西南航空 (LUV) 2008 Q2 法說會逐字稿

Good day.

My name is Jackie and I'll be your conference operator today.

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

second quarter 2008 earnings conference call.

(OPERATOR INSTRUCTIONS).

Thank you.

It is now my pleasure to turn the floor over to Jason Bewley, Director of Corporate Finance.

Sir, you may begin your conference.

Good morning, I'd like to thank everyone for joining us today for our second quarter results and outlook for the remainder of the year.

Joining me today is Bob Fornaro, our President and Chief Executive Officer; Arne Haak, our Chief Financial Officer, Kevin Healy, our Senior Vice President of Marketing & Planning and Mark Osterberg our Chief Accounting Officer.

I'd like to remind you that this call will contain forward-looking statements.

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

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

We'll also be discussing several non-GAAP financial measures that we believe are consistent with our true operating performance and provide a more meaningful period of comparisons and excludes special items.

A copy of today's press release and SEC filings and reconciliation of non-GAAP financial measures is available in the Investor relations section of the Company's website of AirTran.com.

Today we'll discuss the second quarter results and outlook of the third quarter, as we outline our initiatives for adapting high oil prices.

At the end of the call there be a brief question-and-answer session.

Now, I'd like to turn the call over to Bob.

Thank you, Jason.

Good morning, everyone.

Thank you for joining us on the call this morning.

Before I start, I would like to thank all the AirTran crew members for their hard work, dedication, and positive attitude.

Last April we had the honor to receive a 2008 Air Quality Award.

Jointly awarded by the University of Nebraska and Wichita State.

This award is based on a compilation of operating metrics that report to the DOT each month.

Despite difficult economic times our crew members are off to another strong operational year.

In the second quarter, our completion factor was 99.4.

Mishandle bags were down to three per 1,000 passengers and on-time arrivals exceeded 80%.

First among major airlines in the latest DOT report with an on-time arrival rate of nearly 85%, which is a further indication of the quality operation that we run.

This morning, we also announced our financial results for the second quarter of 2008.

We reported a negative operating margin of 6.6% and a net loss $13.5 million.

These figures included a gain on a sale of two aircraft for $7.3 million and goodwill impairment charge of $8.4 million.

Our profit reversal, versus the prior year's quarter, is driven, primarily, by the enormous increase in fuel prices.

The average price per gallon of fuel increased more than 70% from $2.20 per gallon last year to $3.75 this year.

For a total increase of $167 million.

Currently we're disappointed by this quarter's financial performance.

As we previously told you, we took steps 18 months ago to reduce our growth rate, coming into 2008.

After five consecutive years of 20-plus percent growth or more, we entered 2008 with a growth rate of, roughly, 10% to 12%, a rate in which we were comfortable with oil at about $80 a barrel, and with a moderate accounting.

As energy prices continue to advance and the economy softened, we have reassessed our competitive position in the marketplace.

We understand our challenges, excessive growth, and certain areas of market under performance.

We are, also, well in control of things we can manage.

Such as non-fuel CASM and operational performance.

Our advised capacity plan starts in September as we move rapidly to reduce our capacity and drive unit revenues up to reflect the higher energy prices.

We're focused on five areas in order to adapt to this new environment.

First, capacity reduction.

We are cutting our plane capacity once again, to minus 7% to 8% in the last four months of the year.

This is down from our last guidance in June of down 5%.

We expect our year end fleet size to be no more than 139 aircraft versus the original plan of 147.

For 2009, we have reached a second agreement with Boeing to defer four additional aircraft.

Therefore, we will take only two deliveries next year.

It is our intention to pursue further aircraft sales and we expect 2009 capacity to be down between 4% and 8%.

We have an outside target of at least 10%, depending on the number of airplanes we're able to sell.

To date, we announced the suspension of service to two cities, Stewart, Newburg, and Daytona Beach.

We anticipate additional city closures.

A comprehensive review of both our fleet and route network will be ongoing and we're prepared to do more.

Second area of focus is continued cost reductions.

We began the year with an industry-leading non-fuel cost position.

Remain disciplined as evidence by our drop of non-fuel CASM of more than 3% in the quarter.

While the reduction of growth will put upward pressure on fourth quarter costs we expect FTEs for aircraft to further decline from 2000 levels of 60 per aircraft.

Our goal is to maintain our industry-leading cost overtime.

Point number three, our focus is increased liquidity.

In April we raised $147 million in the concurrent equity and convertible senior note transaction.

Today we announced that we have reached a commitment for up to $150 million in a letter of credit facility, that can be applied toward holdback or deposit requirements with our credit card processes.

We have several aircraft sales in the pipeline, which Arne Haak will address shortly.

