西南航空 (LUV) 2008 Q1 法說會逐字稿

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

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

Conference Call.

All lines have been place on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

(OPERATOR INSTRUCTIONS)

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

Sir, you may begin your conference.

Good morning, everyone.

I'd like to thank you for joining us for a discussion of our first quarter result and our outlook for the remainder of the year.

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

I'd like to remind you that this call will contain forward looking 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 April 22, 2008.

If you would like additional information concerning factors that could cause our actual results to vary from those in our forward-looking statements, they can be found in our Form 10-K 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 filing and a reconciliation of these non-GAAP financial measures is available in the investor relations section of the Company's website at airtran.com.

Today, we will be discussing our first quarter results, discussing our outlook for the second quarter, as well as outlining our initiative for adapting to a high-oil price world.

At the end of the call, we will open up the floor for a brief question and answer session.

Before we get started, I'd like to thank the over 8500 crew members of AirTran Airways for all of their hard work in this very challenging environment.

Over the past four years they have been critical in the success of our company, and in delivering operational excellence and great customer service.

These accomplishments have been recognized during the Airline Quality Rating, which is issued by the Wichita State University and the University of Nebraska at Omaha.

From 2004 to 2006, AirTran consistently ranked number two in quality, and in 2007 we received the top ranking for quality among major airlines.

We are all proud that we have built an airline that can deliver a winning combination of high-quality service, operational excellence, and an industry leading cost structure.

I'd now like to discuss our first quarter results.

For the first quarter, AirTran Holdings reported a net loss of $34.8 million, or a loss of $0.38 per share.

These results included a $5.2 million charge or $0.04 net of tax per share related to the unrealized loss on the riveted financial instruments.

Excluding these charges, we reported a net loss of $31.6 million, or a loss of $0.34 per share.

Despite the challenges of the current economic environment, we delivered solid revenue results.

Year-over-year we added nine aircraft, which resulted in capacity growth of 10.8%, as measured by available seat miles.

Passenger demand, as measured by revenue passenger miles, grew by 19.2% which resulted in a record first quarter load factor of 75.3%.

Our average passenger yields declined by 0.7% during the first quarter, this was driven by an increase in passenger length of haul which rose 5.9% to just over 760 miles.

As a result, passenger revenues increased 18.4% to $566.4 million.

Other operating revenues increased 21.7% to $30 million.

Total revenues increased by $92.3 million, and our total unit revenue during the first quarter increased 6.7%.

This was inline with our guidance of up 6% to 7% at the start of the quarter, and actually slightly ahead of our most recent guidance of up 6% to 6.5%.

The quarter was aided by the shift of Easter from April to March, which produced better than anticipated revenues at the end of March, and also by better than expected other revenues driven by our ancillary revenue initiatives.

Our total operating costs during the first quarter increased by $140.5 million, or 28.6%.

This results in a 16% increase in operating costs per ASM.

Of this increase, 102.4 million, or over 72% of this increase was due to higher fuel expense.

The price of fuel rose from $2.01 per gallon in the first quarter of 2007, to $3.00 per gallon in the first quarter of 2008.

Fuel prices have risen rapidly through the entire first quarter, and fuel now represents nearly 43% of our total operating expenses.

During the quarter, we hedged over 40% of our fuel at in all-in price of $2.89 per gallon, which resulted in savings of $4 million.

Our non-fuel operating expenses increased by 11.7% to $363.2 million, resulting in a non-fuel operating cost per ASM of $0.0629 which was up 0.8% year-over-year.

This was slightly higher than our initial quarterly guidance of up 0.5% as result of two material items.

During the first quarter, we received a surprise assessment from the Baltimore Washington International Thurgood Marshall Airport for over $2 million.

This assessment was related to a cost recovery effort by the airport to pass on back rents and fees to offset budget shortfall to all airlines over the last several years.

We are currently in negotiations with the airport on this matter.

Deicing expense during the first quarter was significantly higher as well, as a result of increased wintry weather.

Our deicing expense during the first quarter was nearly $81.00 per departure.

The previous record cost per departure was set last year and was $66.00 per departure.

The average deicing cost per departure over the previous four years was approximately $53.00 per departure.

Absent the airport charge in Baltimore, and the effects of the increased rate of deicing, our non-fuel unit costs would have been flat year-over-year, slightly better than our previous guidance.

Our total cash and investments at the end of the quarter was $386.3 million, of which $28.4 million was restricted.

