I'm glad you raised the question here.

Our tender offer is still outstanding to the shareholders.

The company has merely satisfied the requirement to make their recommendation.

The tender offer currently expires February 8th.

As you probably know and everyone else most of the tenders come in in the final day or two prior to the deadline.

We do have the option to extend the tender offer if we so choose to; we've not made that decision.

And at this point we are maintaining a high level of dialog with MEH shareholders answering their questions.

The provision of the poison pill it's really a two-step process.

The first step would have been the detachment of rights being triggered by our tender offer but the Midwest Board chose is not to do that.

The second trigger would be upon the acquisition of 15% or more of the stock by AirTran, the rights would then become effective.

We have no intention of acquiring prior to the disarming of the pill, 15%.

So we are progressing down the path.

We have a roadmap maintaining a lot of dialog, answering questions and looking forward to closing out the transaction.

So I see.

So if you get to the February 7th date and 60% of the shareholders have at least announced their intention to tender, I guess that sends a strong message back to the Board.

But then to go from there I guess things get probably pretty complicated if they decide to remain recalcitrant on the issue?

Is that a --?

I think that is a fair comment.

Okay, good.

Second question, this is a lot easier, this is maybe more down Bob's path.

You announced your service to Newburgh.

There's certainly opportunity there and whether you were first or JetBlue, the fact is they're going into some of those same markets and then you've been building up a nice presence in White Plains and I know that that is a slot constraint airport with the parking right issue.

It looks like you've gotten a few more and now we see JetBlue going into the market.

What is going on here?

I mean you are picking out some good markets, they are coming in right on top of you.

Any thoughts where are these slots coming from etc.?

White Plains in particular, this is a fairly convoluted process but there are slots available in the morning and late evening and I think when JetBlue when we see their schedule, pretty poor quality from a slot perspective because we acted first.

I suspect JetBlue looks at it as they want New York to themselves.

We can compete with them.

Our costs are lower.

We've got a good product and I think we have one thing that differentiates us versus JetBlue.

They are in only leisure markets to both those from New York to Florida and we have additional service to Atlanta which is going to provide 30 some odd additional connections.

So they can take customers to two or three places and we can take customers to 35 to 40.

And so I think that is an option that favors us.

Our costs are lower, they've got a lot larger presence.

But I think we also have an advantage I think because we got the 717 and it's probably better sized to some of these markets.

So we will see.

But again I think they've kind of taken the legacy approach of following the new guy in the market.

So I guess we plan on staying and again our schedules is far superior because we have hub service in addition to leisure service to Florida.

Okay.

And then just one quick last one on gates.

I know Stan talked about the -- on the D Concourse the additional capacity there.

How many gates do you guys have on C and how many can you grow into D and what sort of gate turns -- when I say gate turns -- what is the number of turns that you are doing per gate at present?

I'm just trying to get a sense on --?

If I can ask -- I'll try to give a broad answer for everybody on the call because this is actually fairly important and it actually had a very big impact on our revenue and unit revenues in the quarter.

On the C Concourse we have 22 gates and on the D Concourse everything is first come, first served.

Okay?

And what happened was the three gates came available in late August.

And we are under the belief that we were going to be able to get those gates and gradually go into them and the airport told us it's first come, first served.

So what we did we added approximately 15 departures over our August schedule versus probably we would normally do some seasonal reductions so in round numbers we probably had in the short run we spooled to up about 20 departures which is 9% of our capacity.

Really in the off-season.

In addition to what Delta was doing it really put of lot of pressure on our unit revenues.

But now we've got the gates and what you are now seeing us do as we move into the first quarter the fifth flight to Pensacola perhaps has now become peak season service to Florida.

Phoenix has been announced.

It looks like it's going to spool up very well.

Daytona looks good.

So what is happening is now we're taking of these additional or incremental frequencies and they are going to become core markets for us.

I think you're going to see the quality of the revenue improve significantly as we move late into the first quarter and into the second quarter.

It was a very painful process for us.

Hurt us in the short term but there's still a number of important markets in Atlanta that we don't serve.

I think we have about 230 departures today and we believe on the footprint that we operate that we can operate at least 300 departures a day -- again tight turns and (multiple speakers).

Yes, that gets my answer.

Thank you.

Appreciate it.

Jim Parker from Raymond James.

I'm just curious about your thinking regarding fuel hedges.

You've got a substantial amount hedged and apparently an opportunity to hedge more and realize year-to-year decreases in your fuel prices for '07 versus '06.

What is your thinking -- it's going to be hard of course to forecast fuel.

But would you be inclined to go ahead and lock away more of your fuel prices if the futures will permit you to do so?

Yes, right now, Jim, our fuel hedges are essentially at par with spot prices in the market.