And lastly, we have reduced our plan non-aircraft CapEx 40% to 50% from plan levels to $12 million to $18 million.

Fuel hedging.

We continue to offset a portion of the fuel costs through conservation of fuel hedges.

During the quarter we realized gains of $16.8 million on our hedges, we continue to look for hedges as they are available and Arne will spend more time on that as well.

Finally, the fifth area of focus is revenue improvements.

This an area that has been mixed to date.

We are very pleased with our new ancillary revenues initiatives, such as the call-center fee, second bag fee and seat assignment fee; however, year-end revenue performance has lagged despite numerous fare increases.

We've seen some change in close and business bookings and weakness in some of our long-haul routes.

With double-digit capacity growth and staged length increase of nearly 8% in this quarter, unit revenue performance is sub par.

In the fourth quarter we expect to reduce our stage length by about 7% or 8% sequentially as we reduce capacity in Atlanta long-haul markets and our seasonal flying from Milwaukee to the West Coast.

Another part of our capacity reduction plan in the last four months of the year is tied to lower aircraft utilization in trough travel periods and various day-a-week schedule adjustments.

At today's energy prices, approximately two-thirds of our costs are variable, which means we believe that aircraft utilization is less important in all peak periods.

With fuel representing 50% of our total cost during the quarter we are mindful of the challenge we face.

As always, we'll take the challenge head-on and adapt to the new environment.

Now it, is my pleasure to turn the call over to Arne Haak, who will provide a detailed review of our financial performance during the second quarter.

Thanks, Bob.

Good morning, everyone.

As Bob had mentioned reported a net loss for the second quarter of $13.5 million or loss of $0.12 per share.

Included in the results are three items worth noting.

First, we recorded a $7.2 million gain, $4.6 million net of tax $0.04 per diluted share, net of tax related to the sale of two aircraft during the quarter.

We also recorded $34.2 million unrealized gain on derivative financial instruments, 21.4 million net of tax or $0.20 per diluted share related to future fuel hedges.

Finally, we reported a $8.4 million impairment charge or $0.08 per diluted share related to goodwill.

During the second quarter of 2007, we recorded a $6.2 million gain related to the sale of aircraft, which was $3.9 million net of tax or $0.04 per share.

Excluded these items we reported a net loss $31.1 million, or a loss of $0.29 per share during the second quarter this year, versus net profit of $38.3 million or profit of $0.38 per share during the second quarter of last year.

These results are unacceptable.

And we are taking numerous steps to address this.

While Bob highlighted the tremendous impact of rising cost of fuel, our revenue performance did not meet our expectations.

During the second quarter, we grew the capacity as measured by ASMs 12.3% year-over-year.

This is the largest percentage increase in capacity in the second quarter of any major legacy of low-cost airline, and clearly impacted our performance.

Our average stage length increased 7.6% year-over-year to 742 miles.

While our passenger length of haul increased 9.6% year-over-year to 785 miles.

Passenger demand remains solid, up 13.3% year-over-year.

But average yield declined 0.8% year-over-year.

In part, because of the growth in staged length.

As a result, passenger revenues increased 12.4% to $658.6 million.

When we gave our initial second quarter unit revenue guidance in April, we expected passenger unit revenue to increase 5% to 6%.

This was based on negative unit revenue performance in April due to the shift of the Easter holiday and extremely strong advance book revenue trends for both May and June.

In late May, we began to observe a shift in behavior in some of the close-end bookings and reduced our guidance for per passenger unit revenue.

This behavior became more dramatic later in the quarter, as a result our passenger unit revenues were up only 0.1% year-over-year.

The actual year-over-year change in our passenger unit revenues was positive in both May and June, but below our expectations.

As we review our revenue performance our view from several key issues emerged.

The dramatic change in oil prices is now being felt more broadly in the economy.

This general economic weakening has resulted in the a change in consumer behavior.

A greater percentage of our customers are booking further in advance than we anticipated and demand for close-in leisure appears to be declining.

We're also seeing a greater number of customers are waiting for sale fare than we have observed in the past.

While the sale fare offered are significantly higher than last year, a greater mix of customers are purchasing sale fare than in the past.

Our continued capacity growth has created additional pressure on top of that of the overall economy.

In the second quarter of 2008, over 17% of our capacity was a new markets or routes we've served for less than a year.

In some of our Atlanta markets, our own capacity growth has contributed to modest decline in local market traffic per flight and weaker revenue performance.

We've been able to backfill that demand with connecting traffic, this has resulted in the lower realized yields in unit revenues.

This has been particularly evidence in some of our transcontinental routes.