This was up from $355.8 million at the end of the year.

Interest income in the quarter was down 64.2% year-over-year to $1.8 million.

This is due to lower interest rates on investments, and the change in the unrealized decline in net asset value on our investment in the [Columbia] Management Strategic Cash Portfolio Fund.

Our exposure to this fund which we outlined in our 10-K, has declined from $80 million at the end of the year, to $52 million at the end of the first quarter, as a result of the receipt of scheduled disbursement.

Over 90% of our remaining cash balances invested in treasury securities.

We have no direct exposure to auction rate securities, as we successfully eliminated these investments from our portfolio during the fourth quarter and the first week of January.

There has been a lot of speculation in the last several weeks as well over agreements with the organizations that process our credit card transactions.

I'd like to spend a few moments reviewing our current agreements to help set the record straight.

We have competitive agreement with all of our primary credit card processors.

These are relationships that have been in place for over 12 years, and we are in full compliance with all of our agreements.

None of our current agreements with our primary processors contain financial covenants that we must meet to maintain our 0% holdback on future sales.

They do contain a material adverse change clause, which is standard in these contracts and applies to all airlines.

These contracts also preclude us from disclosing the specific commercial terms of our agreement.

I'd now like to spend a few minutes talking about our outlook and future plans for the Company.

Demand for our product remains strong, as evidenced by our 19% growth in RPMs, and a 5.2 point improvement in load factor.

We are currently expecting that April unit revenues will be flat to down slightly as a result of the shift in the Easter period.

Advanced book revenue for the remainder of the second quarter and the summer is up significantly year-over-year, and we expect unit revenues to be up 5% to 6% in the second quarter.

We continue to work to hedge our fuel exposure with a portfolio of swaps and various types of collars against both crude oil and jet fuel.

With an underlying assumption of $104 of crude oil and $23 crack spread, we expect our second quarter fuel price per gallon to be between $3.20 and $3.25 per gallon, all in net of the effect of our hedging contracts.

We have hedged approximately 50% of our fuel for the remainder of the year, and over 20% of our current consumption for 2009.

With the same underlying assumptions for the second quarter, 48% of our current needs have been hedged at a price of $3.05 to $3.10 per gallon.

In the third quarter, 51% of our current needs had been hedged at a price that is currently valued between $2.85 to $2.90 per gallon.

In the fourth quarter, 48% of our current needs have been hedged at a price that is currently valued between $2.85 to $2.90 per gallon.

In 2009, over 20% of our current needs have been hedged at a price that is currently valued between $2.85 and $2.90 per gallon.

As we highlighted earlier, fuel now represents nearly 43% of our total costs, and it's pricing has become extremely volatile.

In the last six months, we have seen the price of oil rise from $80 a barrel at the end of September, to $96 a barrel by the end of 2007, to nearly $117 a barrel as of last Friday.

Even last year, with oil around $70 a barrel, many legacy airlines and several smaller carriers have struggled to produce viable domestic margins.

This implies that with oil prices well above $100 a barrel, domestic capacity will be significantly reduced.

Legacy airlines continue to shrink their domestic operations, and are increasingly turning towards international flights which are currently being supported by stronger overseas currencies.

Others who have struggled for years to adapt have already failed.

There should be no debate that there is a need for reliable, affordable, low-cost air transportation in the United States.

Yet, there are very few airlines that have been able to build successful, profitable, domestic airline networks in the United States, which is the world's largest travel market.

AirTran has been one of the most U.S.

successful airlines the past nine years, because of our low-cost discipline, and our ability to respond quickly to both change and to opportunity.

AirTran's business model is sound and it is built on a foundation of industry-leading low non-fuel cost, a young fuel-efficient fleet of modern aircraft, a high quality product, a diversified network, a nimble management philosophy, and is supported by a team of smart, disciplined and motivated crew members.

We do spend a lot of time talking about non-fuel [CASM], but even with the advantages of low-cost, new aircraft and industry leading quality, we are not immune to the challenges that face our entire industry.

Adapting to high energy prices is a challenge faced by all airlines.

It will also create opportunities for those who successfully adapt.

There are two solutions for our industry to today's high energy prices; either the prices our customers pay will increase to accurately reflect the cost of energy, or the price of oil will abate.

We have been working for the past several months in identifying how AirTran should adapt to these challenging times.

Today, I would like to share with you the framework of our plans, and over the coming months, we will provide additional details and updates on our execution of these plans.