Since September 30th we've actually been taking little bites and we've added 10%.

That has been our strategy all along rather than going out and locking in 90% we'll take little incremental bites of 3% to 5%.

I think in the current environment we may do a little bit more.

But we still think we've got a window here to acquire good pricing and of course we want to get protection in that all-important hurricane season as well and we're looking at the future curve of that.

So I think you can expect us to do a little bit more here going forward in taking advantage of the low prices and any interim dips that come along.

Okay.

A second question regarding the tender from Midwest Express or Midwest Air Group shares, will you reveal the number of shares that are tendered as we move along here say when your tender expires?

That is a legal requirement Jim to do that so the answer is yes.

That is absolutely right, yes.

Thank you.

Andrew O'Conor from Wells Capital Management.

Good morning, gentlemen.

Congratulations on your cost performance.

I wanted to know I may have missed this, can you quickly summarize which new destinations AirTran is adding in '07?

Sure.

Daytona Beach, seasonally.

Stewart, New York, Phoenix, San Diego and St. Louis.

And, Stan, would you expect service to all these destinations to be accretive from the very beginning?

I would say so, yes.

Okay.

And then lastly in regards to your cost guidance for '07 to be down 3.5% relative to '06, how would you get there?

That is coming about from primarily from the additional 737s that are coming in because we are able to leverage the network that we already have in place and the infrastructure at the stations.

We don't have to hire ground personnel one for one for every aircraft.

That is why we've been reporting this productivity statistic of full-time equivalents per aircraft because it has been going steadily down.

So the airplanes and the way we've been building our network and adding flights is the primary driver of those costs as well as we always keep a keen eye on all of our cost drivers including vendor contracts that we enter into, etc.

Okay.

Then for the fourth quarter it appears that you are already below your goal for '07.

Is the idea that because you are adding new destinations costs may come up a little bit but for the full year still be down by 3 to 3.5%?

Again the fourth quarter costs appear to be below what you are hoping to get for full year '07.

The costs actually will fluctuate by quarter and that is why we give a full-year guidance because depending on the flight schedule and costs are being driven by deliveries, etc., it could fluctuate.

We also move our maintenance around seasonally obviously during the Christmas and Thanksgiving periods.

We don't want airplanes in C-Checks, We want them out flying.

We try to manage our maintenance with the peaks and the valleys of demand as well.

Thank you.

Good luck, guys.

Gary Chase from Lehman Brothers.

Good morning, guys.

Just a couple quick ones on the revenue side probably for Bob.

Can you just -- you kind of walked through what you were doing with the extra gates in the C Concourse there and so one.

Is the though process here, if I understand you right, is the thought process that the marginal contributions from the new flying you are doing in markets like St. Louis will be significantly greater than what you experienced with that I think you used as an example that the fifth flight to Pensacola.

Is that the thought process you are trying to convey around this issue?

Gary, again that is the thought process.

Again we added frequencies really almost in the off-peak normally if you fly a flight in the peak -- we flew more to certain markets in the off-peak than we did in the peak because of the timing of things.

And like I said during off-peak flying you create your own self competition.

I think it also corresponded to a period where Delta was building up.

And I think we kind of hit a crescendo there in November and I think the market is kind of rationalizing itself.

We're at a point now where destinations -- our footprint in Atlanta and the Southeast is getting very harsh, 55 destinations or so.

We found over the years as we add more destinations in Atlanta, it just improves our entire breadth of service across the whole system.

We do have again a number of routes.

These things fill up pretty well.

Some of the east-west routes they are a lot more stable than perhaps some of the East Coast markets.

We always anticipate competitive reactions.

But quite frankly there's not a lot the competition can do if we want to fly three flights to Phoenix.

We're going to do well.

We've got large banks; we've got a very strong hub.

So I think this is the point where right now in Atlanta new cities will outperform additional frequencies.

We've got a pretty healthy number of flights per market now in Atlanta.

And I think, Gary, also to add to that the east-west flying it will help strengthen our third-quarter which typically for us is a weaker quarter than it is for some of the other carriers that predominantly are east-west.

So that is part of the thinking as well.

Typically you run like a 15% RASM deficit when you start a brand new market and you are saying those marginal frequencies you added to not lose those gates were inferior to what you are expecting even though obviously new markets are going to come at a little bit of a discount as they spool up, right?

That's right, Gary.

That is exactly -- not only was -- there were incremental services in New York peak.

So you get kind of a compounding effect.

And any thoughts on sort of how the quarter looks?

Can you give us any hints on sort of where January is just in terms of RASM or did I miss that?

Have you provided that insight?

I think it's a good time to talk about that and give you a little bit more guidance because obviously it's been pretty hard to follow.

