西南航空 (LUV) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the AirTran Holdings second quarter 2007 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.

Good morning, everyone.

I want to thank you for joining us today for AirTran Holdings second quarter 2007 earnings call.

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

These statements are not in historical fact, and instead, you should consider them as time-sensitive forward-looking statements that are accurate only as of July 26, 2007.

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

The copy of today's press release and the 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 F-4 registration statement.

I would highlight that all of our 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 amendments or supplements to these documents.

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

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

Thanks, Arne, and good morning, everyone.

Today, AirTran Holdings is pleased to announce an all-time record, setting quarterly profit of $41.5 million, or $0.41 per diluted share.

This performance reflects the growing demand for our product and the outstanding customer service provided by our crew members.

To everyone who made this our best quarter ever, thank you.

The second quarter has historically been AirTran's strongest and this year was no exception.

We set new records in financial and operating performance, reflecting the success of our strategic growth plan and the value that is being generated by our expanding route network and the deployment of the Boeing 737.

We're so pleased with the performance of the new aircraft that we recently exercised options to purchase an additional 15 737s which we'll deliver in 2011 and 2012.

At the same time, we rescheduled our deliveries to ensure a smooth and manageable growth rate of 10 to 15 aircrafts per year for the next five years.

Including these option exercises, our fleet will total 200 aircrafts at the end of 2012.

AirTran's operating performance, as reported by the Department of Transportation, is particularly impressive when compared to the other reporting carriers.

Based on the most currently available DOT data for the first five months of the year, AirTran ranked first among major carriers with appeals baggage claims, second with appeals-denied boardings, and third for on-time performance, fewest complaints, and completion factor.

Our operational performance has steadily improved and supports the customer's view that AirTran is a safe, dependable, and on-time operator.

When combined with our product offerings of business class in every flight, XM Satellite Radio, assigned seat selection, extra-large easy fit overhead bins, and low fares and great service, it is no wonder that more and more customers choose AirTran for their travel.

The proof of this statement is in the numbers.

During the second quarter, we served an all-time record 6.3 million customers and achieved a load factor of 78.8%.

This is a noteworthy achievement when you consider that we grew load factor to a new record while adding 27 737s.

We continue to expand our network by adding St.

Louis, San Diego, Charleston, South Carolina, and Portland, Maine to our route net.

This is in addition to the new cities we announced in the first quarter, commencing service to Phoenix, Daytona Beach, and Newburgh, New York.

As a result, we now have over 20% of our available seat miles and transcom markets to-and-from points in the east and the west to points out west.

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

Since the 1st of the year through the end of the second quarter, AirTran has placed eight 737s into service.

In the first two weeks of July, we received our final two 737s for 2007, bringing the total additions to ten aircraft.

Our fleet now consists of 87 717s and 57 37s, and we will receive no more aircraft until February 2008.

On a year-over-year basis, capacity, as measured in available seat miles, increased 21.3% during the quarter.

The growth in capacity was driven by additional aircraft, and the 5.8% increase in average stage flight to 689 miles from 652 miles.

Traffic or revenue passenger miles increased 22.3% and load factor increased to an all-time record 78.8%.

Average fare was $92.74, down 1.5% from $94.18 a year ago.

The lower average fare primarily reflects the yield decline of 5.9% from $0.1376 to $0.1295.

In the second quarter, AirTran's non-fuel unit cost declined 6% from $0.0630 to $0.0592, representing an all-time record non-fuel unit cost.

On the total operating cost basis including fuel, AirTran's unit cost declined 5.2% from $0.0999 to $0.0974.

The Company's cost performance is significant as it reflects the core benefits of our ongoing investment in new technology, our young fleet, high aircraft utilization, and station efficiency.

We believe that through the combination of technology, fleet, and network, we can continue to lower our unit cost and achieve industry-leading productivity for the long term.

Average daily utilization declined by less than a percent to 11.2 hours compared to 11.3 hours last year.

Utilization by fleet type was 10.8 hours for the 717 versus 11 hours and 12.0 hours for the 737 versus 12.2.

