西南航空 (LUV) 2007 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the AirTran Holdings Inc.

third quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS) It is now my pleasure to turn the floor over to Arne Haak, Vice President of Finance.

Sir, you may begin your conference.

Good morning, everyone.

I want to thank you for joining us today for AirTran Holdings' third 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 comments are not historical fact and, instead, you should consider them as time sensitive forward-looking statements that are accurate only as of October 30th, 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 in the Investor Relations section of the company's website at AirTran.com.

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

Okay.

Thank you, Arne, and good morning, everyone.

Today, we are pleased to announce a third quarter profit of $10.6 million, or $0.11 per diluted share.

Included in these results is a net of tax charge to write off the costs associated with the Midwest Air Group acquisition of approximately $6.6 million, or $0.07 per share.

Without the charge, third quarter earnings were $17.3 million, or $0.18 per diluted share, representing the second best third quarter net income in the last ten years.

We believe this outstanding performance primarily reflects the benefits from our investment in new east/west markets, which are generating a positive contribution to the bottom line.

Operating income was $38.5 million, and represents our best third quarter operating income in company history.

Compared to last year, our operating margin increased 7.1 percentage points to 6.3%.

The third quarter was especially challenging due to high fuel costs, ATC delays, and high load factors.

Nevertheless, we operated one of the best operations ever, setting a new all-time quarterly record load factor of 80.1%.

As in previous quarters, our crew members deserve a lot of credit, and on behalf of our executive team, I want to thank everyone for their hard work and for making our customers feel welcome when they fly on AirTran.

The cornerstone of our financial and operating success has and continues to be our low costs and modern fleet.

The new Boeing 737s have been a key factor in AirTran's success and in July we took the final two aircraft for 2007, increasing the total fleet of 737s and 717s to 137 aircraft.

Looking ahead to 2008, and factoring in the current outlook for fuel prices, we have taken action to reduce our 2008 deliveries by three additional units, for a total delivery of 10 aircraft.

The three rescheduled deliveries have been moved from the end of 2008 to 2011, and will result in a more balanced growth rate.

We're also adjusting our 2008 level of operations to more closely match supply and demand in our seasonally weaker months of January, February, and September.

Our ability to fine-tune capacity is improved by the fewer number of aircraft coming online, and when combined with the reduction of deliveries, will result in a revised 2008 growth rate of approximately 10%.

In addition, since September 14th, we have taken two fare increases, ranging from $2 to $12 per one-way segment, depending on fare type and market.

As a result of these changes, we believe we are making the necessary adjustments to maintain profitability in this challenging environment.

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

On a year over year basis, capacity in terms of available seat miles increased 20.9% from 16 additional aircraft, and a 7.7% increase in stage length from 659 miles to 710 miles.

The longer stage length reflects the growing east/west flying, as well as utilizing the longer haul capabilities of the 737s throughout our network.

Traffic expressed in revenue passenger miles increased 32.3%, resulting in a record high load factor of 80.1%, a 6.9 percentage point increase over last year.

Passenger revenue, or passenger unit revenue, increased 2.9% on strong load factors, combined with a 6% decline in yield, and a less than 1% reduction in average fare.

During the third quarter, AirTran's non-fuel unit costs declined 2% year over year to $0.0592.

On a total operating cost basis, including fuel, AirTran's unit costs declined 4% from $0.0989 to $0.0949, aided by lower price per gallon of fuel of $2.25 versus $2.33.

As in prior periods, we continued to see the benefits to costs and productivity in the form of lower unit costs.

Average daily utilization increased approximately 1% to 11.2 hours from 11.1 hours in the year earlier period.

Utilization by fleet type was 10.8 hours per day for the 717s and 11.9 hours per day for the 737s.

Our third quarter operating performance improved year over year, resulting in a 99.1% completion factor.

On-time performance improved from 72.9% to 75%, and baggage claims per 1,000 improved from 6.1 claims to 4.7 claims versus prior year figures.

For the 12 months ending August, 2007, AirTran ranked first among the major airlines in baggage, and third in the Department of Transportation on-time performance rankings.

During this same period, AirTran achieved a completion factor in excess of 99%.

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

During the third quarter, we set record levels for both passenger and total revenues, at $580.6 million and $608.6 million, respectively.

This represents a 24.4% improvement in passenger revenue, and a 25% improvement in total revenue.

