西南航空 (LUV) 2007 Q4 法說會逐字稿

Good morning.

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 fourth-quarter 2007 earnings conference call.

(OPERATOR INSTRUCTIONS).

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' fourth-quarter 2007 earnings call.

Joining me today is Stan Gadek, our Chief Financial Officer; Kevin Healy, our Senior Vice President of Planning and Marketing; and Bob Fornaro, our Chief Executive Officer.

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

These statements are not historical facts, and instead you should consider them as time-sensitive forward-looking statements that are accurate only as of January 29, 2008.

If you would like additional information concerning factors that could cause our actual results to vary from those in the forward-looking statements, they can be found in our Form 10-Q and other SEC filings on the Company.

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, our SEC filings and a reconciliation of these non-GAAP financial measures are available in the Investor Relations section of the Company's website at AirTran.com.

At this point I would like to turn our call over to Stan.

Okay.

Thank you, Arne, and good morning, everyone.

Today we are pleased to report that AirTran has achieved its sixth consecutive year of profitability with net income of $52.7 million or $0.56 per diluted share.

This is a significant accomplishment, particularly given the challenges from surging fuel prices in the latter part of the year.

2007 was also notable in that we served a record 23.8 million customers, generated $2.3 billion in revenue and achieved a 76.2% load factor for the year, an all-time Company record.

We are very proud of these results and believe they show increasing customer preference for AirTran.

By offering a great product featuring new aircraft with business class and free XM Satellite Radio on every flight combined with affordable fares and friendly service, we believe we provide one of the best travel values in the industry.

Better still we continue to diversify the network with our recently announced inaugural service to San Juan from both Atlanta and Orlando, as well as new nonstop service from Milwaukee to New York's LaGuardia Airport.

This morning we continued our Milwaukee expansion with the announcement of new seasonal service to Boston, Los Angeles, San Diego, San Francisco and Seattle.

We are pleased to inaugurate these flights in response to passenger demand for lower fares and better service and look forward to the opportunity of adding even more destinations to our route network in the future.

During 2007 we achieved our third consecutive year of unit revenue improvement as we developed new markets and adjusted fares to keep revenue apace of higher fuel costs.

While the first half of the year's unit revenue performance was challenging, the second half rebounded as we took fare increases and adjusted our expansion.

Nevertheless, fuel costs in the fourth quarter impacted our financial performance, resulting in a small loss.

Since the first of the year, we have continued our focus on revenue performance and recently increased our fuel surcharge to $10 each way on most fares.

Another key element to profitability has been our cost structure, and in 2007 we again reduced nonfuel unit costs, achieving a nearly 3% improvement over the prior year.

In fact, for 2007 we achieved an all-time record low of $0.603, continuing a trend of six consecutive years of nonfuel unit cost reductions.

These results are particularly noteworthy and have helped to offset fuel prices while creating a significant cost advantage over our competitors.

AirTran's success in 2007 would not have been possible without the hard work and dedication of our over 8600 crewmembers.

On behalf of the executive team, I want to acknowledge this significant contribution and say thank you for your effort and thank you for putting the customer first.

The enthusiasm of our people and their desire to serve the customer is part of AirTran's unique advantage, which sets us apart from the competition.

During 2007 we were especially pleased to have created over 800 full and part-time jobs.

AirTran's success has enabled many individuals to pursue new career opportunities they otherwise may not have had.

This is a responsibility we proudly take on and is made possible as a result of the expansion of our Company and the creation of new opportunities.

In that regard, we recently announced, in partnership with the State of Florida and City of Orlando, a multi-year program to expand our facilities here, which will provide additional space to house our system operations control and related headquarters functions, as well as provide for 120 new jobs over the next three years.

And now I would like to talk about our metrics.

During the fourth quarter, capacity as expressed in available seat miles increased 15.1%, resulting from 10 additional aircraft and a 7.4% increase in average stage length to 699 miles.

On a full year basis, stage length rose 6.6%, contributing to an annual increase in capacity of 19.4%.

The reduction in year-over-year fourth-quarter ASMs directly reflects the adjusted delivery schedule with the last aircraft having arrived in July 2007.

The increase in stage length for the quarter and full year primarily shows the increase in East/West flying, which averaged approximately 20% of total capacity during 2007.