While several airlines have announced modest adjustments to their capacity, we strongly believe that more industry capacity needs to be removed.

Our current fleet plan which was developed in late 2006 at a time when oil prices were at $60 a barrel, and many had expectations of continued oil price reductions, we adjusted our growth rate down to 10% per year, from our previous plans to grow 20% a year.

At a time when it would have been easy to be optimistic about the first significant reduction in oil prices in years, we took a disciplined approach that resulted in a business plan that could produce significant profits at oil prices well into the $80 and $90 per barrel.

The benefits of this plan begin to show in 2007, and we had high expectations for 2008.

Oil price volatility has become especially severe in the past three months.

The price of oil has ranged from the 80s in early February and has risen to more than $115 a barrel in recent days.

It has become common place to see the price of oil move $6 to $10 a week.

This volatility has greatly increased the risks and the potential rewards for the U.S.

airline industry.

As we have done in the past, we are moving quickly and aggressively to adapt to this change, and properly position our company to once again benefit from the inevitable opportunities to resume the growth of our business.

Our plan is quite simple, given the seasonality of our business, we believe we will be profitable at current fuel prices during the spring through summer travel period.

However, with the run-up in fuel prices, there is no economic merit in continuing to grow our business, and we are executing a plan that will result in a suspension of our growth plans beginning in September 2008 and continuing at least through 2009.

Our capacity guidance for the remainder of the year and 2009 is as follows; we will continue to increase our ASMs in the second quarter by 10% to 12%, and by 9% to 10% in the July through August period.

Our growth rate for the September through December 2008 period will be flat year-over-year, as will our growth rate for all of 2009.

This represents a 10% reduction in our capacity plans for the fourth quarter, and a 10% reduction in capacity for 2009.

The impact on our fleet plan is as follows; we began the year with a fleet of 137 aircraft, comprised of 87 717's and 57 737-700s with a plan to grow to 147 aircraft.

We are now planning on ending 2008 with a fleet of 141 aircraft, down six aircraft from our previous estimates.

We had planned to grow our fleet by an additional 14 aircraft in 2009.

Our revised fleet plan calls for ending 2009 with 141 aircraft.

We are working on multiple fronts to not only reduce our fleet, but potentially do so in a way that will monetize a portion of the value of our fleet and adjust our future order book.

We have already reached signed agreements to sell four aircraft in 2008, and expect to shortly complete an agreement for the sale of additional two aircraft.

The sale of these four aircraft will improve our planned cash flow by over $40 million through the cash gained on the sale, and the avoidance of equity investments in the aircraft.

It will also eliminate the need to the issue over $120 million in additional aircraft debt.

This reduction in growth will also allow us to cut our non-aircraft CapEx plans for the year in half, from $25 million to $30 million, to $12 million to $18 million.

We've also been aggressively reviewing our planned operating costs.

We now expect non-fuel operating unit costs to be down 1% to 1.5% year-over-year in the second quarter, and down 2.5% to 3% in the third quarter.

Given our solid cost performance in the first quarter and our current outlook for the second and third quarters, you can see that the cost discipline at AirTran remains robust.

We have also announced two efforts today to raise capital; a $65 million equity offering, as well as a joint $65 million convertible debt offering.

When combined with a potential 15% green shoe, we are looking to raise an additional $150 million in capital.

It is clear to us that our previous decisions to invest in growth, and to invest in new airplanes has proven to be too aggressive for an oil environment that very few could have imagined just six months ago.

We are also prepared to reduce our growth even further if economic conditions in the U.S.

worsen.

We are uniquely positioned with low costs and a young fleet.

The timing of our aircraft order and the prices of our aircraft gives us great confidence that we have the flexibility to execute on our plans, to manage our levels of capacity and further improve our liquidity should it be necessary.

In addition, with very low non-fuel costs and high current fuel prices, our variable costs are now approaching 65%.

This gives us a tremendous amount of flexibility to manage our capacity during off-peak revenue months.

Legacy consolidation has also recently begun with the announced plans to merge two of our largest competitors in Delta and Northwest Airlines.

Legacy airline consolidation and the corresponding elimination of inefficient and redundant domestic capacity is long overdue.

We view this as being a positive for the industry and a strong positive for AirTran as domestic capacity will come down, and our low-cost advantage will continue to widen.

In summary, AirTran has a solid business model.

and the right strategy for today's domestic air travel marketplace.