Putting this growth in perspective, we generated nearly as much revenue in the third quarter of this year as we did for the entire year of 2000, when we reported annual revenue of $624.1 million.

Looking at the individual line items of expense on a unit cost basis, salaries, wages, and benefits declined 0.5% from $0.0199 to $0.0198.

The improvement in unit costs primarily reflects the productivity increases brought about the new 737s and our investments in passenger technology, including kiosks, web check-in, and online seat assignments.

Productivity, as measured in terms of full-time equivalence per aircraft, was 59.6 FTEs in the third quarter, and 59.2 year to date.

These metrics represent our best ever performance for the respective periods.

Aircraft fuel unit costs declined 6.8% from $0.0384 to $0.0358.

The reduction resulted from a 3.4% decrease in the price per gallon of fuel from $2.33 to $2.25, primarily resulting from additional fuel hedge coverage in 2007.

In absolute dollars, AirTran's fuel expense increased 12.7% from $190.7 million to $214.9 million.

Increased consumption from the larger fleet raised fuel expense by $31.8 million, while the price reduction lowered fuel expense by $7.6 million.

Savings from fuel hedges and supplier contracts in the third quarter was $12.8 million, and $17.1 million year to date.

Aircraft rent on a unit cost basis declined 15.8% from $0.012 to $0.0101.

As in prior periods, this reduction resulted from the increase in debt financed aircraft, thereby reducing the percentage of leased aircraft in the total fleet.

Updating our fleet information, the number of leased and owned aircraft at the end of October of 2007 remains at 87 717s, comprised of 79 leased and 8 owned aircraft, and 50 737s, of which 22 are leased and 28 are debt financed.

We took delivery of the last two aircraft for 2007 in July, and have added a total of 16 aircraft year over year.

Distribution expense in the third quarter increased 5.6% from $0.0036 to $0.0038.

The increase in distribution unit costs primarily reflects an increase in year over year GDS bookings and a higher level of credit card transactions.

During the third quarter, 57.4% of our bookings came directly from AirTran.com.

Approximately 27.4% of our customers checked in using the kiosks, while 22.3% checked in over the internet.

In total, 49.7% or nearly half of our customers checked in for their flights using automation.

Going forward, we expect to increase automated functionality even more through the introduction of new applications, such as mobile web, which we've recently implemented.

Using mobile web, our customers can now view flight schedules, check flight status, and check in for their flights using mobile phones and handheld devices.

Maintenance, materials, and repairs unit costs increased 13.6% from $0.0059 to $0.0067, and maintenance costs per block hour for the third quarter increased 19.5% to $288 from $241.

However, on a year to date basis, the unit costs declined 4.3% to $0.0066, and costs per block hour declined 1.1% to $281.

The third quarter increases in unit costs and cost per block hour are atypical, and primarily result from the timing of certain maintenance events in 2007.

Landing fees and other rent unit costs declined 7.1%, from $0.0056 to $0.0052.

As in prior periods, the reduction in the unit costs was due to the increased level of flying and longer stage lengths.

Aircraft insurance and security services declined 23.1% from $0.0013 to $0.0010.

The company continues to benefit from a reduction in aircraft insurance rates, driven primarily by our new and technologically advanced fleet of aircraft.

Marketing and advertising unit costs also declined 32% from $0.0025 to $0.0017.

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

Depreciation unit costs increased 46.7% from $0.0015 to $0.0022, and this increase is almost entirely driven by the greater number of owned 737s and related purchases of spare parts and equipment.

Other operating expenses unit costs increased 6.1% from $0.0082 to $0.0087.

The increase resulted primarily from additional ground handling expense related to the new stations which were opened since the third quarter 2006.

Looking at the balance sheet, AirTran ended the third quarter with $384.9 million in total cash and investments, of which $28.3 million was restricted.

In addition, the company had net deposits with Boeing of approximately $42 million.

Not reflected on the balance sheet is the market value of the firm orders for 63 737s, which will be delivered over the next five years.

Current and long-term debt, including capital leases, increased to $1.07 billion, as a result of new aircraft and TDP financing.

All but $125 million of the debt is secured by aircraft on our balance sheet or delivery positions.

Regarding additional sources of liquidity, we can report that we have secured permanent financing commitments for all but one aircraft scheduled for delivery in 2008, and we expect to have that one finalized shortly.

And now I'd like to provide you with our updated guidance.

Capacity growth for the fourth quarter 2007 is expected to be approximately 15%, and for the full year, 19%.