Traffic, as expressed in terms of revenue passenger miles, increased 25.5% and 25.0% for the quarter and year respectively.

Load factor in the fourth quarter was up 6.3 points to 75.3%, representing another fourth-quarter record, in addition to the annual record load factor of 76.2%.

Fourth-quarter passenger unit revenue increased 9.4% to $0.0966 year-over-year.

The strong unit revenue performance was driven by the 6.3 percentage point increase in load factor, as well as an improvement in yield of 0.4% to $0.1284.

Average segment fare was $93.35, representing a 6.5% increase over last year.

On a full-year basis, unit revenue increased 1.5% to $0.0969 and again primarily reflects the improvement in load factor, offset somewhat by lower yields in the second and third quarters of 2007.

During the fourth quarter, nonfuel unit costs increased 2.2%, primarily reflecting adjustments for certain onetime maintenance events and other true-ups, as well as higher distribution costs driven by the record revenues.

While higher than anticipated, we do not believe this is a trend and expect to continue reducing nonfuel unit costs in 2008.

On a total operating cost basis including fuel, AirTran's fourth-quarter unit costs increased 7.7% to $0.0993, primarily caused by the 21.3% increase in the cost per gallon of fuel to $2.45.

However, on a full-year basis, total operating unit costs declined 1.7% to $0.0957 aided by the full-year reduction in nonfuel unit costs of 2.6% previously mentioned.

Average daily utilization declined slightly from 10.9 hours to 10.8 hours during the fourth quarter and from 11.1 hours to 11.0 hours for the full year.

Utilization by fleet type for the fourth quarter was 10.5 hours per day for the 717s and 11.4 hours per day for the 737s.

Operating performance stats for the fourth quarter and the year were 99% and 99% for completion factor, 76% and 76.8% for on-time performance, and 3.7 and 4.0 claims per thousand for baggage claims.

And now we will review our financial performance.

For the fourth quarter, AirTran recorded a net loss of $2.2 million or $0.02 per diluted share.

Included in these results are net of tax charges of approximately $1.1 million or $0.01 a share to record the unrealized net loss associated with the ineffective portion of interest rate and fuel derivatives.

Also included in the fourth-quarter results were true-ups to our annual tax rate, resulting in additional income tax expense.

Net income for the year was $52.7 million or $0.56 per diluted share.

Included in the full-year results are the charges associated with the termination of our exchange offer for Midwest Air Group and a gain on the sale of two aircraft amounting to a net of tax reduction to earnings of $2.8 million or $0.02 per diluted share.

Looking now at revenues, AirTran set new records for both passenger and total revenue.

For the fourth quarter, passenger revenue grew 25.9% to $553.9 million, and total revenue increased 26.5% to $583.8 million.

Full-year passenger revenue increased 21.2% to nearly $2.2 billion, and total revenue increased 22.1% to $2.3 billion.

These numbers represent all-time records and reflect strong unit revenue performance and passenger demand.

They also reflect improvements to revenue production, which are coming about from network diversification, changes in fleet and improved yield management.

Looking at the individual line items of expense on a unit cost basis, salaries, wages and benefits declined 2.9% in both the quarter and full year to $0.02 and $0.0199 respectively.

The reduction in unit costs as in prior quarters primarily reflects the productivity improvements throughout the Company, driven by the new 737s, as well as investments in customer service technology.

Productivity as measured in terms of full-time equivalents per aircraft was 59.6 for the quarter and 59.3 for the year, significantly better than last year's measures of 60.4 and 61.5 FTEs respectively.

Aircraft fuel unit costs increased 17.7% in the quarter to $0.0386 while declining slightly by 0.3% to $0.0354 for the full year.

The significant increase in fuel unit cost in the quarter resulted primarily from a 21.3% increase in the price per gallon of fuel to $2.45, and in absolute dollars, the cost of fuel went up 35.3% from $163.5 million to $221.1 million.

Increased usage from the greater number of aircraft in the fleet comprised $38.7 million of this increase, along with an $18.9 million increase due to higher prices.

Savings from fuel hedges and fixed forward contracts in the fourth quarter were approximately $24.3 million and $41.4 million for the full year.

Aircraft rent on a unit cost basis declined 13.1% to $0.0106 for the quarter and 11.6% to $0.0107 for the full year.