The decision to continue growth through the Summer was made earlier this year, when fuel was about $100 a barrel and the likelihood of oil above $125 a barrel seemed remote.

Finally, we believe that in some cases, significantly higher price structures have not produced incremental revenue.

So far this year we have taken a number of fare increases.

We have also increased our fuel surcharge and non-sale fare from $5 last fall to $15 today.

In addition, we increased sale fare, which are now offered anywhere from $15 to $45 higher year-over-year, which is more than a 10% to 20% average increase.

In some cases the combination of increases and surcharges resulted in non-sale leisure fare that were too high.

And accelerated the shift of pricing from non-sale to sale fare.

Our ancillary revenues efforts continue though to develop quite nicely.

Some of these efforts like business class upgrades and seat assignment fees are recorded in the passenger revenue line.

Some are recorded in the other operating revenue line.

Our other operating revenues increased 31.2% to $34.7 million.

This is due to higher call-center revenues and increases on the Company's minors, change fees, and baggage revenues.

When we combined all of the ancillary revenue benefits that are reported in the passenger revenue line, with those in the other revenue line, our total ancillary revenue per passenger -- in plane passenger is up 46% year-over-year in the second quarter.

Although, we face numerous challenges I want to recognize and thank our front line crew members that have help contribute to both this other revenue growth and higher compliance without sacrificing our professionalism.

Moving on to the costs.

Our total operating costs during the second quarter increased by $203.2 million or 37.9%.

This translates into an over 20% increase in operating costs for ASM.

Of the increase, $166.5 million or 82% of increase was due to higher fuel expense.

The price of fuel rose from $2.20 per gallon in the second quarter, $3.75 in the second quarter of 2008.

And this price change alone accounts for over $150 million or 91% of the increase in our fuel costs.

The rise in fuel prices has been extremely rapid.

The increase from the first quarter of this year to the second quarter alone represented an increase in expense of over $70 million.

We have continued to manage our fuel exposure to the use of hedges and derivative contracts on crude oil.

During the quarter we realized over $16 million of savings related to the contracts or $0.17 per gallon.

Excluding the impact of the gain on aircraft sales and goodwill impairment charge our non-fuel operating cost for ASM was $0.0573, which was down 3.2% over the prior year non-fuel operating costs.

Our total cash and unrestricted -- pardon me, our total unrestricted cash and investments at the end of the quarter, $445.9 million.

This is up from $326.2 million at the end of the year and reflects the net proceeds from our April stock and convertible debt offerings $135 million.

We do not hold any cash from our fuel hedge and derivative counter parties for unearned fuel hedges or derivative contracts.

During the second quarter, we purchased three aircraft that were debt financed.

Our non-aircraft CapEx for the second quarter was $2.9 million and $5.4 million year-to-date.

During the first quarter conference call we gave you an update on the credit card processor agreement, we remain in full compliance with the terms of the contracts.

In the second quarter we entered into discussions with one of our primary card processors and during these discussions we agreed to begin a limit level of cash holdback, which amounted to $23.8 million, or 8% of our exposure at the end of the second quarter.

This month, we've executed an amendment with our primary credit card processor, which extends the credit card processing term through December 31, 2009.

As a condition for the extension we've agreed to financial covenants that said holdback requirements related to our balance of unrestricted cash.

We can satisfy the holdback requirements either with cash or with a letter of credit.

During July, we've also received a commitment for asset-backed letter of credit facility from a major financial institution for up to $150 million, which can be used to satisfy holdback requirements with one of our credit card processors.

Although, we've pledged certain assets to secure the reimbursement obligations under the letter of credit, we believe that our pledge agreements do not materially impair our ability to sell 737 aircraft and earn to sell leaseback from 737 aircraft or seek to enter a variety of other liquidity-enhancing transactions.

During the second quarter we reached agreements to sell five aircraft to be sold in the third and fourth quarter of this year.

Since the first quarter, we've also reached two agreements with Boeing Company to defer our new aircraft delivers.

The net result is that we have moved 22 aircraft from 2009 to 2011 to 2013 to 2015.

Based on our aircraft sales, and these deferral agreements, we'll, now, end the year with no more than 139 aircraft down from our original plan of 147 aircraft at year-end.

Our revised delivery schedule for 2009, now, contains only two deliveries.

One in the first quarter; one in the second.

In 2010, we are currently scheduled to take seven aircraft down from 14.

While credit markets in the economy are pressuring the aircraft market, we continue to see interest in the Boeing 737, 700 aircraft for additional potential sales in late 2008 and also in 2009.

I would now like to share with you our updated guidance for the third and fourth quarter.

While we've been successful in raising our prices and demand for our product generally remains strong, and our current capacity levels, our recent yield performance is below our expectations.