We are pleased with the initial results of our reduced growth rate in the fourth quarter 2007.

As a result, we expect unit revenue to improve between 8% and 9% in the fourth quarter year over year.

Non-fuel unit costs are expected to be flat to up 1% in the fourth quarter, and down between 2% and 4% for the full year.

Our fuel contract and hedge positions, including all taxes and fees, for the fourth quarter are approximately 50%, in the range of between $2.07 and $2.12.

Our estimate for jet fuel prices in the current quarter, including all taxes and fees, and the benefit from hedges, is in a range of approximately $2.35 to $2.40 per gallon, based on an assumed crude price of $85 a barrel, and a crack spread of $15.

Obviously, this fuel guidance may change, depending on where fuel prices go during the quarter.

Fuel expense sensitivity is approximately $2.5 million per quarter for every dollar change in crude or crack spread before the effective hedging.

Capacity growth by quarter for 2008 will be 10% in the first quarter, 12% in the second quarter, 10% in the third quarter, 10% in the fourth quarter, and for the full year, 10.5%.

Non-fuel unit costs for 2008 are projected to be flat to down 1%.

We will provide quarterly guidance at a later date, when we have concluded our 2008 budget process.

Our fuel hedge positions for the first half of 2008 represent 6% of projected usage, and are based upon a price per gallon before taxes and fees in a range of $2.20 to $2.25.

Hedge positions in the second half are approximately 3% in a similar price range.

I would like to sum up by saying thank you to our customers for their business, our shareholders for their support, and our crew members for providing our customers with the service they expect and deserve.

While we are pleased with the results of the third quarter, it is clear that continuing high fuel prices are going to challenge the industry going forward.

In response, we have already begun to address the situation by rescheduling deliveries and adjusting our level of operations during the slower periods of the year.

In addition, we have taken two fare increases since September, and as the cost of fuel rises, we will adjust fares to remain profitable while retaining price competitiveness.

This management team has never shied away from making the decisions that are necessary for ensuring the long-term growth and success of the company.

AirTran has many unique strengths and advantages, consisting of a low-cost structure, a modern fuel-efficient fleet, a strong route network, and a workforce of dedicated crew members.

All of these attributes contribute to making AirTran a lean and efficient competitor, well-positioned to take advantage of any opportunities which may arise.

We are optimistic about the future, proud of what we have accomplished, and laser-focused on achieving long-term success and profitability.

We look forward to bringing you further updates in the quarters ahead.

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

(OPERATOR INSTRUCTIONS) Your first question is from Duane Pfennigwerth with Raymond James.

Hi.

Thanks, Stan.

I'm wondering if you could give us some thought behind your initial take at capacity growth moderation next year.

And if fuel were to stay at these levels, what sort of further flexibility do you have to moderate that further?

Thanks.

Well, good morning.

Good question.

I think -- in looking at capacity, actually, within the last couple of weeks, we have made an adjustment.

I think if you would have asked us a month ago, our capacity level would have been higher.

It probably would have been about 14% in the first quarter.

Now it's -- it'll be about 10%.

Primarily, what we're doing in the first quarter, there's about a five, six-week period, post-New Year and pre-Presidents' weekend, which is one of the weakest periods of the year for every airline in the US.

And again, that's even if you have an international network, it's still weak as well.

And that's an area where we've made some adjustments in terms of day of week flying and some of our -- and again, our evening capacity.

So I think in terms of -- with fuel prices at these levels, our variable costs are pretty high.

And so at the margin, in weak travel periods or in off-peak periods, [they can fly off our] utilization, and that's something that we can do on a seasonal or a monthly basis.

Regarding the airplanes, given the worldwide demand of planes, and especially outside the US, we have calls all the time.

We have tremendous embedded value in our fleet.

And if necessary, we will adjust capacity further.

So it's a combination of looking at the fleet -- you can either reschedule or increase or decrease your utilization.

Historically, we've flown at 11+ hours a day.

I still think on an annual basis we'll be close to that.

But in shoulder periods, it can be well below that.

I think each -- price of fuel and the season will be our guide regarding capacity.

Thanks for the detail.

Okay.

Thank you.

Thank you.

Your next question is from Mike Linenberg with Merrill Lynch.

Yes.

Good morning, all.

I guess two questions.

The new ASM forecast is at 10.5%, what was the number that you were using prior to that?

I'm not sure if you ever really had a formal number out there for '08 ASM.