As in prior periods, the ongoing reduction in rent expense unit costs primarily results from the increase in debt financed aircraft in our fleet.

Updating our fleet information, the number of leased and owned aircraft remains unchanged from the third quarter.

We have 87 717s, of which 79 are leased and eight are owned.

We have 50 737s, of which 22 are leased and 28 are owned.

And a total of 10 737s were added to our fleet during 2007.

Distribution expense unit costs increased 21.9% to $0.0039 in the quarter and 5.4% to $0.0039 for the year.

The increase in distribution unit costs primarily reflects the higher revenue volume and a greater number of credit card transactions.

During the fourth quarter, 57.6% of our bookings came from AirTran.com and 58% booked for the full year.

Approximately 25.6% of our customers checked in using kiosks, while 23.3% checked in using the Internet.

In total, 48.9% of our customers checked in during the quarter using automation.

Maintenance, materials and repairs unit costs increased 19% to $0.0069 and 1.5% to $0.0067 for the quarter and year respectively.

The increase in the fourth quarter unit costs was primarily driven by additional accruals for FOD engine damage and other onetime maintenance items.

Maintenance costs per block hour in the fourth quarter increased 24.7% from $236.5 per block hour to $294.7 per block hour.

For the year cost per block hour increased 4.7% from $271.8 per block hour to $284.6.

Maintenance costs per block hour are also being affected by higher costs related to the 717 fleet.

However, we expect to see a reduction from these block hour rates in 2008.

Landing fees and other rents unit costs increased 16.7% to $0.0056 in the quarter and 1.9% to $0.0054 for the full year.

The increase reflects in part a higher number of operations from common use gates in Atlanta, as well as operations from higher cost airports throughout our network.

Aircraft insurance and security services unit costs declined 28.6% for both the quarter and full year to $0.0010.

As in prior periods, a reduction in insurance primarily reflects the benefits from our new and modern fleet.

Marketing and advertising unit costs declined 15.8% to $0.0016 for the quarter and 25% to $0.0018 for the year.

The reduction in unit costs primarily reflects the expiration of certain promotional programs which ended last year, as well as more efficient use of our marketing and advertising dollars.

Depreciation unit costs increased 14.3% to $0.0024 and 31.3% to $0.0021 for the quarter and full-year respectively.

As in prior periods, the increase in unit cost is being driven by the addition of owned 737s and related purchases of spare parts and equipment.

Other operating expenses unit costs increased 16% to $0.0087 in the quarter and 6% to $0.0088 for the full year.

The increase was driven primarily by additional ground handling expense at new stations, as well as adjustments to accruals for miscellaneous items.

Operating income for the fourth quarter increased from $2.1 million in 2006 to $14.9 million in 2007, resulting in a 2.6% operating margin on improvement of 2.1 percentage points.

For the full year, operating income increased from $40.9 million to $137.9 million, resulting in a full-year operating margin of 6%, up 3.8 percentage points compared to the 2006 operating margin of 2.2%.

EBITDA for the quarter and full year more than doubled coming in at $26.8 million and $181.7 million respectively.

Looking at the balance sheet, AirTran ended the year with $355.9 million in total cash and long and short-term investments, of which $29.6 million was restricted.

In addition, the Company had net deposits with Boeing of $119.8 million.

Current and long-term debt including capital leases was $1.06 billion and consisted primarily of debt related to new aircraft and predelivery deposit financing.

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

I would now like to provide you with our guidance for 2008.

Capacity additions by quarter are expected to be approximately 10% for the first quarter, 12% for the second quarter, 10% for the third and fourth quarters and for the full year 10 to 11%.

Aircraft deliveries will be three in the first quarter, five in the second quarter, and two in the fourth quarter for a total of 10 aircraft.

Nonfuel unit costs are projected to be flat to down 1% for the full year and up approximately 0.05% in the first quarter.

Our fuel hedge positions consist primarily of caps and three-way collars.

Assuming oil at $90 a barrel, our fuel hedges for 2008, including all taxes and fees, are valued in a range of between $2.55 and $2.60 per gallon.

Again, this is the price range for the hedges only.

The percentages by quarter are as follows.

37% in the first quarter, 26% in the second, 24% in the third, 19% in the fourth quarter.