Looking at second quarter operating performance versus last year, our completion factor was 99.3% compared to 99.5%, on-time performance was up to 79.6% versus 76.6%, and baggage claims were down to 3.75 from 4.18 claims per 1,000 customers.

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

Passenger revenue reached an all-time record of $586.4 million, generated by record passenger counts, offset slightly by a lower average fare.

Total revenue for the second quarter was an all-time record, as well, coming in 16.3% above last year's $528.2 million.

It is interesting to note that AirTran earned almost as much revenue in the second quarter of 2007 as it did for the entire year of 2000 when we reported full-year revenue of $624 million.

Looking at the individual line items of expense on a unit-cost basis, salaries, wages, and benefits defined 5.4% from $0.0204 to $0.0193.

The improvement in unit cost reflects the productivity increases generated by the additional aircraft and customer focus technology applications such as kiosks, online seat assignment, and web check in.

On an FTE-per-aircraft basis, in the second quarter, we scored 59.9 employees, down 3.5% from 62.1 FTEs in the year-earlier period.

When you consider the fact that AirTran leads the industry in both FTEs per aircraft and lowest stage-placed adjusted non-fuel unit cost, the obvious conclusion is that AirTran is the leader in productivity and efficiency.

Looking at aircraft fuel expense, unit cost declined 4.1% from $0.0370 to $0.0355.

The primary reason for the reduction was a 1.3% decline in the price of fuel from $2.26 last year to $2.23 in 2007.

In absolute dollars, AirTran's fuel expense decreased $28.9 million of which $31.6 million was due to increased flying, offset by $2.7 million from the $0.03 per gallon reduction of fuel cost.

During the second quarter, AirTran was hedged using a combination of fixed forwards and [jet] swaps for approximately 34.8% at an all in price per gallon, including taxes and fees, were approximately $2.12.

The benefit from fuel hedging in the second quarter was $4.3 million.

Aircraft rent on a unit-cost basis declined 11.7% from $0.012 to $0.0106, reflecting the additional debt finance 737s year over year.

During the quarter, we placed three new aircraft in service.

Updating our fleet information, the number of leased and owned aircraft as of the end of July '07 are 87 717s, comprised of 79 leased and 8 owned aircrafts.

That's unchanged from the year-earlier period.

And 57 37s of which 22 are leased and 28 are owned.

As previously mentioned, there are no further aircraft deliveries scheduled for the year, but the next delivery is coming in February of 2008.

Distribution expense in the second quarter was unchanged year over year of [$0.042].

During the second quarter, 58.1% of our bookings were made through airtrans.com and approximately 53% of our customers checked in for the flights using Internet or kiosk technology.

Maintenance materials and repairs unit cost decreased 10.8% to [$0.066] from [$0.074].

Maintenance cost per block hour declined 6.9% from approximately $305 to $284 per block hour, year over year.

The reduction in maintenance costs resulted primarily from the addition of new aircraft and the timing of scheduled maintenance events.

Landing fees and other rents were down 5.4% to [$0.053] from [$0.056], and this reduction was due primarily to the additional flying.

Aircraft insurance and security services declined 23.1% from [$0.013] to [$0.010].

As in prior periods, this reduction was driven primarily by the reduced [hull and] liability rates which we obtained during the insurance renewal process.

Marketing and advertising unit costs also declined 28% from [$0.025] to [$0.018].

The reduction in unit costs reflects the expiration of certain promotional programs which ended last year.

Depreciation unit costs increased 53.8% from [$0.013] to [$0.02].

This increase is driven almost entirely by the additional owned 737s and the purchase of the spare parts and equipment to support the fleet.

Other operating expense unit costs increased by 2.4% from [$0.083] to [$0.085].

This increase was driven primarily by additional ground handling at the new stations open since the second quarter of last year.

Operating income reached an all-time record of $69.7 million, representing a 28% increase over last year, and an operating margin of 11.4%.

EBITDA was $88.4 million compared to $60.7 million last year and EBITDAR was $149 million versus $117.6 million.