We know we need to increase or realize average fare.

And we have taken some very significant increases to the fare structure.

Some fare still need to be increased further.

Some fare may have been too high.

We also know that our capacity needs to be reduced to a level that will support price increases to cover the increase cost of jet fuel.

This capacity will begin to come out in September.

We have accelerated the amount of capacity to we're removing.

We now expect the capacity to be down 7% to 8% in the September through December period.

As a result of these capacity reductions, we're currently projecting our third quarter capacity to be up 3% to 4% year-over-year in the third quarter; and down 7% to 8% year-over-year in the fourth quarter.

Full year capacities are expected to be up 4% to 5%, down from expected growth of 10% to 12% at the beginning of this year.

Our advance book revenue for the remainder of third quarter remains well ahead of last year.

We expect our unit revenues up 2% to 3% in July and August.

Our current scheduled plan calls for a more than 21% reduction in ASMs, from August to September.

Which is more than double last year's reduction.

We are currently projecting double-digit improvement in unit revenue in September.

Yesterday, we, also, announced new E-Ticketing capabilities at MBTA Conference in Los Angeles.

While AirTran pioneered ticketless travel 15 years ago, our interface with traditional travel agencies, online travel agencies, and corporate travel departments has been somewhat complicated and limited to either paper tickets or some ticketless travel reservations.

These capabilities now allow our key travel partners and corporate travel managers using the Saber GDS to book AirTran travel in the same fashion as they book all other airlines.

In the coming months, we expect to announced additional GDS capabilities, such as improved seat assignments, business class upgrade functionality, frequent flyer recognition and expanded corporate program integration.

We expect our non-fuel unit costs to begin to rise as capacity comes out September 2008.

Before the third quarter we expect them to be flat to down 1%.

It is too early to comment on fourth quarter costs as the fleet plan still remains in flux.

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

With an underlying assumption, $132 crude oil and $30 crack spread we expect the third quarter economic fuel price per gallon to be between $3.85 and $3.90 , all-in, never the affect of hedging and derivative contracts.

We bought derivative contracts and hedged nearly 70% of fuel for the remainder of the year.

And over 20% of our consumption for 2009.

We've contracted to partially protect, roughly, 70% -- 77% of our third quarter fuel consumption.

Based on last week's forward-curve, which resulted in the average crude oil price of $132 of crude oil and $30 crack spread for the third quarter our all-in price of our derivative and hedged fuel would have between $3.65 and $3.70.

With an underlying assumption of $125 crude oil and a $27 crack spread we expect our fourth quarter economic fuel price per gallon to be between $3.65 and $3.70, all-in, net of the effects of hedging and derivative contracts.

We have bought derivative and hedge contracts for, approximately, 61% of our anticipated fuel consumption in the fourth quarter.

With the underlying assumption $125 crude oil and $27 crack spread, the all-in price of our derivative and hedge fuel would be between $3.45 and $3.50 per gallon.

The structure of our hedge portfolio will also give us the flexibility to benefit from the reductions in the price of crude oil and jet fuel.

Approximately, 3% of our hedge contracts for the third and fourth quarter involve swaps or fixed price arrangements.

The remainder of portfolio is comprised of either [caps] or collars.

Our regular debt payment not related to aircraft sales and deferrals is $17 million in the third quarter and $23.5 million in the fourth quarter.

In conjunction with the aircraft sales and deferrals we anticipate prepaying over $98 million in aircraft and purchase deposit debt during the remainder of the year.

We're currently projecting our non-aircraft CapEx for the full year to be between $12 and $18 million.

One final item of note, in regards to our tax rate.

As of June 30, 2008, our deferred tax liabilities exceeded our deferred tax assets by, approximately, $11 million.

We plan on recognizing the financial accounting tax benefit of future losses, only to the extent that the deferred tax liabilities exceed deferred tax assets.

What this means, is at this time our likely tax rate for the remainder of the year will be, approximately, zero.

Once we can actually use the tax benefits, we will, again, be recognizing additional deferred tax assets.

Which is simple a financial accounting matter and will not effect our ability to use cost and any future losses to offset future taxable income.

So in summary, the second quarter was clearly more challenging than we could have imagined at the beginning of this year.

The challenges of high fuel prices and a weakening economy are dramatically affecting all airlines around the world.

We remain convinced that these challenges will, also, present opportunities.

And we are later focused on the position of the Company so it can be a successful, strong, and viable, low-cost leader in the US marketplace.

High oil prices will impair the economics of flying lower-yielding leisure companies on connecting itineraries for all airlines.

This will result in the Atlanta hub getting smaller.