Our estimated total fuel cost in the first quarter will be in a range from $2.85 to $2.90 per gallon, including the benefit of the hedges.

Using a base assumption of $90 a barrel oil and a $15 a barrel crack spread for spot purchases and factoring in the effective hedges, we estimate that the all-in total fuel cost for 2008 will be in a range of between $2.75 and $2.85 per gallon.

Total fuel consumption for 2008 is projected to be approximately 390 to 400 million gallons.

Fuel price sensitivity on a quarterly basis is $2.5 million before the effective hedges for every $1.00 change in the price per barrel.

Non-aircraft CapEx will be approximately 25 to $30 million, and our projected income tax rate for 2008 will be approximately 39 to 40%.

In summary, we would like to acknowledge our customers, shareholders and crewmembers.

Each group is an integral part of our business, and AirTran's success is directly linked to their support.

Looking at the year in review, we reflect on the many challenges we have faced.

Most successfully, some not.

We have always worked hard to create value, and we take pride in the knowledge that we have accomplished that and more.

As we look forward to the new year, we believe that we're well positioned to benefit from the industry changes which are surely coming.

Whatever comes our way, you can be sure that AirTran will never lose its focus on profitability and providing value to the customer.

And with that, I would like to open the call for questions.

(OPERATOR INSTRUCTIONS).

Jim Parker, Raymond James.

You have done some surcharges, and I would like to know actually what the total of the surcharges is and if, in fact, they are holding?

Are you actually realizing higher fares, or are you having to move seats down into lower fare buckets?

This is Kevin Healy.

We have done really a fuel surcharge that started at $5.00 and now $10.00.

It applies to most fares, not all.

Generally sales fares are exempt, but otherwise, it is there and it is holding.

Okay.

And a second question is, I believe that you very quietly began to charge for assigned seats sometime in the fourth quarter.

What have you done in that regard, and what other ancillaries might you be pursuing?

On the seat assignment, it was an introduction to give the option to customers to allow them to reserve a seat for a fee in advance.

Otherwise, they get it at check-in.

So on that option, they can pay $5.00 for certain seats, $20.00 for an emergency exit.

It has been exceptionally well-received.

We have some other ancillary things that we're working on, but we're probably not going to detail those out right now.

Alright.

When you say well-received, what proportion of your passengers are actually paying for an assigned seat?

Jim, I think the impact may well be a few million dollars a month.

I did not want to give a percentage, but it is something that when you take a nice look at it, at the end of the month, it is a noticeable improvement in revenue.

Kevin?

Yes.

I think that's it.

And Bob, it looks like Delta may combine with Northwest or maybe United.

What would be the impact on AirTran?

Where might there be capacity eliminated, or what opportunities might be created for AirTran by that combination?

Certainly consolidation again obviously is the buzz right now, and consolidation is basically an acronym for taking domestic capacity out of the marketplace.

Again, it is about international diversification and domestic capacity reductions.

If you look at where most of the hubs are and potentially the excess hubs, most of them are east of the Mississippi.

Again, there's a lot more hubs there.

And so therefore, the bulk of the redundancies are going to be East of the Mississippi where we basically have the bulk of our capacity.

It will either be in the Southeast, certainly the Northeast, and I think one of our stated goals is to keep developing our presence in the Midwest.

So I don't have an estimate for you, but I would say most of these combinations would create significant benefit for us in terms of just improving our revenue naturally, plus allowing us to be much more strategic in our growth plans and allow us to diversify.

Ray Neidl, Calyon Securities.

You mentioned that you continue your program of route diversification.

I'm just wondering absent consolidation what your plans are in that area?

How you can continue to spread your risk and diversify your routes?

What we're looking at right now for next year is about half of or a little more than half of our growth will be in Atlanta and continuing to build the hub there.

A little more than a quarter will be developed continuing the development of Baltimore, which is good, and then we will grow out.

The rest will be in the other category.

We announced this morning continued expansion at Milwaukee.

Last week we added LaGuardia.

We announced five additional seasonal destinations this morning -- LA, San Francisco, San Diego, Seattle and Boston.

So that takes us to a total of 13 nonstop destinations, about 20 departures a day there, and I feel pretty good about that as well.

Okay.

With the possibility of consolidation, I take it that like other airlines you will be looking for maybe some asset pickup.