Finally, I would like to point out that during the second quarter, the Company recorded a pre-tax gain on the sale of two aircraft of $7.2 million, which is reflected in the other income and expense section of the income statement.

The gain on an after-tax basis is approximately $4.5 million, or $0.04 per diluted share.

Looking at the balance sheet, AirTran ended the second quarter with $428.7 million total cash and investments of which $29.6 was restricted.

In addition, the Company has a positive [switch bowling] of approximately $113.3 million.

Current and long-term debt and capital leases increased to $1 billion as a result of new aircraft financing and PDP debt.

However, all but $125 million is secured by the underlying collateral.

With respect to liquidity, we are pleased to report that we closed on an $82-million deposit financing agreement for 18 aircraft delivering 2009 and 2010.

With this financing, we have reduced our working capital requirements for aircraft deposits.

I would now like to update our guidance for the second half of 2007.

Capacity growth is expected to be approximately 20% for the third quarter and 14% for the fourth quarter, or 19% for the full year.

We expect unit revenue growth to turn positive in the third quarter with an increase of between 2% to 3%, year over year.

Non-fuel unit costs are expected to be down 3% to 4% for the full year.

We still expect to see a reduction of approximately 1% to 3% in the third quarter and approximately flat, year over year, in the fourth quarter.

Our fuel contracts and hedge positions, including all taxes and fees by quarter, are approximately, for the third quarter, 49%, a price range of $2.07 to $2.12.

Then for the fourth quarter, 46%, and a range of $2.05 to $2.10.

Approximately 73% per Gulf Coast jet with remaining 27% crude oil.

We are hedged over 55% during the August to October hurricane season.

Our estimate for jet fuel prices in the current quarter is in the range of approximately $2.25 to $2.30 per gallon based on an assumed crude price of about $72 a barrel and a [crack] spread of about $16.

Annual fuel consumption will be in a range of between 365 million to 375 million gallons.

Fuel price sensitivity will be about $2.5 million per quarter for every dollar change in crude or crack spread before the effective hedging.

And now, I'd like to provide you with a brief update on our efforts to acquire Midwest Air Group.

As you know, on June 10, we extended our tender offer of $15 per share, consisting of $9 cash and 0.5842 shares of AAI common after receiving tenders for approximately 59.5% of MEH common stock.

We subsequently extended the tender offer to August 10, 2007.

On June 14, the shareholders of Midwest selected three new directors to the MEH Board by a margin of 2 to 1, further underscoring shareholder support for our proposal.

Finally, on July 16, we met with the full Board of Directors of Midwest Air Group and presented our proposal in detail.

At this time, we have not received a response from the Board of Midwest Air Group.

While we remain hopeful, we are also frustrated by the Company's continuing disregard for its shareholders who have voted three times in favor of our proposal.

We believe our offer is full and fair, and we are confident that a merger of our companies will bring about significant employment and economic benefits for the Milwaukee and Kansas City communities.

We call upon the Board of Midwest to carry out the role of its shareholders and enter into discussions to merge AirTran and Midwest.

In conclusion, we thank our customers for their business, our shareholders for their support, and our crew members for delivering quality, service, and a great product.

We are pleased with the results of the second quarter and believe that it demonstrates what can be achieved with our business model, even during a period of high fuel prices.

We believe our core fundamentals are on track and we will continue to improve in the quarters ahead.

We look forward to providing you of further updates on Midwest and reporting continued profitability for the third quarter and full year 2007.

I thank you for your interest in AirTran.

At this time, we'd like to open the call for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Jim Parker of Raymond James.

Good morning, Joe, Bob, Arne, and Stan.

Good morning, Jim.

Alright.

With oil at 77, you've got to figure out some way to get some more revenue from customers.

And I believe that recently you began to charge for assigned seating.

I want to know what your plans are, going forward, for additional non-seat revenue.

What can you do in terms of bag, selling more car rentals, hotels, things to generate revenue?

Jim, good question.

Again, just a little background.

I think, first of all, if you look at our non-passenger revenues, I think if you, they grew at, growing 40% to 50% versus the underlying revenues at 15% to 20%.