We have extremely low cost, high quality, a diversified network and the demonstrated discipline and experience to manage adversity and immerge as a stronger, more viable airline as we have done in the past.

With that, Operator, I'd like to turn the call over for questions.

(OPERATOR INSTRUCTIONS)

Our first question comes from Michael Linenberg with Merrill Lynch.

Yes.

A couple questions here, Arne.

The 737, excuse me, the aircraft sales, I think it was four that you'd signed and two planned.

Are those all 737-700s, are they outright sales, or are some sale-leasebacks, so you're going to hold onto some of the airplanes?

And then possibility for selling 717s, is that in the cards, does that make sense, especially with the run up in fuel?

Very good question, Mike.

The sales that we have announced are all 737-700s.

We have had discussions with people and they are ongoing, there is a very high demand for people to buy the aircraft, as well as for lenders to do sale-leasebacks in some of the airplanes we own today.

There is interest in the 717, and there can be certain scenarios where it might make sense, but we are pleased with that aircraft and what it does for us.

I think we are most confident in what we can execute on the 737 side.

The 717, there are still people who are asking about 717s and that door remains open, but I think most of our efforts are likely to remain with 737s.

Okay, and then just my second question with the pull back in capacity growth to flat.

There's a lot of stuff that you're adding this summer; seems like you are adding a lot of service out of Milwaukee, you're doing some of the long haul out of Baltimore to LA and Seattle.

Some of that longer haul stuff probably doesn't make as much as sense given where fuel prices are.

Is that stuff seasonal?

Does that stuff go away?

Where should we look for cuts and pullback as we get into the fall?

Mike, this is Kevin Healy.

Yes, when we announced the services that you mentioned, they were seasonal.

So generally speaking, they are going out anyway and then some other point-to-point will come down as well over the next couple weeks.

Again, those are largely east-west routes, which typically peak from June through early September.

So that was our plan early on.

And again, they will see seasonal reductions there.

Okay, and then if I could just, one last one, to follow up.

I know Arne made the statement that based on current fuel prices, that given where demand is you thought you could be profitable through the spring and summer.

And I just -- when we talk about current fuel prices, he did throw out some fuel prices that you were currently using, and I just -- presumably those are the numbers at which you could be profitable.

I think it was a crack spread in the low 20s --

I think even higher.

I think I know where you are going with your question here --

Yes, yes.

Even higher than that obviously.

What we see in the summer looks very good and as we look at the whole period in combination, I think, we are very pleased with what we see on the revenue environment, and the numbers probably a good bit higher.

That being said, going forward, the profitability is still sub-par compared to the typical profitability we have in this time of the year.

Okay, okay, very good.

Thank you.

Our next question comes from Jim Parker of Raymond James.

Hi, good morning.

I want to follow up on Mike's question.

At what oil price crack spread level do you burn cash?

Just from operations, ex your aircraft sales and so forth, at what oil price crack spread do you actually burn cash?

Well, Jim, it's actually a higher number than I think any of us thought it would have been if you'd asked us back in September or December of last year.

We think that the business is modestly profitable into the low 100s, around $100 a barrel, in low 100s right now.

A lot of that depends on the revenue environment and our assumptions and what happens with capacity in the marketplace.

But, really what we think we are doing here today -- this combination of activities, if you look at what we've done; we've aggressively managed our fuel hedge portfolio.

I think we've done a very good job in structuring what we have done to give us protection, with a 50% hedge.

We are slowing our growth, we are cutting our own internal CapEx, we are making this problem a much more manageable problem for all of us to manage.

This, combined with the capital market raise, we believe gives us the position where we can focus on the most important issue which is adapting our business, which we are confident we can do.

And it allows us just to focus on that, and instead of chasing the latest -- what is the latest economic issue, what is the latest credit issue, what is the latest fuel issue?

We have positioned the Company now so we can focus on transitioning this business to being successful in a high-oil world.

Jim, just [with] one other question.

I think we want to break the industry into a couple of phases.

Right now, we are in a seasonally strong revenue period, and as we enter the fall, obviously, we see the [shoulder] periods and seasonal weakness.

If you look at what we've seen, just about every carrier that has done an earnings call has announced in the fourth quarter a 4% or 5% increase in capacity, that includes Southwest last week, Continental and American.

I believe you'll hear other calls today on the three earnings calls.