I'm just wondering would this at all change the Midwest situation, the Midwest airlines situation with the investment by TPG and Northwest?

Yes, regarding again the Midwest situation, again, first of all, as you know, that transaction has been delayed.

Certainly DOJ has -- sees some competitive issues, but they may well approve it at the end of the day.

But we think we can compete there because it is really underserved, and you've got a high-cost carrier there that basically charges too much.

So I think the we're doing in Milwaukee remains an opportunity really under any scenario.

I think certainly if you start putting some of these very large carriers together, there may be small carveouts.

Certainly you look at New York, there has to be some carveouts, even in the Washington National.

So those are places that we actually would like to strengthen our hand because those are some of the best airports in the country.

So we think we would like to actually again participate in some of these small carveouts that we anticipate.

Jamie Baker, JPMorgan.

I guess a question for Kevin or for Bob.

You spoke enthusiastically about demand in your release, but I did not hear you quantify any RASM guidance for the first quarter.

I do not want to read too much into this fact, but you don't have as easy a comp in the first quarter, but you are growing less quickly.

Should we assume that high single digit RASM is at least possible in the first quarter?

I feel pretty good about the announcements that we have on the books right now, and I think what we're looking at is 6% to 7% unit revenue improvement in the first quarter.

A lot will depend on how the closed-end come in in March.

It is the strongest part of the quarter obviously.

Well, as a follow-up to that, your commentary in this regard is nearly identical to that of everyone else this earnings season.

And frankly, I'm a bit surprised.

Not as it relates to AirTran per se, but I had just figured we would have seen some evidence of a slowdown by this point.

You guys have lived through prior downturns.

Aren't we at the point where we should be seeing demand erosion, or is it still premature given travel being a planned event?

I'm just wondering if you are as surprised as I am.

I think it is still too early to tell.

I think if people make their travel plans for the holidays and then they take a fresh look when they enter the new year, which is kind of the way people tend to act.

We feel very good about January because we are very disciplined in our capacity.

And as we look out on the last, say, 45 days of the first quarter, we are trying to sell higher prices, and we really need to see whether people will pay those prices.

So it is really too early to tell.

I think the issue for AirTran and most other carriers is, how high will the unit revenue improvements be?

And I think we are certainly going to see them.

A lot of these things are fare driven.

The question remains whether we can raise the fares and raise the load factors simultaneously.

I think we feel pretty good about the 6% to 7%, but that depends on a very strong March.

Got it.

Okay.

Thanks for the color.

I appreciate it very much.

Frank Boroch, Bear Stearns.

I guess following on to that question, Bob, you know, in the last couple of months, some of your comments seem to suggest you were thinking of slowing some growth in '08 for capacity.

I guess given that that is not announced -- has not been announced today, if we strip out the Easter effect with the current fuel assumption, the CASM ex fuel guidance, it looks as though AirTran could be on track to post a year-over-year earnings decline in '08.

I'm just trying to think, what is your thinking around that?

Is your goal to grow earnings this year, or is this sort of the longer-term strategy and sort of what can shareholders look to for long-term value?

A couple of very good questions.

Let's talk about capacity.

We're still reviewing our capacity plans, and this is really an ongoing situation.

But, as we started 18 months ago, we have taken steps to slow down our growth because fuel expenses are 40% of our costs.

And we are really looking at the situation now.

It is likely we will reduce capacity further this year, and we will begin to focus on 2009 as well.

Oil prices stay high.

This is not a one year problem.

It is something we need to make a permanent adjustment to.

In regarding year-over-year earnings, with oil at $90 a barrel and no consolidation, it is very hard to increase your earnings on a year-over-year basis.

I mean that is an awfully tall challenge.

So again, I think consensus now is some of the estimates are stale, but I believe consensus is about $0.30 or thereabouts right now.

But to hit of 2007 numbers with $90 a barrel is tough, especially with perhaps a weakening economy.

And so therefore, you have got to be more disciplined in capacity in the past.

Our costs are going to go down as we talked about today, and quite frankly, we are scrubbing those to see if we can reduce our costs further.

But we have to manage really what we can, and I can guarantee you we are always disciplined on costs, but we're going to be even more aggressive on costs than we had expected.

One follow-up if I may.

When you think about structurally sort of the load factors that the network can support given a lot of the growth, I don't know maybe this is for Kevin, where do you see sort of maximum load factors topping out?