I think it would have been, Mike, close to 12%.

Okay.

Maybe even a little bit higher than that.

Okay.

Okay.

And much of the change, or the bulk of the change, is really in that six-week period in January, February, and a little less in September.

Okay.

Great.

And then just my second question has to do with the pilots.

It looks like there was another election there.

It looks like the process has been slow, but from an outsider's point of view, it appears that internally, they don't have their own house in order.

I'm not sure what they want.

What's the new timeline?

What's your best sense?

I know you've been in this process for some time, and it seems like there's just a lot of frustration on all sides.

Yes.

Well, we're still under a blackout with the mediator.

But as far as the union process goes, they still have to elect a vice president.

They just elected a new president.

They've got to elect a new vice president, and then they've got to elect four new board members, and then they have to constitute a new negotiating committee, because the former committee resigned.

So we don't see -- we're sort of idling at the curb here for a while, I think.

Okay.

Okay.

Very good, then.

Thank you, Joe.

Thank you.

Thank you.

Your next question is from Ray Neidl with Calyon Securities.

Hey, Stan, I noticed that it looks like your insurance costs are improving there.

Are we getting back to more normal levels post-9/11?

Is the government still involved?

Or is there still more cost savings in that area?

No.

I think there definitely are more cost savings.

And frankly, the improvement is being driven primarily by the young age of our fleet and the fact that we're operating the most technologically advanced aircraft.

So the underwriters recognize that in the form of lower rates.

So we're optimistic that we're -- we'll continue to improve in this area.

We're currently in the renewal process right now.

Okay.

And Bob, regarding your growth, I know you're not comparable to the network carriers, but in the high fuel cost environment, most of the network carriers are actually decreasing their ASMs domestically, simply because, as you mentioned, the variable costs are so high.

Is that feasible for a young carrier?

Or do you have to maintain growth to get a certain market mass?

Well, it really is, again, a great question.

And in terms of, again, we're trying to -- those networks, the big legacy carriers, those networks domestically have clearly matured.

And quite frankly, they're in a consolidation phase, because they really can't maintain that mainline capacity.

So what we've seen over the last five -- the last decade, 150 seaters have become RJ's or Embraer , so that they're in a process of reducing that capacity, because it's basically mature.

For us, we're in a slightly different situation because we're trying to develop a network.

So our network hasn't matured or hasn't peaked.

And we'd like, over the long haul, to create a diversified network.

And I think very simply we really don't want our eggs in one basket.

There's a -- I think if you get all your focus in one hub, you become vulnerable to some of the tough tactics that can occur in this industry from time to time.

And so we want to avoid that and, again, we view this as a very long process.

But at the same time, I think when we arrive with that diversified network, we want to be financially strong.

And I think -- so that requires a balance between ability to build a network versus the strength of the balance sheet.

One area we're very, very happy with is the development of the east/west network.

Four years ago, we had no trans-con activity.

This year, it was about 23% of our summer capacity.

And it really helped us significantly.

And I think as we look forward, I think it's going to do better next year.

So I think more of our strategy to diversify into the east/west line has made a big difference on our annual numbers.

Again, I look for stronger third quarters down the road.

Again, that's part of you've got to grow into that.

So I think what we're committed to is not growth at all costs.

We want to develop the network rationally, but we want to get there profitably.

We don't want to get bigger and weaker.

So we're trying to strike a balance.

If we haven't hit the right balance, we'll do

Great.

Thank you.

Thanks, Ray.

Thank you.

Your next question is from Jamie Baker with J.P.

Morgan.

Yes.

Good morning, everybody.

Morning, Jamie.

Stan or Joe, in any legacy airline merger scenario that you can dream up, Justice is more likely than not to require some level of divestiture.

I'm wondering the extent to which you've modeled the various legacy combinations, how quickly you might be able to act in any sort of divestiture scenario, and also any color on the geographies that you'd most likely choose to step up, and presumably the Midwest region is still on your wish list.

Yes.

I -- we haven't done specific modeling, although we do believe that the Justice will require divestitures.

And we've demonstrated in a number of cases how fast we can move.

Baltimore, key point, Indianapolis, key point.

So we have the ability to move very rapidly.

Obviously, when we were going through the Midwest thing, we kicked around with our investment bankers and advisors our ability to get money.

We have absolutely no concern that we would be able to get money to acquire certain assets if we chose to do that.

So as we always do, we'll be in a reactionary mode rather than sort of a power mode.