So -- and if oil prices remain at the same levels, I would guarantee you when we do our earnings calls in July, you'll see more reductions in capacity.

And at that point, we're going to see significant improvement in unit revenues going forward.

You just can't project out a situation where the world stays at high oil prices and nothing else happens.

This is creating a situation where all carriers are going to react.

And what's going to happen is, we are going to change the revenue environment.

The revenue environment -- you'll push up average fares as [redone] capacity weaves.

So it's the situation we see today -- if we see high oil prices, we'll be looking at a different scenario for most carriers just three months from now.

All right?

Okay, Bob.

Also it appears -- I say it appears that United has tried to raise the fuel surcharge, but that AirTran is not going along with the [entirety].

I don't know maybe it was $20, but you talk about demand being strong for the summer season, but on the other hand, perhaps surcharges are not holding.

Can you update us on that?

There is a -- the straw is [comp correlation] at the end of the day is to make -- between capacity and pricing.

Just raising prices, without reductions in capacity is not going to raise the average fare.

And so, in order to support the price increases, the capacity has to drop.

There is some customer segment that is elastic, but a large portion of the customer base is inelastic, especially with leisure travel, so you just can't be adding increases on top of increases.

The only certain way to get the average prices up is to accompany it with capacity adjustments.

Those two things have to occur simultaneously.

I think you'll see in the second quarter and in the third quarter, you will see our average fares go up, while we have a surcharge, we've taken a number of fare increases.

You don't adapt from $70 oil, basically six months ago, to $115 oil in three or four months.

It takes a little time, and it's a combination of efforts.

So, I think that in terms of the price increases, we're comfortable that we've taken a number of increases, we've increased our ancillary revenues in a number of areas, and we have a surcharge as well.

So, I think there is plenty of room with the fare structure right now.

The issue is, ultimately trying to raise the mix, trying to move customers from lower paying fares to higher paying fares.

But there is plenty of room in the fare structure right now.

It's just a matter of trying to sell those customers to higher ticket prices.

Okay, thanks.

Okay.

The next question comes from Frank Boroch of Bear, Stearns.

Hi, guys.

I wondered if you could -- have you talked about, with the pilots about the change in the capacity plan and for -- the impact with that on negotiations?

Well, Frank, yes we have not had conversations about this level of reduction.

I think our pilots are aware of what we are looking at before.

I think about -- we went back about five weeks ago, we were looking at a lower reduction in capacity, but it was just two weeks ago that the oil prices had pushed below $99.

This is very, very volatile.

At some point you have to stop and say when do you make your long-term decisions.

So this is a very, very volatile situation.

I think that when we're talking about the situation with our pilots, and everybody at AirTran Airways, because everybody has an interest in really what we're doing to successfully manage in these times.

But, right now, regarding on the negotiations with our pilots, at this point we are not in negotiations yet.

I think, you may be aware, we have a mediator.

Our pilots are in the process of assembling a negotiating team.

And I suspect at some point, perhaps this quarter or next, we will begin to have conversations.

But right now, there is not active negotiations.

Okay, great.

And then, lastly, could you remind us are there any covenants in any of your fixed income securities that limit your M&A flexibility?

No, Frank, there's not.

Obviously what we did with Midwest Airlines, we've been through a lot of that.

And in terms of if it came from the other side, I think that the firm, the acquiring firm would have to honor our obligations.

Great, thanks a lot.

Our next question comes from Gary Chase of Lehman Brothers.

Kevin, can you help us through how a RASM progressed through the quarter and what the impact of the early Easter was?

Sure, Gary.

The unit revenue actually in March was very strong.

January was good, February was also a little bit do to some industry pricing, but overall got much stronger as we came into March and then closed stronger at the end of March than we had originally anticipated.

And in terms of the strength in March, was that principally in the Florida markets and what you would expect in the spring break markets or was that something you say across the board?

Generally, Florida is very strong.

The early Easter helped that.

But I think in the strong close was in most market performed well, certainly Atlanta and Florida.

I also think that you have to consider the fact that certainly some revenue would have flown in April did move into March because of the early Easter.

So, I don't think our situation at AirTran is any different than what some of the other airlines have announced as well.

As we look at March and April combined, and look back versus January and February, the combined period is stronger and the outlook for May to the summer looks quite good at this point as well.

Obviously it's limited visibility, but what we see we like very much.

All right, I appreciate that.

And then just a quick question on the network.