What can you run at?

Is it 78% on a full-year basis given the seasonality of the system or where -- what are the limits?

You know, I think we can get a couple more points or a point or so this year in the plan as our summer -- our third quarter is much stronger than it has been historically as we get into longer haul.

That tends to help us drive up the loads as well.

So I think there's a little more upside on the load.

Daniel McKenzie, Credit Suisse.

(inaudible) relates more to nonhub flying, something you guys are doing more and more of here.

And I guess in particular, AirTran has gone into a number of markets historically only to pull out a little bit later.

So I'm hoping you can provide some perspective about why the nonhub flying you guys are engaging in today is different than the nonhub flying that has been downsized in the past?

Again, it is a good question, and I guess it has to do with discipline.

First, if you could take the approach that you're not going to try things, then you will never succeed in this business.

And for the most part, we have hit many of the revenue targets in some of these routes.

But when I joined this Company and a whole bunch of people in our room, oil was $11 a barrel, and now it is $90.

And so we have seen fuel as a percentage of our expenses go from 15 to 20 to 30 to 40%, which means ultimately you have got to raise your fares and which means that the stimulation of the market is slower and so starting up new routes takes longer.

It is a simple matter of fact.

So we can stand around, and at the end of the day, we're going to be profitable.

And so sometimes we have to back off because our profitability is our one number one objective rather than pretend that our route is working.

I can tell you as we speak today, even with the improved profits in this industry, most airlines lose money domestically.

And I think there's probably only two or three that actually are profitable.

So you have to put that in the proper business context.

We have taken a step to reduce the growth.

Certainly we cannot grow 25% a year with oil prices where they are.

That is why we're trending down towards 10%.

We will open up fewer of those routes.

And, quite frankly, we will position ourselves where we can live through these extended school ups of a lot of these different routes.

So I think we have changed direction a little bit.

But I'm certainly going to tell you there is not a carrier in this business who is making money on every route.

Sometimes you have to back off and make sure you preserve the financial strength of the organization.

Got it.

Okay.

Thanks.

And just following up on that, can you guys share your RASM trends with respect to hub and nonhub flights?

In other words, are you seeing more strength in RASM at your hub, or are you starting to see some RASM strength in nonhub flying?

If you could just provide some revenue perspective, that would be helpful as well.

Yes, I will just start a little bit, and I will turn it over to Kevin.

But you have to look at again the operations were two-thirds, let's say, Atlanta hub to one-third nonhub.

The costs in the nonhub piece are all lower, and the routes are more leisure-oriented.

So those yields will be lower, but the costs will be lower.

And I think right now the hub operation is stronger because we have -- again, we've got 32 gates in Atlanta, and that allows us to be much more selective in terms of some of the revenue choices that we make.

Got it.

Okay.

(multiple speakers) -- the nature of hub versus nonhub is different.

We carry a lot more business obviously through Atlanta, and even Baltimore is growing.

Markets like Baltimore, Boston are good business markets, but largely nonhub flying for us is leisure.

(OPERATOR INSTRUCTIONS).

Mike Linenberg, Merrill Lynch.

Two questions.

First, Kevin or Bob, you talk about advanced bookings being good.

What sort of trends are you seeing as supply comes out of the system?

Are you seeing the booking curve lengthen at all on one hand?

And then on the other and sort of related, many of the carriers have started putting back in place the dreaded Saturday night stay restriction in order to get the lowest fare.

Some of the minimum night stay requirements are being extended.

Is that stuff that you're looking at?

Have you guys put some of those fences, if you will, back into the fare structure?

You know, as far as adding a Saturday night stay or any of that sort of thing, that is not something that we're considering.

Generally speaking I think a big piece of our success is the ability to have a customer come to our website, understand the price rules and buy a ticket with confidence that they got the best deal.

We do have some segmentation based on advanced purchase and other attributes, but we think that we can manage through that better than adding fences that try and cut off business travelers from a low fare.

And as other carriers do that, that generally is going to be to our advantage as well.

And then on the advanced book?

The advanced bookings, we came into the quarter real strong and continued to see that -- we keep an eye closely on as we've raised fares and take increases, you are sensitive to a point where that starts having diminishing returns.

But it is a balance.