But, it will also result in larger capacity cuts by other carriers from high-leisure markets, like Florida, which will create point-to-point opportunities for AirTran.

We've already seen several airlines withdraw completely from certain Florida cities and just last week, we announced new point-to-point service from Milwaukee to Florida.

In the past we have always moved quickly to capitalize on opportunities.

Today, we're moving even faster and working to adapt to the challenges presented by fuel and the economy.

In the last three months, we've already executed on the fleet plans that we laid out in April and the further rise in oil and a weakening in economy we're doing more.

We firmly believe that we've remained uniquely positioned with low costs, high quality service, a young fleet and friendly crew members.

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

Thank you.

(OPERATOR INSTRUCTIONS).

Your first question is from Mike Linenberg with Merrill Lynch.

Please go ahead.

Yes, just a couple of questions.

On the, on the holdback here, the -- if we think about $150 million letter of credit facility that you have, what does that -- you know, what's the percentage of holdback, would be implied by that 150?

Cover like 75%?

50%?

Trying to get a sense of these size of that processor agreement?

Sure, Mike.

This is Arne.

First of all, details of both LC agreement and credit card processor agreement are subject to confidentiality clauses.

We're limited to what we can say.

Here's what we can say, the $150 million letter of credit today would satisfy over 50% of our exclosure with our primary processing.

Over 100%?

Over 50% of exposure.

Oh.

Seasonally -- it moves seasonally and declines -- tends to peak in the second quarter and will decline through the end of the year.

The low point is year-end.

And, then, it begins to build up again in the first quarter.

Then, peak again in the second quarter.

So it is typically a -- if you're looking for a way to model it, I would suggest look at the air traffic liability line, historically on the balance sheet and it's a percentage of that liability.

Okay.

Good.

Then, just my second question, when you go back to RASM, quarter, initially, thought it would be up, I think you have, 4% or 5%, midsingle-digits and came in just up a small amount, basically flattish.

Where in the quarter, where were the areas that were trouble spots I mean, you listed four or five things.

A lot of long-haul service out Milwaukee.

If we were to exclude the new stuff, look at the same-store sales basis, were you up several percent?

I mean, what was the biggest drag in the quarter?

Just a little more color on that front would be great.

Mike, good question.

I think that at your conference we -- (inaudible) -- be up 2% or 2.5%, even in the middle of June.

Look of the areas of under performance, I think, clearly, almost everything really long-haul.

Last year, long-haul route had the best performance and anticipating a strong performance this year.

That didn't occur.

We had an 8% -- again, a very, very big increase in stage -- last June, 20% of capacity east-west routes.

This year 28% to 29%.

Long haul routes certainly below the average.

Some cases, in the quarter, that they were down, those were actually down.

So they actually pulled us down several percentage points.

East-west, clearly, was a negative.

I think when you get into -- then that includes, again, new Milwaukee routes, when we went into those routes we were looking at $90 to $100 a barrel and now we're flying the routes with oil up substantially higher.

Yes.

Finally, in term of our absolute capacity, in Atlanta, a lot of it at the margin was filled with connections, rather than locals.

The local fare have been rising, again, two locals are certainly better than, obviously, one connecting itinerary.

But the big issue is really the long-hauls.

Okay.

Very disappointed.

Matters when you take the routes out.

You get to the fourth quarter, going to see a very, very strong increase in unit revenue.

Okay.

Very good, thank you.

Okay.

Thank you.

Your next question is from Duane Pfennigwerth with Raymond James, please go ahead.

Just regarding your unit revenue guidance for the third quarter, what's the different about this forecast, the assumption behind it versus the forecast you put forth in the second quarter?

I -- sorry, maybe, Kevin you can chime in, I think in terms of giving detailed forecast, looking July and August we can get a good glimpse of both months, very, very strong advance bookings coming in, with deterioration.

Both have a lot of long-haul capacity, which has become a drag.

That's why we have broken into two pieces.

When we get to September, first of all, things change.

We had a planned capacity increase of 10%.

Now the actual increase will be down about 7 or 8.

The real big change.

Actually, when we get to September, there's so many moving pieces.

Really have to learn a lot about how bookings patterns will change.

This is the biggest capacity change in the industry we've seen since the 9 - 11 period.

We've seen a lot of capacity come out of Florida markets.

A lot of cities are down substantially.

So, travel patterns will be different.

Flows will be different.

And we're not sure what the travel is going to be doing.

So, we think we're going to see at least a double-digit.

A lot is due to the fact you can tell what we're taking away.

Advanced bookings look very, very good, but -- I think we really have to wait until we get close to September to see how the actual travel patterns begin to shift and change.

This is Kevin.