So, there's a few things going on and regarding change fees, excess baggage.

Again, we have a small [res basis] booking fee, which we instituted a year ago.

It's quite low, probably could be increased if we desired.

And credit cards, but we also have a number of programs that we report of in the passenger line and not necessarily in that ancillary revenue bucket, such as upgrades, which is a very large number for us.

[Damage] to this reservation fee, we do have assigned seating for everybody.

We have always had assigned seating for passenger-paid certain fare classes.

And then, our practice had been to give seat assignments at final check in.

We're upgrading the opportunity to buy that at the time of purchase.

Again, so it's optional and it's, quite frankly, the result of, it really surprised us how good they are.

I think you'll see those numbers improve.

So we feel pretty good about it.

We look at this stuff all the time, but there's some of the things that we're working on.

Upgrade fees are a very big program, as is ancillary revenue, and we see those numbers move a lot.

So you can see us continue to do the things that we're doing, perhaps adding fees where appropriate, or adjust fees upward where appropriate.

Again, if you look at the other revenue category, it's growing substantially faster than the other categories.

Okay, thanks.

Second question is that when you initially announced your desire to acquire Midwest, you put forth some figures regarding the earnings accretion, cost savings, incremental revenue, and so forth.

Midwest numbers, at least in our forecast, relative to our forecast, have turned out to be a lot lower than what we were thinking earlier at the time you did your announcement of your intention to acquire Midwest.

Given their lower numbers, has the accretion impact that you've calculated, has that changed substantially?

Again, another good question.

Our valuation of Midwest was not based on Midwest standalone.

Quite frankly, again, Midwest operating numbers, and you go through all the adjustments, their numbers are worse on a year-over-year basis.

But we don't value that based on a standalone.

Midwest is a small carrier with all the characteristics of a legacy carrier, but they don't have an international division.

So standalone, we don't think their valuation should be very high.

We value them based on the value of their territory to us, the diversification it brings to us, the ability for us to continue on our expansion, reduce our costs.

So we've approached it from our perspective.

We bring synergies that Midwest can't bring on their own, and so therefore, we're comfortable.

We would like to do some limited due diligence, make sure we haven't missed anything.

We certainly don't see any need to be raising the price significantly based on their performance.

So that's the value that it brings to us and our network.

Route diversification, but at AirTran, we do not have a lot of high share routes.

They're a very, very competitive route network.

And we think at AirTran, we could dramatically improve performance of their underlying operations.

It's about really territory and diversification, okay?

Yes, okay.

Thanks, Bob.

Thanks, Jim.

Right now, Jim, they're on a run rate, first half of the year, about $4.5 million worse than last year where they essentially broke even at the operating line.

Thank you.

Your next question comes from Jamie Baker of JPMorgan.

Hey, good morning, everybody.

Good morning, Jamie.

I thought that was pretty robust random guidance for the third quarter.

Can you give us a feel for how the months progress and remind us if you quantified the impact on short-haul demand, last year, post London?

I'm just trying to sort of normalize for that event.

To start back, really in the second quarter, we were down about 5% in virtually every month.

And I think if I went back three months ago, I though June would have been better.

And I thought we would turn in June.

It looks like the turn will start in July.

But the way it looks to us, again, when you have a month is almost all of our [hours], our July unit revenues will be, in the worst case, down 1% and it could be as good as flat.

So we're making the turn, really, as we speak.

And then they go up from there.

It's hard to sort out, again, the impact of the London issues last year because we also have a lot of things going on in the capacity perspective.

Last year, we had a lot of new routes which really underperformed for a couple of months, and Delta had a lot of new capacity.

So as we look at the capacity, going forward, in each quarter it looks better.

If you look out our competitive routes, they're largely flat.

If you look at the southeast for the third quarter and the capacity is flat to negative, depending on how you want to calculate it as you go into the fourth quarter.

So I think mostly it's fewer new routes that we've added at AirTran and overall, a little bit of less capacity.

And I think also, again, the west coast operation for us is pretty good.