In terms of slowing the growth, do you see opportunities in the network to reallocate out of existing markets to continue to expand in some places where voids might be created from consolidation, or do you think it's just simply taking out some of the market development?

Is that kind of what you are after?

If you look at what we are really doing, as oil prices have increased over time, market development has taken longer and longer.

So I think, again, by slowing the growth you are reducing market development.

So, I think that's important.

But, also as part of this, I think there needs to be a redistribution of the capacity as well.

There are routes, for example, that we might have got into in a $50 or $60 environment that don't hold up at $100.

And so, some of the things that we're doing, we're going to have to stop.

So as the industry enters consolidation, we do have some flexibility to optimize our [fleet zone], even though the growth is slowing and we have fewer airplanes.

I think there is certainly room to re-optimize the network and to take advantage of some of the adjustments

I think that the one positive is certainly as the capacity drops, the traffic and revenue will redistribute itself [via certain host].

And I think that within our portfolio, clearly we have a lot of strength in Florida, we have very strong operation in Atlanta, we have the largest low-cost hub in the world, and a really strong operation in Baltimore.

Those are our key strengths, which we're going to continue to build around, and I think through our efforts to diversify with these, high prices will slow.

Certainly down the road, yes we will be able to redistribute some of our airplanes and grow two to three years down the road, and I think there is adequate flexibility to take advantage of any consolidation efforts that we're going to see in the next couple of months.

Great, thanks, guys.

Our next question comes from Ray Neidl of Calyon.

Yes, Bob.

One thing, I can see you cutting growth, or taking growth out all together with the current fuel prices.

But on the other hand, in the past you said you had to have some growth in your system because you were a small market and you needed a certain market mass.

What effect is that going to have on your future plans then?

Are you going to have enough market mass?

Well, I think we have to take things in perspective, Ray.

I think, if I look back over ten years at AirTran, we've been through a lot.

When 1999, I think our company had $5 million or $10 million of free cash and the oldest fleet in the United States, and we began to put a turnaround in place, and we didn't grow at all in 1999 because we wanted to have a foundation in place.

So that was our approach eight or nine years ago.

Now, after 9-11, we took action and reduced our capacity early and didn't grow for a period of six to eight months, while we repositioned our company.

I think we were one of the few airlines that came out of 9-11 substantially stronger.

While a number of these airlines were going to the ATSD for loans or filing bankruptcy, again AirTran continued to be profitable every single year.

So when we look at the situation in front of us, we have to look at this as a pause.

The priority needs to be adapting to higher fuel prices, and once we adapt we can continue to on our path to diversifying the Company.

But we have to set a priorities, we have to simplify the things that we're working on.

And right now, our goal is we are going to adapt, and we are going to adapt faster than every one of our competitors.

We've taken this seriously, and our feeling is we would rather be out in front of the changes rather than be in the back of the line.

We're simply resetting our priorities to be highly profitable in a high energy environment.

And you're keeping your flexibility open, I take it, because if consolidation does occur on a major scale, other assets that you might want to pick up, such as maybe U.S.

Air assets in Washington D.C.?

A good question.

And I think that certainly, we are actually on record, even with the Department of Transportation certainly, that we are in favor of consolidation.

Quite frankly, we think consolidation will benefit all the players, especially in the domestic market and the only caveat to our support of consolidation is we want the ability to compete.

So that could mean perhaps additional gates in Atlanta, and certainly ability to grow in Washington National, LaGuardia and Chicago O'Hare.

I think what's very, very important to compete in the U.S.

market is you got to have access to the key cities.

That's how you build a reputation with business travelers, by going to the important places.

So I think we are going to have that opportunity.

I believe there is going to be more capacity coming out of the marketplace than perhaps the potential companies are talking about.

Great.

And finally, Bob, with the recent action of Frontier Airlines with Chapter 11, does that have any effect on your partnership there?

Frank, so far I think I probably stated in the past, that relationship is probably worth for us $5 million in 2007.

And I think so far, it's continuing, and we think, again, it's a very, very small step in our revenue base and everything tells me that that will continue with no changes.

Okay, good.

Thank you.

Take care.

The next question comes from Jamie Baker of JPMorgan.

Great, good morning, everybody.

Good morning, Jamie.

Question on ex-fuel CASM trends.

You've just improved your guidance for the -- couple of quarters this year when you're still growing, but the reality is cost declines are often difficult to achieve on flat growth.