So we will -- we're watching, obviously, what's going on.

And to the extent something pops up on the radar, we will react accordingly.

And again, I think we move very fast, and we're not concerned with our ability to finance fairly-sized deals.

Got you.

Thanks.

Jamie, let me just add one thing along that -- I think slots in DCA and La Guardia are always high on our list because they fit with any strategy.

They fit with strengthening the airline in the Northeast, but it also -- those are really the key cities, and it's very difficult to really develop a Midwestern focused city or cities without access to the most important business centers in the country.

So that -- they always become high on any priority list.

Thanks for that.

And Bob, as a follow-up on the RASM guidance, obviously, very healthy year on year improvement that you're modeling for in the fourth quarter, but it still implies that you will generate less revenue in Q4 than in Q3.

Traditionally, you've grown revenue from the third to the fourth quarter.

I realize supply plays into that.

I'm just trying to determine whether you're being deliberately cautious, whether something is slowing down, or whether the network has simply changed over time, and we should disregard some of those sequential trends from the past.

Well, I think it's -- the quarters are -- again, they're judged different.

July and August are some of the -- really the best months of the year.

I think for us, again, just kind of look at it in absolute terms, 8% to 10%.

We're largely done with October.

Our October number is in the middle of that range.

And we have -- the bookings for November and December look every bit as good as what October looked.

As I look into January, which is really very far out for this time of year, it looks pretty strong as well.

So I think what we have going forward is we probably have fewer developmental routes going into this part of the year versus last year and even versus the summer.

So I think, to be honest with you, I think in terms of a relative basis, I think our growth is accelerating.

I think it's underlying more rational as well.

Got you.

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

I would add to that, we have dramatically improved our third quarter, which is something we've been working on now for about three years.

If you just look at the last couple of years, we've added San Diego, Phoenix, Seattle, St.

Louis.

We had Denver and LA and San Francisco before.

So we've got a lot more east/west traffic that tends to peak in the summer.

So I think the sequential -- historical sequential phenomena may change a bit as we strengthen that third quarter.

Got it.

Big help.

Thanks, gentlemen.

Thanks, Jamie.

Thank you.

Your next question is from Dan McKenzie with Credit Suisse.

Well, yes.

Hi.

Good morning.

Good morning, Dan.

Stan, does the (inaudible) fuel guidance of flat to down assume a contract with the pilots is done sometime in 2008?

In general, yes, it does.

Okay.

Great.

And then I guess, Bob, I'm wondering if you can provide some perspective on the capacity shifts that seem to be occurring at Boston and Chicago.

It looks like AirTran is pulling down a significant chunk of flying in those cities.

Good question, Dan.

Let me just start in terms of looking at the network.

A number of things that we're doing, quite frankly, are seasonal.

And with fuel prices in the $90s, you need -- you have to do things that you might not necessarily want to do.

So for example, our Boston Midway, which I think is pretty good six months of the year we're not going to fly it.

It will come back next April.

And Midway Charlotte, which we'll drop for January and February, those are by far the lowest months of the year.

And it's not just for AirTran.

If you look at Chicago for all carriers, or look at Boston for all carriers, January, February and early March, are very, very weak, all the routes.

And so we're going out and saying, "You know what?

We've just -- we've got to do what we need to do, and put the airplanes in the best possible places they can." So a number of changes that we're making are seasonal.

Regarding our other activity, I think we recently signed a deal with ATA, and we -- sometime this winter, in January, we will be picking up five more round trips to La Guardia and more capacity to Washington National.

And we think that those new slots, combined with what we have, are going to allow us to diversify our network into some cities, and really begin to help us in the Midwest or wherever we choose.

And I think it's very, very clear, if you look at how carriers develop cities, I think you've got to have service to key cities.

And for us, we can certainly service the leisure destinations, we can service Atlanta, but access to the big business centers is critical in many markets.

We think these round trips will make a big difference to our route portfolio as we enter the second quarter.

And just to put some flavor on that, we're picking up five -- we'll have five round trips out of La Guardia that we can add -- as all of you know, that's been a high -- a very high priority for us, to try to get La Guardia slots.

And we'll also have one additional round trip out of the Washington National Airport.

So this is a huge happening for us, which just occurred this past week.

Great.

And when does those flights start?

I'm sorry.

I missed that.

Fourth quarter.

Fourth quarter.

Okay.

Great.

Thank you very much.