If you look at the revenue performance I think again in three areas, it's competitive capacity, it's our capacity, those late additions and probably some Delta recovery from those -- the bankruptcy fears that might have scared the customers off in the fourth quarter.

A number of things going on.

As we went through the quarter, we normally expected strength and it got weaker.

So actually our weakest month of the quarter was December on a year-over-year basis.

January, our load factor will be down slightly but January will be better than December, slightly.

And as we move into the quarter, it starts getting progressively better.

Right now I'd say a good revenue guess is somewhere between 3% to 4% down.

Although there may be some upside in March.

March has the most favorable capacity year-over-year and March is somewhere between 40% and 43% of the quarter from a revenue perspective.

So if there is some upside in March perhaps that can give us a little upside to that 3% to 4% RASM guidance number.

As we move into April, I guess we just saw Delta's capacity adjustments for April and they are down in head-to-head markets year-over-year.

So as we move into March and April the key months the supply situation is getting better and perhaps we'll start seeing more improvements as well.

I'd also like to add that we're seeing a significant drop in fuel prices too and that is certainly going to help out the first quarter.

So we are looking forward to getting all those factors to converge here and as we get further in the quarter we will be able to give hopefully some more guidance.

Thanks very much guys, understood.

Jamie Baker from JPMorgan.

Good morning, guys.

Bob, thanks for that down 3 to 4 RASM color.

But it still implies that passenger revenue would be up somewhere around 6% from the fourth quarter just finished.

And I recognize that there were some negative factors in the fourth quarter.

But if that is accurate I think that would be the best fourth to first quarter revenue comparison that you've ever had.

Can I just reconcile that I understood that guidance correctly and I'm not looking at it the wrong way?

I think -- you mentioned 6% -- I think again you've done one more step of math but I think again that would be fair.

A lot of these undertones or calculations are probably driven by capacity as well -- (indiscernible) look at the capacity is getting bigger.

But I think that's kind of the way its shaping now, down 3% to 4% is the way.

And we're starting to see -- where we came up short in the fourth quarter was the close in bookings were soft and almost like the close in bookings are beginning to rebound as we move into January.

So first real positive trend in close in bookings that we've seen in about 45 days or so.

So the bookings always look good at this time for [Florida] season, they will look exceptionally strong.

We will see how they close out.

But fortunately the capacity situation, our capacity is much higher quality as we move into the peak.

And I think Delta's capacity, Delta's capacity is down significantly on a sequential basis from I'll say November, December to March, April.

Okay.

Circling back to Stan, you mentioned in some of your prepared remarks about raising the service bar.

I was wondering if you'd be comfortable elaborating on that as it relates to the merger just given that Midwest is already so highly regarded it seems more likely than not that the local Milwaukee passengers would in fact witness some sort of a decline in what they've come to expect.

Can you add anything to that?

Well, yes, this is Joe.

I mean we have business class on every single flight.

We have XM Radio on every single flight.

The fact of the matter the MEH product offering is all over the place.

I mean they have this image which they deserve, a very high-quality service and I hear about lobsters and they haven't certain served lobsters in six years, and they have 2-by-2 seatings on less than half of their flights where we have 2-by-2 seating on every flight.

Is there a quality of service 18 passenger Beech 1800s or is it Dornier 32 passenger RJs or is it 50 passenger RJs or is it's all coach MD80s?

So you know their product offering is all over the place quite frankly.

I think their image there's a lot of nostalgia in their image that doesn't fully bear out.

So we think that by putting our product in there and also they've done a better job of brand management than we have.

Adopting some of the things that they do that we don't would be the best of both worlds.

So maybe the mystique exceeds the reality I guess you'd have to drink quite a bit for a chocolate chip cookie to look like a lobster.

All right.

Thanks for the color.

I appreciate it.

Good luck.

(OPERATOR INSTRUCTIONS) Helane Becker from benchmark.

Hi, gentlemen.

This is my question.

Every so often I hear from some of your pilots I guess you've had a -- I've always thought you've had really good relationships with all of your employees including them.

But I guess there's an open contract and every once in a while they kind of poke their heads up, figure out that you've made some money and make some noise.

Could you just update on us on what is going on them and where you stand in the negotiations?

Yes, we are in active negotiations through mediation process.

We met already two days since we started the new year.

I would say that we made some very good progress in those talks.

The rhetoric has been toned down quite a bit which we view as positive.

So we're working our way through the process.

That is all I can really say about that.

Okay, that is fair.

Do you think they have a timetable for when they would like to get something done or do you?

Well, we do.

We'd like to get it done as soon as we possibly can.

I sort of assumed that part.

But you need a willing partner to get it done as quickly as possible.

Yes, well the mediator has asked us to go quiet and that is what we are going to do.