We've got almost a quarter of our capacity in east-west routes.

Now, June, all those routes collectively ran more than 90% [large] factor and those are the routes that will stay high in August and September.

So it's a combination of things.

It's hard really to pinpoint each one of them.

Normally, third quarter rev doesn't hinge on September the way that first quarter is make or break, depending on March.

Should we consider September the real swing month, this year, given the year-on-year impact?

Jamie, it usually is.

Oh, it is?

Okay.

If we have, I would say, hopefully if we have a moderate season for hurricanes, hopefully that will put some upside.

It's so hard to tell given the nature of our route network.

The fastest swing month, if it swings the right way, will be at the high end of our range.

Got you.

Thanks a lot.

Okay.

Thanks, Jamie.

Thank you.

Your next question comes from Mike Linenberg of Merrill Lynch.

Yes, good morning.

I guess two questions.

You took delivery of your last 737s, 700s for the year, I guess, all the way through February '08.

Should we anticipate any additional new cities for the rest of the year or city pairs?

I think, yes, Mike, in terms of cities, I don't think we'll see a new city unless we happed to add something maybe very late in the year.

But I think we are always, especially in the wintertime, always looking at new city pairs, at least seasonally.

Okay.

So you'll see some of that in, what I would consider, sort of high-volume, seasonal routes.

Okay, and then just my second question.

In the past, you've been very good at giving us updates on how the Atlantic capacity looks, going forward.

Any updates on third and fourth quarter, how capacity is looking versus a year ago?

Again, I think it looks pretty good.

I think it's, maybe Delta is down.

The competitive capacity is really very benign.

Our growth is pushing it up, but as our growth slows down, it will moderate, as well.

So as we look at the fourth quarter at AirTran market, certainly, the fourth quarter is going to be down and the third quarter will be up slightly, which in the scheme of things, is actually pretty comfortable for us.

And again, it's probably AirTran capacity pushing it up a little bit.

So I'd say the southeast capacity, right now, it looks pretty good.

Okay, good.

Thanks, and good quarter.

Thank you, Mike.

Thank you.

Your next question comes from Gary Chase of Lehman Brothers.

Hey, guys.

Sorry to keep going on this.

Just a quick one.

In terms of, you must have some visibility at this stage into August, as well, just any sense for how that's booking up.

I know you probably don't have a really solid feel for [resan] yet, but do bookings look the way they're supposed to to support that kind of number for the third quarter in terms of [rathom]?

Yes, our bookings would support a higher number, but you never know how these things are going to materialize.

If you look three months ago, I thought [Q] would be strong because the whole haul routes tend to book up faster and the east-west capacity has made a real big difference at AirTran.

It's really supporting the network.

The larger carriers have international that supports them, but the trans capacity is making a substantial difference.

You're going to see healthy load factor improving and actually a pretty good yield trend as we go forward.

The bookings certainly support the outlook of 2% to 3%.

And maybe we'll get lucky at some point with some good weather around here.

And then just on the 10 to 15 aircraft, you say that's kind of the skyline, looking forward.

Just any thoughts for us on what will make you change that in one direction or another?

How will you use the flexibility?

You've got an 11% margin in your best quarter of the year.

How do you think about what it needs to be in order to keep growing at that implied rate from the 10 to 15 aircraft?

I think you may get comments from a couple of us.

I think that's really a start.

I mean, we certainly would like to see the earnings higher and we've been growing for about 20% to 25% for three-and-a-half years.

So I think, actually, we're really going into a trial phase and the 10% should be relatively easy because certainly, some new routes don't screw up and you'll make fewer mistakes with fewer airplanes to deploy.

I mean, in theory, there should be some tightening.

The growth rate next year, that will be about 10% to 10.5%, 11% the first quarter and 9% or 10% in all the instilling quarters.

You really have got to let the results dictate that.

Certainly, if we're able to complete the Midwest transaction, these airplanes will come in very hand because we would try to re-fire their [MB80s] very, very quickly.

That would be probably our first priority, but I think a 10% growth rate is a fairly big change.