Thanks, Dan.

Thank you.

Your next question is from Frank Boroch with Bear Stearns.

Good morning.

Stan, could you give us a update on CapEx in light of the fleet changes that you outlined earlier, for '08?

Yes.

The non-aircraft related CapEx will probably -- we've been running a run rate of about $30, $35 million here in '07.

We haven't completed our budget process for '08 for next year, but I would anticipate it'll probably be in that range.

In terms of the aircraft, we'll have ten aircraft that'll be coming, and we'll have debt financing related to that.

That's about as much as I can tell you at this point.

Okay.

Great.

And could you maybe give us some color on how your largest competitor -- any changes you've seen on the margin over the last few months in their competitive behavior in your markets?

Well, I think, regarding capacity in Atlanta or the East Coast, I think -- it's pretty rational.

Again, we hear from time to time a lot about Delta.

If Delta wants to strength itself financially, Delta's got to manage its capacity in Atlanta wisely as well, because clearly it's the source of their domestic strength.

If you look at what's going on really in the third and fourth quarter, again, capacity in Atlanta is up slightly.

Third quarter, we were up about 2.5%.

Fourth quarter's up slightly, about 1.5%.

It is up a little more in the first quarter, 4% to 5%.

But if you look at east of the Mississippi, where we have the bulk of our capacity, you're going to be looking at an increase, 2% to 3%.

So really, in the scheme of things, that's a pretty low number.

We think, for the most part, capacity in (inaudible) is a little more rational this year.

Looking at the entire East Coast, which is more important, it looks pretty level.

So I think, really, in the scheme of things, the first quarter looks very similar to what we've seen in the last six months.

And a lot of the improvement, or a lot of our improvement, is tied to the things that we are doing ourselves.

Okay?

Great.

Thank you very much.

Thank you, Frank.

Thank you.

Your next question is from David Simpson with Lehman Brothers.

Good morning, guys.

Just a quick question.

With some of the seasonal changes in the network as you shift things between the east/west and the north/south, can you give us a sense of how that's impacting stage length, and particularly fourth quarter, and then for next year?

Are we going to see big changes in stage length, or is it going to be pretty consistent?

Well, I think the stage length is going to be up about -- again, about 7% in the fourth quarter.

That's because of a little bit more -- we still have a little bit more east/west capacity, and some more Floridas year over year.

We haven't completed the plan for next year, but I don't believe that the stage length will jump as much next year.

It may be about half that rate, maybe 3% to 4%.

Again, I'm guessing right now.

But I think it -- we don't necessarily target the stage length, per se.

We more or less target the route.

And again, our plan was to grow the east/west route this year, which helped us.

And then -- and like I mentioned before, a number of these routes out of Boston, Boston business routes for all carriers are quite weak in the first quarter.

And we're going to fly more capacity to Florida, and it looks like the strategy will pan out for us.

Okay.

That's great.

Thank you.

Thank you, David.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question is from Bob McAdoo with Avondale Partners.

Hi, guys.

Could you give us what your new delivery schedule looks like since you cut some airplanes out?

Yes.

We've got -- we're going to pull it up here --

Hang on second, Bob.

The three that we took out came out of the last half of the year, Bob.

And we have eight through December, and two in December.

(Inaudible - crosstalk)

Eight through July.

Bob, there's five in the first quarter, there's three in the second quarter, and two early in the third quarter.

And then that's it.

So it's timed basically like it was this year a little bit.

Yes.

Yes.

Trying to get airplanes when the season's picking up.

Okay.

The other thing is, as I'm looking, trying to compare to last year.

There are a couple of funny things I'm struggling with a little bit.

It looks like, in terms of making year over year comparisons kind of by line item, one of the things -- it looks like last year, you moved $5 million or so out of maintenance down into other operating.

And if you don't make that adjustment, it makes your other operating look like it jumped 45% year over year.

And it's still a big number.

I'm trying to understand what all is going on there.

I think we had -- last year -- we'll go back and double-check for you, but we did reclassify some accounts out of the maintenance category into other.

And we had given that guidance previously, but let us come back to you on those --

Let us get back to you, Bob.

Okay.

And the other thing is why did interest expense jump so much this quarter versus last -- versus the second quarter?

That's the debt financing on the aircraft, Bob.

That's just all aircraft debt?

It is.

Yes.

It's the debt financing on the new 737s.

We're taking a much higher percentage of them on debt financing this year than we did last year.