If we look at what your annual ex-fuel CASM declines have been, say 2003 through 2007, they've been fairly modest when growth was very, very aggressive.

Doesn't this imply that you're going to be facing some significant ex-fuel CASM pressures in 2009?

Hey, Jamie, this is Arne.

Hey, Arne.

A lot of it will depend on how we adapt to this fleet plan that we are going to and how we do it.

But really, our view on it is this; we have a great cost position right now and a big cost advantage versus the legacy carriers.

Consolidation is likely to widen that.

Our costs may come up a little bit because of our slowing growth and going to flat, but really what is going on right now is not about -- managing fuel is not going to be done through CASM, it has to be done through RASM.

And that's going to be -- we need to set the level of operations to price, so we can price for energy.

And if that means CASM comes up and it puts a little bit more that we need to do in front of the fare, that's fine.

The bigger problem here is fuel, it's not the non-fuel CASM.

Understood, and I don't want to put figures in your mouth Arne, but when you say a little bit, that means, by my speak something less than 3%?

Jamie, I think it's probably too early for us to comment until we have finalized our decision on how we do this.

Well, it's always worth a try.

Thanks a lot, everyone.

No problem.

Again, I just want to add one more piece of color, and by the time we get to the, let's say the September period with two more quarters of reduction, our non-fuel cost advantage versus our nearest competitor, Southwest, will be significant and well below other low-cost carriers and substantially better than the legacy carriers.

So, again, I think the goal is going to widen substantially by the time we reach the end of the third quarter, and then at that point, we'll have further commentary about how we're going to enter the fourth quarter with our capacity plans.

Thanks a lot, Bob.

Thanks, Jamie.

(OPERATOR INSTRUCTIONS)

The next question comes from Dan McKenzie of Credit Suisse.

Yes, thanks.

Good morning, guys.

Hey, Dan.

Just going back to the supply-demand dynamic in your markets.

Wondering if you could provide some perspective on the good guys and bad guys from Delta's change to their schedule.

Yes, I'll make - start, and maybe Kevin can elaborate.

I think that certainly as we enter the summer quarter, I think the situation in Atlanta improves significantly.

I think probably the best supply-demand levels are really in the long-haul markets, which is very good for both carriers, it's been a lot of reductions, again Atlanta long-haul and also [it's] secondary markets such as -- which will ultimately help us, in places like LA and San Francisco.

So, the overall situation Atlanta looks quite good, and in particular the long-haul markets looks extremely good.

When you look out through the summer, particularly west of the Mississippi, you're into double-digit decline really through most of the next -- rest of the year.

So overall, capacity is coming out somewhere close to 9% in June, July and August.

Much larger percentages when you look at what the other guys are doing west of the Mississippi and generally speaking I think that puts us into a position to keep moving unit revenue up.

And I guess, just one last thing.

Obviously, no one's forecast beyond September includes the reductions that we're planning or the reductions that the other carriers are going to make as well.

I am just absolutely convinced that two or three months from now if oil prices are at $115, the carriers that announced 5% reductions last week will be announcing more.

Because it's [clearly] -- AirTran is one of the two airlines that have been profitable over the last nine years.

And we already talked about today, our profitability is around $100 a barrel, most of the legacy capacity was not profitable at $70 a barrel.

And so, at $100 or $115, their losses are very, very big and they are going to take action.

They really have no choice.

Again, you can go back and validate those comments with publicly traded information DOT numbers.

So, I think the stage is set for further capacity reductions in the fourth quarter and beyond.

Yes, okay thanks.

And I guess following up a little bit more in demand.

I think there is a fair amount of investor concern that at some point here the passenger falls off a cliff and revenues fall off the cliff, and just wondering why are we not seeing that already?

I would have expected to have begun to see that by now, and we're not.

Any perspective on why demand seems to be holding up at this point?

It's a question that we ask.

We spend a lot of time making sure that we keep demand going.

In the near term, we still do promotions even though we've raised the average fare on sales and introduced other revenue streams to support the current environment.

As you look out past the summer, I think that's what we're doing in terms of getting capacity in line with where you think demand might be.

The other is, certainly for our network, I think we have a much stronger network and a product that isn't entirely leisure based, that will allow us to keep moving forward.

Overall, what we focus incessantly on fuel, it doesn't seem to be creeping in to the rest of the economy, certainly not with the impact that we're having, but we are aware that that is a potential and that's why we're doing what we're doing with capacity.