We know the airplanes have tremendous value.

I think Stan mentioned the numbers and we get a lot of people calling, so this, it's a very manageable problem.

We're spending, right now, several hundred million dollars of airplane equity hidden on the balance sheet.

A lot of money there.

Stan, anything else?

Yes, just as Bob said, in terms of the future deliveries, we've got a lot of embedded value because, as you all know, we've got below-market deal when we ordered the airplanes.

And those airplanes have continued to increase the value.

So if demand improves, we could flex up.

If it softens, we can flex down, but we've got a very manageable smooth growth rate, going forward, here, about half of what we've been growing at, historically, here.

So we feel pretty good about that.

And we made this action last year, so we think we're ahead of deteriorating yield environment.

Some of the others have started slowing down, as well, but we actually took this action a year ago, working with Boeing to sell a couple airplanes, and then we scheduled our delivery rate.

So we think we've got a lot of flexibility in capacity.

Thanks, guys.

Thank you.

Thank you.

Your next question comes from [Ray Nado] of [Parryon Securities].

Yes, you were looking at unit revenue, up 2% or 3% in the third quarter.

Does your venture guess for the fourth quarter or for the year?

If you kind of follow the trends of our capacity and where we think things are going the fourth quarter, we'll improve at a higher, it's too early to use bookings as the basis, but certainly, the fourth quarter, given the capacity outlook and given where our growth rate is, should be quite a bit better in terms of unit revenue improvement.

I really don't want to push down on a percentage yet but fourth quarter is going to be a lot better than the third quarter.

Okay, great.

And you're ten aircraft deliveries per year, going forward, what kind of flexibility do you have if, in fact, you wanted to cut back sharply on that?

Well, we've got a good relationship with Boeing, and I think if we needed to adjust that, and I don't believe we do, we could accomplish that.

It's a very manageable growth rate.

It shows that we really got out ahead of the curve here relative to our peer group last year when we started adjusting the schedule of deliveries.

And so, this 10% to 12% assumed growth rate that Bob talked about, I think, is very manageable.

Okay, great.

And finally, Joe, Midwest Airlines, is there any schedule that you're aware of when their Board of Directors are going to meet to discuss the topic or do you have any schedule that you want to discuss with us?

No, we don't have anything scheduled and I don't know what their schedule is.

I would guess that after looking at the lousy numbers they produced today, they would be wanting to get together pretty quickly and assess our $15 a share offer.

The numbers today were surprisingly bad, quite frankly.

Okay, great.

Thanks, guys.

Thanks, Ray.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question comes from Daniel Mckenzie of Credit Suisse.

Hi, good morning.

Good morning, Dan.

Our retail analyst reports that retail spending is down pretty significantly in Florida, and I'm not sure if AirTran looks at retail spending when planning growth, but I guess, first, I'm just wondering how that particular geographic segment is holding up.

And then, secondly, I wonder if you could provide, perhaps, some more granularity on overall industry capacity trends impacting this part of your system.

With the question about retail trend, first of all, it's very, very hard to tell how things can flow through a purchase.

We don't see a significant change (inaudible) which are actually pretty strong.

And actually, a number of Florida routes, particularly Orlando, are actually quite, a lot less seasonal than they were even four or five years ago.

We've gotten bigger down here, quite frankly.

We're carrying more business travel on an origin basis.

We have almost 60 departures a day, so I think -- I can't tell you, collectively, what's happening in the marketplace but all I know, our Florida numbers, both inbound and outbound, are fairly solid.

Generally, what impacts the numbers are, I'd say, capacity.

So again, business may be down in Orlando, per se, but our underlying numbers seem to be fairly strong.

I think in terms of capacity, again, our view is go relatively small.

I think regional capacity as much as dictates a lot of results for us and reduce some of the seasonality in our airline.

Again, we're at about a quarter of our capacity now going east-west and, quite frankly, it's actually worked the way we planned.

We feel pretty good about knowing where we're heading.

Normally, as we get into the third quarter this time of year, we don't like what we see from a booking standpoint.

We feel pretty good about that.