And Stan is correct on the -- it is things like contracts and services, like de-icing, ground handling, things like that, used to be reported in our maintenance, materials, and repairs line, and we didn't feel -- as that grew to be a bigger part of our business, we didn't feel it was appropriate to leave it in that line.

We put in the other operating line.

Okay.

All right.

All right.

Thanks a lot.

Thank you, Bob.

Thank you.

Is that it, operator?

We do have one final question from Dan McKenzie with Credit Suisse.

Yes.

Hi.

Just one quick follow-up here.

Given the RASM guidance of up 8% to 9%, I'm just wondering if you can provide some more perspective of where that strength is coming from?

Is that just coming from markets that are maturing?

Or is there strength elsewhere in your system?

Any color you could provide would be helpful.

Dan, I think it really is pretty much across the board.

Again, what we've done is we've taken a harder look at where we're flying as we enter the fourth quarter.

We did reduce capacity in Boston, Philadelphia, which is a route we had been in a number of years.

But again, for the most part, again, Atlanta was -- has been very strong over the last six months, whereas last year, it struggled, as we made a lot of changes.

Northeast is better -- generally speaking, I can't single out any particular area, just general strength, our costs are pretty good, as you know.

And we're getting basically higher load factors across the board.

Again, our load factor's up significantly.

And we've made some adjustments, like some our competitors, in revenue management, making bigger investments in our systems and our people.

And quite frankly, those investments are much more important now, because every nickel clearly counts.

And so that is an area where we've got a lot of attention and we're making a lot of upgrades in terms of tools and our capabilities.

Okay.

Good.

Thanks.

Thank you, Dan.

Thank you.

I would like to hand the floor back to management for any further or closing remarks.

Okay.

This is Joe.

Just a couple of closing comments.

We've talked a good bit about it today, but I want to emphasize our focus on January and September.

They're just terrible months for us, and we always tweak our schedule down during those periods, but we're going to be much more aggressive in 2008 than we've been in the past in trying to not fly inefficient flying, especially with $90 a barrel fuel.

So that -- we're still working on the plan, but we think that we can make some sizable reductions there, and not give back so much of the money we make in the other months in those two really bad months.

So that's one thing that will be different here.

As we talked about, we've pulled out an additional three airplanes.

That's down eight from where we were about a year and a quarter ago, and brings our capacity next year to about 10%.

If it turns out that that's too much, these airplanes are 737s at well below market, and we have no problem whatsoever -- Boeing has been very cooperative with us, a very good partner with us, and we think that there would be very little issue with eliminating additional airplanes if it should come to that.

RASM looks terrific going into the fourth quarter, bookings look very good, as Bob mentioned, all the way out through January.

Bookings look really good.

And we're very confident about that.

We didn't talk much about these slots, but it's a very big deal for us.

It gives us the opportunity to go from the nation's two most important airports, two big business centers, that we've been essentially blocked out of.

So five round trips out of La Guardia and one out of Washington -- an additional one out of Washington National.

And so we're pretty excited about that.

And we'll be announcing those services in the not-too-distant future.

And lastly, on fuel, obviously, it's the number one concern of everybody in the industry.

With 737s and 717s, we've got the best technology.

We're a little behind on our hedging for 2008, but we'll catch up with that.

Right now, we're 50% hedged for the fourth quarter.

We have a comprehensive program internally.

We're looking at everything we do internally as far as weight on the airplanes, our fuel burn.

We're considering slowing the cruise speed down a bit, the climb speed down a bit.

We're looking at taking weight off the airplanes every place we can.

We're reinforcing our conservation program of -- we did some numbers yesterday.

It costs $150 an hour to run an APU.

It costs less than $5 an hour to run a ground power unit.

And that's why we've invested in putting ground power units on all of our gates in Washington, Baltimore -- I mean, Atlanta, Baltimore, Orlando, the other big cities.

So we've got a comprehensive study going in that regard on fuel.

And we'll deal with it.

We'll also look at raising fares to the extent that we need to, to stay ahead of the fuel increases.

So we're pretty proud of the third quarter.

It's something we've been working on for a long time to try to improve.

I think you've seen the first elements of that improvement this year.

I think there's more to come next year.

And fourth quarter looks pretty decent.

So thank you very much for your attention today and your time today.

Thank you.

This does conclude today's AirTran Holdings Inc.

third quarter 2007 earnings conference call.

You may now disconnect.