We will continue to offer sales.

We initiated another this morning, and I think driving demand and keeping sort of a moving price to maximize demand is the key for us.

Okay.

And then just on a second question and this is a question for Bob, with respect to Northwest/Midwest, I think, Bob, you sort of threw out the comment that there may be some competitive concerns there, and that may be holding up the deal.

And, of course, when the deal was announced, you probably were only serving four or five markets from Milwaukee, and I think with Washington or with LaGuardia I think you're at your eighth, and I think you're trying to get some slots to serve Milwaukee from National.

And then you just announced another slew of cities.

So if anything, I guess one of the arguments that some would have against the deal would be that this would be a market where new competition would face difficulty getting into.

And, of course, you guys are sort of an example of the opposite of that.

In fact, one could argue that because of your actions the deal stands a much higher chance of going through.

So I'm just curious about, there must -- you know, the strategy here?

You know, Midwest you wanted yourself, and yet now here is an opportunity that maybe by your actions you have sort of pushed them into Northwest.

Just thoughts on that?

Well, if you look at the situation over in Milwaukee with Midwest, I think -- if you look at the whole situation, a year ago they made some claims about significant profitability they would see in the year.

They missed the numbers by a mile, so they end the year with very, very disappointing results.

Between TPG and Northwest, they are now investing almost $500 million.

I think certainly as the buyers look back, they may well be seeing some buyer's remorse there as well.

They also have a 30 -- they are paying at a time that their deal was done at [$62] a barrel, and now it is $90.

So I think Midwest has got some real issues.

It has announced a layoff of 300 to 400 people where they made all the promises about how good they were for the community.

So we more or less have said to ourselves, let them have it, and the situation will be even worse, and we are going to go compete aggressively with them.

And certainly if they are in a backdrop of, let's say, consolidation, there may be even more opportunities in the upper Midwest than there are today.

So we just got tired of really waiting around.

We think Midwest has got a lot of issues, and they will only get worse after this deal closes.

Okay.

That is great.

That is very helpful.

Bob McAdoo, Avondale.

Quickly, in earlier conference calls, you talked about pulling down capacity seasonally in the January/February timeframe, things like Chicago, Boston or whatever.

I'm just curious for some color as to are you glad you did that?

Does that still look like the right thing to have done?

Are you getting the kind of results there that you would have thought in terms of what it's going to do to this quarter, and are you going back into all those routes that you did pull back?

I think we had a very strong January, and I think that does show that it is the right move to move out of some of these weaker routes, particularly in this fuel environment.

I think you're seeing that in today's announcement as well of shifting capacity around outside of the hub when and where the demand is.

So we will be going back into the Chicago route that you mentioned and doing more seasonal flying during the peak period and not trying to run that through the off-peak where whatever you tend to make gets lost.

There are no further questions at this time.

I would like to turn the floor over to management for closing remarks.

Yes, I would like to thank everybody for joining the call this morning, and again, a couple of highlights.

I think we took a couple of very positive steps in 2007.

We had a fairly strong year from an earnings standpoint compared to prior years.

Nonfuel costs dropped for the sixth consecutive year in a row, down 2.6%.

And we ended the year on a strong note from a unit revenue perspective.

And that is a real positive as well.

I know we did not talk about it much today, but we basically had the best operating metrics in the history of our Company, which is really attributed to the AirTran crewmembers.

Our on-time for the year is approximately 78%, which is probably number three for all major carriers.

Our bag numbers are probably industry-leading numbers this year, either number one or two, and certainly we're number one of all the major carriers.

And we had excellent metrics in terms of involuntary bookings and completion factors.

So we feel very, very good about those.

However, as I said, fuel is a challenge.

$90 a barrel is the [mean], 40% of our expenses.

And so, therefore, we are continuing to review our capacity and again with a bias towards reducing it further.

And as it comes to expenses, we have forecasted our expenses will be down, and we will manage those even more aggressively.

And I think finally, we think the circumstances are really ripe for change in this industry.

The talk of consolidation this year because the domestic market is relatively weak, it's a capacity year, and a consolidation can play a very big role in reducing that.

And carriers like AirTran who are efficient and nimble can really capitalize on the opportunities that this situation can provide.

So with that, I appreciate you joining us this morning, and we will talk to you in a few months.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.