We think the macro trends are still favorable for us.

We still see the situation where we can keep reducing our unit cost.

Our unit cost can still come down even as the growth rate slows down a little bit.

As we go forward, I think our brand is stronger, I think our network is stronger.

We've got nearly 270 flights a day in Atlanta.

We've got a lot of power in that network.

And so, I think we're pretty well positioned, or a little bit more diversified.

There's some opportunities in the Caribbean down the road for us that we think we can capitalize on.

I think this has actually been a pretty good year for the development of our route network and we're not really that impacted by broad national trends as much as the larger carriers.

Again, regional capacity is more important to our results than, I'd say, a broad trend.

In general, the central Florida economy is on fire.

Other than housing, it's down.

The rest of the economy here is really doing quite, quite strong.

Okay, good.

And then, I guess, just following up on your route diversification commentary, I guess I'm wondering if you could provide sort of a breakdown of your revenue exposure by geographic segment.

I think you guys have talked about that in the past.

And then, where would you like to see that breakdown go, eventually, here?

I think what we'd like to do is, again, Midwest and reduce the exposure in Atlanta.

Atlanta is still two thirds of our capacity.

Everything else is growing, but so is Atlanta, so we've been very stuck around that 65% number for a couple years.

We just don't want to create diversification just to say we're more diversified.

We'd like to do it in a way that improves our results, but we certainly would like to see that number below 50%.

The Midwest transaction would focus our growth a little bit more and Atlanta would end up being 45% of our capacity rather than 55%.

Our reasons to try to merge with Midwest really side towards territory.

We've got a great cost structure and if we can diversify this network into more regions in the country, we can be very, very strong.

So that's what it is.

It's about territory, it's about diversification, and again, if we get below 50% with the merger, we think we'll be very well positioned.

Okay, great.

Thanks a lot.

Thanks, Dan.

Thank you.

Your next question comes from Frank Boroch of Bear Stearns.

Hi, good morning.

Good morning, Frank.

Given the plan to slow some of the fleet growth down, I'm just interested in hearing your thoughts on the impact to non-fuel unit cost control, going forward.

Well, this is Stan, I think the 737 is a primary driver of the cost reductions because it allows us to leverage the productivity that we have at the outlying stations.

You don't have to hire one for one, etc., but we've been making, also, significant investments in technology within the company and that's driving improved productivity levels, as well.

So it's not just the 737, and really, it's not just technology either.

As Bob mentioned earlier, the network is hitting its stride here and we're really getting some excellent synergies.

So I think when you combine the fleet, the investment technology, and the network growth, we've got good potential to continue to reduce the non-fuel unit cost, going forward.

We think it will be down 3%, 4% this year, and we think we can bring it down lower than that, next year.

Fleet utilization, we've been at higher numbers than we are today.

Right now, we're at 11.1.

We've been as high as 11.3, 11.4.

We think we can get up to 11.5, so there's productivity there.

And to the extent you get higher fuel utilization, by definition, you're getting higher personnel utilization, as well.

So we don't think we're done yet.

Okay, great.

One last thing, any update on the pilot negotiations?

I know you were in D.C.

the other week, and I guess where do things stand with that?

As you know, we got a tentative agreement.

When the pilot leaders took it out and discussed it with some of the members, they got some different input.

They came back and said they would like to have some more discussions before they took it out for a vote.

We are back in mediation with the mediator present, and he's imposed to blackout.

But we're still highly confident we'll get this done and get behind this thing.

Great.

Thanks a lot.

Thank you.

Thank you.

Your next question comes from Kevin Crissey of UBS.

Good morning, everybody.

Hey, Kevin.

Hey, Stan, could you just -- was that, the 2% to 3%, that's [RASM] or passenger rasm?

That's passenger RASM.

Passenger RASM, okay.

That's in the third quarter.

Okay, terrific.

And what was the direction of Midwest Board's questions?

What was, if you would say, the concentration of their questions, what were the kind of questions they were directing to you?

Obviously, it was a confidential meeting, so I don't want to say too much.