Okay, that is fair.

All right, that is it.

All my other questions were asked and answered and thank you very much.

Kevin Crissey from UBS.

Good morning, everybody.

A couple quick ones I think.

Given the brand management and what Jamie raised in terms of the impression of Midwest would you consider keeping their name rather than AirTran name should this go through?

No, I don't think that is a possibility.

Okay.

And then when you talk about your capacity when you say capacity sequentially, are you looking at it on a seat basis, on and ASM basis, on a city pair basis or an O&D basis?

You can look at these things on a lot of different ways and sometimes they are apples and oranges.

I normally focus here on a seat basis because I think seats first of all for us we tend to be shorter haul anyway.

I think seat is a far more relevant for an airline like us especially since we have so few long haul flights.

Everything I'm characterizing is really on a seat basis.

Again, and really in competitive head-to-head markets on a -- for us realistically the ASM number is not very relevant.

And when you say on head-to-head markets is it on O&D pairs or would it be like more city when you say --?

Nonstop to nonstop markets.

So head-to-head markets.

But like if you were flying to say for example into New York you would be looking at all the airports in that area rather than just one?

Because when I -- the reason I'm asking this detailed question is because when I run these numbers I don't really see it in the aggregate maybe if I just run Atlanta.

But I want to make sure that I can back to your numbers by think the way you think.

So if I run basically if I run the O&D pairs that you operate and run Delta's capacity or seats or ASMs, I don't see that much of a dramatic change from -- into Q1.

So that is why I'm asking.

And maybe I'm running it -- I'm running it on an O&D basis, maybe I should be running on a market basis.

Kevin, this is Arne.

Let me give you a little more color here.

We tend to look -- a lot of the capacity additions that have come in the fourth quarter were Atlanta, that was where most of the capacity additions are.

That is where you see most of the capacity coming out as well.

We tend to look at not only the primary airports that we serve but all the surrounding airports.

So outside of Los Angeles, outside of New York even including places like Islip and what Southwest is doing.

However, if you aggregate all the New York markets, its going to give an unfair bias to really where our service is.

If I had to characterize how we look at it, we look at Atlanta; we look at the East Coast to Florida; and we look at generally what is happening on the eastern half of the United States and then look particularly what is unique about West Coast service to Atlanta and the Southeast.

So those are probably the regions that we look at to try and get a sense of what we think supply looks like -- supply portion of the price equation is going to look like.

The problem is you get to New York or anything like that, the numbers get too big.

Terrific, okay, that is excellent, thanks.

And I guess the last thing, point would be, were you surprised by Midwest pilots coming out?

I thought you -- my impression was that you had thought that you had them more onboard than apparently you do?

No, we are not surprised.

We think they probably got a lot of pressure from ALPA National.

Because if the two airlines are put together the odds are very, very much in favor that those 380 jobs would belong to the National Pilots Association.

Okay, thank you.

Thank you, there are no further questions at this time.

Okay, well then operator I'd like to wrap up just a minute.

This is Joe.

Obviously we're quite proud of the fact that we have eight years of profitability in the worst period that the industry has ever gone through.

We're in a very, very small club in that regard and I really want to thank our employees and our customers for helping us achieve that.

It's a monumental task to do and we're very proud of the fact that we were able to do that.

As we've pointed out as we move into 2007, the competitive situation looks much better for us as we move into 2007 with capacity actually being reduced in Atlanta in our markets.

We think that the West Coast flying will be very positive for us.

Seattle last summer was sensational.

And we think San Diego, Phoenix and St. Louis will look equally as good.

As we move into the year we're going to continue to bring costs down.

We're very, very confident, as you know we've always delivered on cost and we're very confident about the 3 to 3.5% CASM improvement for 2007 and so and with reduction in fuel we're really very bullish on the profitability for the company as we move into 2007.

Of course you never know what fuel is going to do.

So we will continue to hedge.

We will continue to have a technical hedge with the youngest airplanes in the industry so by definition we have the best technology related to fuel that you can get.

And we're continuing to pursue the Midwest acquisition.

We're not going to go away.

We're going to see this through.

And we're going to make sure that the shareholders get a chance to express their opinion and based on the conversations that we've had and we've talked to just about all of the institutional owners and we're starting to work on the retail sector as well, we're getting very, very positive feedback.

We are absolutely convinced that the combination of these two companies creates an incredibly strong airline that can compete with anybody under any circumstances coast-to-coast, border-to-border.

So in closing, we look forward to 2007.

One way or another we will do quite well.

And we're quite optimistic about our company's future.

Thank you very much for attending this morning.

Thank you.

This concludes today's AirTran Holdings fourth-quarter and year-end 2006 earnings conference call.

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