When you look at trends we noted earlier, you started to see at end of May, you're adapting to that change in the pattern and the expectations on demand is changing.

Being able to shift fairly quickly in our expectations and the way we approach the market, we're adjusting off of what we've seen and you're starting to seat benefits in the third quarter.

Duane, this is Arne, let me add one thing for you, too.

I think when you say what's changed versus the guidance?

We had, fairly significant negative RASM in April.

If you seen the advanced booking reports in April for what we had on the books for May and June and how much they were up and how much the average fare was up, you would accuse me of sandbagging my guidance.

We did have positive unit revenue improvements in both May and June.

They weren't near the magnitude, close-end billed was not as strong as what we had thought or seen historically.

Now, if you look out at the guidance for July and August, we still have a lot of capacity in place.

I think we had much more muted expectations with unit revenue guidance up 2% or 3% versus what we'd thought May or June back in April.

That's helpful, thanks.

Can you just, quickly, what is -- what was operating cash flow in the quarter?

Could you break out the cash gains, not the book gains, cash gains on two aircraft sales?

Thanks.

Sure, Duane, hold on one second.

Let me pull it up in front of me.

Cash gains -- I'll tell you what, put that in the 8K.

They're not materially much higher than the bookings.

It is just a little bit.

If you look at the free cash flow for the quarter, it was, roughly, a cash burn of about $35 million in the quarter.

Thank you.

Thank you.

Your next question is from Daniel McKenzie, Credit Suisse.

Please go ahead.

Yes.

Hi, good morning, thanks.

Hi.

One very quick housekeeping questions.

Excluding out of period hedges and other special items, I'm arriving at a loss $0.29 for the quarter.

I want to make sure I adjusted the taxes correctly.

That's what we have, too, Dan, 28.52 and to 29.

So.

Got you.

And, then, can you remind us of how many of the 717s are owned by Boeing Capital and, also, related to that, how would you assess Boeing of a source of liquidity?

Worst case scenario.

First of all, on the fleet, we have a fleet today of 87 - 717s, we lease 77 of Boeing Capital.

In regards to working with the vendors, I think we're talking -- safe to say we're talking to all of the vendors.

One of the things that Boeing has been particularly helpful with in the quarter has been a deferral of the aircraft deliveries.

I tell you what, it feels good to kind of have addressed where we felt we needed to be in April when the low as 110 or 115 with a fleet plan.

We have addressed that with a deferral of deliveries and the sale of other aircraft deliveries.

Understood.

Then, just, second question here.

A number of carriers are continuing to ramp up, Latin America, pretty strongly, given the economic growth there.

And report even immediate contribution.

I know AirTran put a spotlight on Latin-American, as well, when you were initially taking 737.

I'm wondering if you could talk about the pros and cons of that geographic region today?

Good question, Dan.

I think if we want to focus on Latin America or Caribbean, I think -- take a step back.

The focus had been to try to develop the domestic marketplace.

We felt our options were best there, really, in a the short run.

As we go into a period of about two years, being dull growth or declining growth, I think we take it -- we are going to take a step back and look where we're growing.

It is likely we'll begin to add some Caribbean flying.

Again, think of the Latin-American flying, one flight a day to a city, and I think it is the kind of thing that you consider when you go into a slower growth period, which we are now, we feel pretty good about our results in San Juan, again, domestic market, but obviously, certain other dense Caribbean markets, Cancun, and maybe even certain Latin America points could surface.

But clear thing for us is, again, we're going through a, - - again, review, top to bottom, of our strategy, and as carriers adjust and we adjust, we think there's still some more opportunities for us point-to-point, Florida.

Again, I think Caribbean routes will come to the forefront this year.

Again, moving into a period now much different than the last two years.

Our focus is going to be almost entirely on the balance sheet.

Making sure as we do reduce our capacity, make sure we pushed our costs down.

We want to make sure when we come out of this, and the industry begins to adapt and move forward, our cost structure is elite and is industry leading.

Okay.

Good.

Thanks.

Appreciate the perspective.

Thank you.

Your next question is from Ray Neidl, with Calyon Securities, please go ahead.

Yes, good morning.

As far as with the slow down on the growth.

What are you seeing possibilities in Atlanta and possibility Milwaukee, I know you're going Milwaukee, Delta-Northwest merger, probably going a little bit more pressure on the home base in Atlanta.

I'm just wondering about the future of Midwest and Northwest investment in Milwaukee.

See yourself shifting more capacity up to the Midwest?

Again, another good question.

This is Bob.

Again, I -- even when we step back.

We don't know what oil prices are going to be.

I certainly would feel better at $100.

The fact is, we have to plan for a very,very wide meta volatility.