I would say there were general questions about how can we get things we done and questions of can we do what we say.

I think Page 61 in our presentation that showed where we and Midwest started in the same position in 1999, same revenue, they were actually more profitable, and the fact that we've increased our revenues over 300%.

We've been profitable every year.

We've added 6,000 jobs while, at the same time, they've lost a ton of money and basically have been a stagnant company.

They've had no job growth, no, very little departure growth.

I think they were, if there's a takeaway, I think they were probably the most impressed with our ability to actually execute.

And again, I would go back to today's numbers for Midwest.

They were shockingly bad.

Certainly, we didn't think they would be as bad as they are, but they're, right now, they made $600,000 at the operating line last year and they're about $4.5 million behind that pace right now on a [polar] airline basis.

That was, the point we made was that Midwest looks very much like a small legacy airline with no international route structure, and the only thing that has been worse in the past as being a big legacy airline is being a little legacy airline.

Thanks.

What if they do nothing?

What other steps are available to you if no action is taken?

This is Bob.

I think what we see as opportunity, I think, we're not going to go away.

We're going to press the deal.

We're patriot enough.

I think we've proven that we can run our airline and pursue this deal.

In fact, the best operational metrics we've ever had, we've got strong revenue metrics, so we could press it and, quite frankly, if need be, we'll go to another Board slate next year.

Potentially, we could get there.

Their numbers are not going to turn.

And at some point, they're going to lose credibility.

At the same time, we have the option of adding some capacity ourselves in Milwaukee and Kansas City because those cities fit with our route network.

So I think there's going to be continued pressure on them from a competitive perspective.

We're going to dig in.

We're going to pursue this deal and see it through because of the diversification it creates for us.

I think if you look at the consensus for next year, I think it's $0.67.

I would not be surprised to see that number come down after today's results of $0.67, fully taxed, and 15 multiple which is what AirTran tends to get.

That's a $6.25 stock.

And I think the Board's taking significant risk to walk away from a $15 absolute certainty deal when you're looking at a $0.67 consensus for next year.

Okay, terrific.

Thank you very much.

Thank you.

Thank you.

Your next question is a follow up from Jamie Baker of JPMorgan.

Okay, apologies everybody, I had to hop off the call there.

Did you quantify 2008 capacity?

We can build it up from your fleet plan, but if you already gave us a number, that would be helpful.

Let me try.

Our best guess now is about 10.5%, and I think it would be 11%, first quarter, 9%, 9%, and about 11%, round numbers.

And also, did you indicate who you sold the 737s to?

No, we didn't.

It's an international carrier.

Okay, just curious.

Thanks.

Look for it in the media.

Thanks, Jamie.

Thank you.

Your next question is a follow up from Mike Linenberg of Merrill Lynch.

My question has been answered.

Thank you.

Thank you, Mike.

Thank you.

There are no further questions.

Okay.

Thank you, operator.

And thank you all for joining us this morning.

I think, as you can tell, we're pretty excited about the second quarter.

As Bob mentioned, we've never run the airline better than we're running it today, completion factor on time, performance, baggage, complaints, involuntary denied boardings are all the top of the industry.

We're pleased with the financial results.

We think and know we can do better and I think the revenue environment, year over year, is going to get better as we move into the second half of the year.

Again, as Bob has indicated, the unit revenues and the bookings are consistently stronger revenue performance in the second half than the first half.

As for Midwest, their Board has to make a deliberation.

The shareholders have spoken very, very loud and very clear.

I don't know how they could do it any stronger with 2 to 1 votes on three different occasions, and we'll see where that goes.

If we pull it off, I think it'll be sensation for AirTran and Midwest, and certainly, the Midwest employees will benefit significantly from the integration, and the shareholders would do well.

If that doesn't happen, we'll continue on our growth plan.

We'll do just fine and I think they're going to struggle.

So we'll see where that goes.

But anyway, thank you for joining us today and we'll talk to you next quarter.

Thank you very much.

Thank you.

This concludes today's AirTran Holdings second quarter 2007 earnings conference call.

You may now disconnect.