I would just add one comment.

Again, I think some of this travel is a little less discretionary than we thought in the past.

For example, in some of the marketplaces where we're strong, over a decade we've trained people to travel.

And certainly, there is that emphasis.

I think if we started to raise prices to ridiculous levels without adjusting capacity, then you might see a fall.

But you don't adjust to high oil prices in six months -- you don't adjust from a $70 environment going back to last summer, to a $115 environment in a matter of months.

It does take a little time and it does require multiple actions.

And so, again, it's continued modest increases in prices, cost control and certainly many of these ancillary initiatives as well.

Great.

And if I could just ask one last quick question here.

In the filings that you mentioned that some of the funds potentially could be used for M&A, even though you're not really looking at any options right now.

But evidently the possibility exists.

Would you be open to taking a third fleet type?

And just given the lay of the land today, wondering if you would be willing to provide any perspective on strategic priorities at this point.

Well, I think certainly we have again an opportunistic mindset.

We certainly are interested in any asset dispositions that may be forced out of some of these potential mergers.

And so, we certainly want to be poised for that because that will strengthen our company immediately whether we're growing fast, or whether we're growing slow, assets in those very dense key markets are very, very important.

So I think in terms of use of cash, I think on the horizon that's a possibility.

But more importantly, I'd say to focus on cash and make sure we have the financial flexibility, along with the capacity adjustments, our continued focus on costs, our hedging, our monetizing our fleet value.

The financial flexibility provides us the time to really focus on being profitable and highly profitable at high energy prices.

That's our number one priority.

Great, thanks a lot.

Thank you.

Our next question comes from Bob McAdoo of Avondale Partners.

Prior application, you said that if oil is still up when we go through the next round of calls, that the industry is probably going to be cutting back some more.

If oil is still at $117, is the flat fall flat next year enough for you, or do you feel like you'll have to go back a little deeper as well?

Bob, I think that really depends on what's going on in the economy.

What do the credit markets look like?

What does the fuel market look like?

Those are the three things we're thinking about, and it may be possible that we would have to go even further.

Okay, that's all I got.

Thanks.

Sure.

Our final question comes from Kevin Crissey of UBS.

Morning, everyone.

Hey, Kevin.

Can you talk about the CFO decision, and when we might expect that?

Kevin, just to make a comment again.

We have a search going on, and I think some decision in the second quarter is probably likely, but that's really all I can say about it.

Okay.

I think the question was asked in terms of you guys being aggressor in consolidation, how about -- you've indicated in your press release that you are not in any discussions.

Have you had any discussions, and what is your view on or how opposed or for the potential for actually selling would you be?

Well, in terms of the consolidation efforts, certainly I think we'd just benefit by having consolidation happening around us.

I think if you wanted to focus on hub redundancies, I think yes, we're pretty well positioned.

If you take out a map and just look at the Northwest, Delta hubs or mini-hubs or focus cities, our operations are very close by in the upper Midwest and Atlanta and in the northeast.

And despite comments about keeping these hubs in Cincinnati and Memphis, we all know that you can't make money with RJs, 50-seat RJs at very, very high oil prices.

So high oil prices are not consistent with some of the comments that are being made.

Again, regarding our interest in receiving a bid, I think our board is focused on the shareholder, and if we received an offer at AirTran, we'd take it to the board and we would be very open minded about it.

Okay, thank you very much.

At this time, there appear to be no further questions.

I'll turn the floor back to management for closing remarks.

Okay.

I'd like to thank everybody this morning for being on the call.

We felt it was important to move up our call, and tell you all what AirTran is doing to [recap] itself in a world of volatile energy prices.

High oil prices are a challenge for all carriers and they may well abate.

However, as we've done in the past, we've decided to be proactive.

AirTran has a history of stepping up to adversity and emerging stronger.

We have great strengths.

We have a unique combination of low-costs and high quality.

We have a diversified network, and we have a strong, solid employee culture.

And we'll take actions in several areas.

We're going to reduce our growth beginning late summer from 10% to no more than flat.

We're going to monetize the value in our 737 fleet, proactively manage our expenses, and we're going to tap the equity and debt markets to provide for additional financial flexibility.

By taking these steps now, we will emerge a stronger airline and be better positioned to take advantage of industry consolidation in a domestic marketplace so that we'll be operated with fewer seats.

Thank you for your time this morning.

Thank you.

This does conclude today's teleconference.

You may now disconnect.