So, wherever oil ends up, we have to plan for volatility that far exceeds what it has been over the past couple of years.

What that means is go route by route and decide.

Atlanta route, where we flew six or seven flights, whether five is more appropriate today.

What we need to do is - - we created the market in Atlanta, for low fare, for, close-end reasonable business fare.

Quite frankly, those average prices need to come up.

What that says is, when the prices come up, market is going to contract.

We have to find the right levels in Atlanta.

And clearly this Summer, at 260 departure was too much with oil hovering $135.

We got to make adjustments there.

Regarding Milwaukee and very, very comfortable with the Florida routes.

Perhaps Midwest is walking away from.

But I think from an approach, we've got to be -- our priorities clearly shifted.

Growth is far down the list of things we're interested in.

I think, number one, obviously, maintaining the liquidity and hopefully returning to profitability.

Those are the two key criteria.

Everything is is a distance third, fourth, fifth.

That's where the focus is going to be.

Opportunities are sometimes nice, but opportunities, also, take time to kick in.

And, so, our goal is two of a fewer number of routes in development.

Right now, I think, I already mentioned the number was 17%, 18% of routes were brand-new this year.

That's too high.

And, so, we've got to be a little bit more conservative going forward.

Okay.

In this atmosphere with the industry shrinking, and your partner Frontier shrinking very rapidly, are you looking for other coach air partners?

Possibly JetBlue or Southwest Airlines or looking international?

JetBlue with -- (inaudible) and investor -- one investor interested that way?

With out really speaking to the specific partnerships out there, one of the things that Arne mentioned was E-Ticketing.

One of the key aspects of E-Ticketing capabilities that we introduced or announced yesterday will facilitate coach air.

A number of different things like that.

That's part of putting yourself in the position to evaluate what the options are.

So, yes, certainly something we're considering.

Okay.

Great, thank you.

Thank you.

Your next question is from Gary Chase with Lehman Brothers.

Please go ahead.

Good morning, guys.

It's Dave [Shulman].

Quick mix on the credit facility, first off, limited to the holdback or general facility?

David, this is ARNE again.

I told Mike we're limited.

Here's what we can say.

Just applicable to credit card holdback.

Doe that extend out through to 12-31-'09?

Yes, it does.

It matches the term of extension.

Great.

Is there an outside chance of 10% reduction in 2009.

I'm wondering what sort of pace does that cut?

Function of oil?

Is that a function of how economically get the capacity out?

Color about what that would be sensitive to?

I think it is tied to -- and I -- (inaudible) we go in at the assumption it is -- it well above 100.

And we just deal with it.

Falls below that?

What happens is, it restructures balance sheet very, very quickly.

Higher than that, that minimizes cash flow.

I think it is a matter of being able to reduce the size of the fleet.

If you look at what's happened with the fleet, overall, the aircraft market is -- I wouldn't call it weak, can't call it strong.

What happened was, when oil went into the 130s and 140s, you could see a change in the aircraft market.

Because, all companies became affected at those rates.

If we end up in an environment where oil is somewhat below 120, or maybe, all of a sudden, the pressure is off a little bit and carriers start to think about replacement.

So, I mean, we think, probably, 10% closer to where we'd like to be.

But it is a matter of being able to sell the airplanes and fly customers.

But, I think in terms of you know what the Bias is.

In the long run we don't want to cut utilizations.

Most airlines are new.

Oldest airplane is 9-years-old.

Utilization cuts are not the way to go for us.

We like to remain highly-efficient and do it with fewer aircraft units.

So I think our ability to sell or sublease airplanes is critical.

Okay.

(inaudible) .

Then, could you give a little update on where you are on the labor side?

I think you asked for 10% pay cut.

And kind of little color on how quickly that could happen?

Kind of where you are in terms of executing on that?

Good.

And what we ended up talking about was the -- for a six month, pay cut, for various labor groups, which are, approximately, 50% organized and 50% non-organized.

Actually had to vote on one of them, relatively close.

But from mechanics voted it down.

And nothing surprises me.

Because, most people, given a choice, don't really want to cut their pay.

One of the problems that we've -- that we face is, , if -- the airplanes are full.

And I'd like to say an environment like 9 - 11 the struggles of the industry were obvious, this time around, I think high oil prices, it isn't as obvious to people.

The struggles and issues that we face.

Over time we'll go back, again, to the Teamsters, we've not put it out to a vote, but we are going to keep our number one cost position.

We think that's most important core asset AirTran has.

We run a good operation.

We have to remain efficient and priorities here are balance sheet and profitability.

Growth is, again, as I mentioned before, a distant third.

I think we'll end up revisiting these issues as we get into the fourth quarter.

We are not raising money or getting letters of credit to spend it, we're using these things to give us the time to adapt and create a new foundation, one to compete in any energy environment.

So we don't feel any sense of relief.

We're prepared to cut more.

We will get our costs down and we'll become more efficient.

If we -- obviously, we think the pay cuts, although not huge, $15 million over six months, we think it sets the right tone to everybody in the Company, to our vendors and everybody dealing business with us.

Really mostly about tone.

No silver bullet to being able to be profitability with oil at 130.

All of the savings got to come from multiple areas.

So minor setback.

We've got a long ways to go.

And, again, we had need to achieve efficiencies in every single area.

Got you.

And, just one last, have you been a cash tax payor and would there be a refund later in the year?

No, David, we're not a cash tax payor.

Okay.

Great.

Thanks a lot, guys.

Sure.

Thank you.

(OPERATOR INSTRUCTIONS).

Your next question is from Kevin Crissey of UBS.

Please go ahead.

Good morning, guys.

Can you say whether Boeing had any involvement in the letter credit at all?

Kevin, it is Arne.

As I said, first of all, the LC was issued by a major bank.

The credit of the issuing bank -- here's what we can say about the agreement.

I talked with Mike what we can and can't say.

The credit of the issuing bank is acceptable to our credit card processor.

The LC facility is secured by a pool of our assets and the repayment obligation lies with us.

So, that's really what we're going to say about our letter of credit facility.

And we think it is a very important piece of how we manage our liquidity going forward.

Okay.

And you talked about the pay cuts.

How about the total employment on the labor front?

What are your opportunities?

Or, challenges for reducing?

If you're going to be down 10%, if able to get there, actual number of people, less people employed?

Good question.

And I think -- but -- two or three weeks ago we announced some larger layoffs because, the flight attendants and pilot groups was a very, very large group.

We announced 300 pilots and - - 180 pilots and 300 flight attendants.

In fact, many crew members will leave other various outs or leave of absences.

I think by the time we get to the end of the year, we'll see our overall, let's say, full time equivalents be lower in December of '08 than December of '07.

We may hit the low FTE for airplane in December of '08.

Something we're watching.

We had a reduction of force in the management back in March.

Certain adjustments can be done through attrition.

We think our total, let assay, headcount -- let's say, headcount will drop proportionately or maybe more than the actual manned capacity.

We have been going through a period of time where we basically be adding an airplane-and-a-half constantly now we go into a no-growth period of time and gives us an opportunity to slow down the cost management.

I think in terms of hedge, we'll become more efficient.

By the end of the year.

Kevin, this is ARNE, again.

I guess the rough order of magnitude map that Bob laid out.

Every aircraft is 60 people.

At AirTran.

Ideally, we think there's going to be opportunities.

We -- if we don't solve everything by getting rid of airplanes, pay cuts may be one way for us to adapt and leave flexibility.

But if we are unsuccessful on that front, it will just mean that we'll have to do more on the aircraft side and that will result in more terminations.

So, our view is, rather than deeper on cut on capacity, rather have short-term pain for all of us and endure the pain for six months and kind of reassess where we stand, industry stands, oil is, as opposed to having to make a deeper cut if we did not do anything on the pay cut front.

Thanks, guys.

Okay.

Thank you.

Your final question is from Robert McAdoo with Avondale Partners, please go ahead.

Couple questions about capacity.

How much of these capacity changes that you got have actually been loaded into the machine now?

And did I hear you say you're going to cut completely off the system a couple more, close down a couple of cities?

Is it two?

When would those be announced?

The city suspended service or closures that have been announced.

So far, Stewart Newburg , which occurs shortly.

Daytona Beach a month or so ago.

A good amount cap is he is in there, you'll see -- capacity in there, you'll see another this week in the scheduled (inaudible)

I thought, Bob said there was another suspension or two coming?

We're evaluating all cities and going route by route.

We didn't specify a number of cities.

It is likely there will be additional closures, which we'll announce next month or so.

Thanks, that's all I got.

Thank you.

I would like to hand the floor over to Robert Fornaro for closing remarks.

Once again, I would like to thank everybody for being on our call this morning.

High energy prices are a challenge for all carriers.

And fuel prices may well abate further, we are not counting on that.

It is our intention to match capacity -- match our capacity to today's economic environment and record high oil prices.

Recognizing that fuel prices will remain volatile well in the future.

So very simple, our goal to adapt quickly, run a quality airline and maintain an industry-leading, non-fuel cost structure.

Thank you for your time this morning.

And we'll talk to you in a few months.

Thank you.

This does conclude today's AirTran Holdings conference call.

You may now disconnect your lines.

Have a wonderful day.