西南航空 (LUV) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the AirTran Holdings, Incorporated, third quarter earnings conference call.

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

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

(OPERATOR INSTRUCTIONS)

I will now turn today's conference over to Mr.

Jason Bewley, Director of Corporate Finance.

Sir, you may begin your conference.

Good morning, everyone.

I'd like to thank you for joining us for discussion of our third quarter results and our 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, and Kevin Healy, our Senior Vice President of Marketing and Planning.

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 time-sensitive forward-looking statements that are accurate only as of October 23rd, 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 10K or 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 and excludes special items.

A copy of today's press release, our SEC filings, and a reconciliation of the non-GAAP financial measures is available in the Investor Relations section of the company's website of AirTran.com.

Today we will be discussing our third quarter results and our outlook for the fourth quarter.

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

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

Thanks, Jason, and good morning, everyone, and thank you for joining us on our third quarter earnings call.

Clearly it is an understatement to say that 2008 has been a challenging year with the rapid escalation in fuel prices and the economic uncertainty we now face.

Through it all, the crew members of AirTran do continue to work hard and have a positive attitude.

Despite difficult economic times, our people continue to post strong operating metrics.

In the third quarter, our completion factor was 99.1%.

Mishandled bags were down to 2.94 per 1,000 passengers.

And on-time arrivals were 78.6%.

The on-time performance results are 3.6 points better than last year and our best ever third quarter result.

Our mishandled bag ratio improved 37% versus last year.

This morning we announced our financial results for the third quarter 2008.

We reported an operating margin of negative 6.8% and a net loss of $107 million.

These figures include a gain on the sale of three aircraft for $10.4 million and an unrealized loss on fuel derivatives of $55.5 million.

Our profit reversal versus the prior year quarter was driven primarily by the enormous increase in fuel prices.

The average cost per gallon of fuel increased more than 69%, from $2.25 per gallon last year to $3.82 this year, for a total increase of $149 million.

Clearly we are disappointed by this quarter's financial performance.

On a more positive note, our industry leading non-fuel costs continue to decline in the quarter, down 0.7% to $0.0588 per ASM.

Also, our full-time equivalent per aircraft was 55.5 for the quarter; again our lowest reported figure ever.

Despite the very difficult quarter and the uncertainty we face in the near future, we are optimistic.

No major airline in North America has faced the same headwinds as AirTran.

With fuel over 50% of our costs and no benefit from international diversification, we bore the brunt of the fuel run-up and a weakening U.S.

economy.

Fortunately, our capacity reduction plan is now in place and our fleet has been pared back from a planned 147 this year to 136.

We are prepared under the right circumstances to further reduce our capacity to accommodation of additional aircraft sales and further rescheduling of our order book.

At AirTran we have the industry's leading cost structure.

And with oil down at more reasonable levels, we are now well positioned to return to profitability in the coming quarters.

I will now turn the call over to Arne Haak who will deliver a more detailed review of our third quarter financial performance.

Thanks, Bob, and good morning, everyone.

As Bob mentioned, we reported a net loss for the third quarter of $107.1 million, or a loss of $0.91 per share.

These results include non-operating losses of $41.5 million, which was comprised of $55.5 million of unrealized losses on fuel hedges and $14 million of realized gains on fuel hedging.

We also recognized a $10.4 million gain or $0.09 per share on the sale of three aircraft in the quarter.

Excluding these two items, our third quarter net loss was $61.9 million or $0.53 per share.

During the quarter we had $673 million in revenue, as our passenger unit revenue increased 5.6%, despite a 4.9% increase in stage length.

Our unit revenue trends were consistent with our previous guidance, of up 2 to 3 percent in July and August, and up over 13% in the month of September.

September's unit revenue performance was aided by a nearly 10% reduction in year-over-year capacity, while July and August unit revenue was against the backdrop of a capacity increase of over 9%.

Load factor for the quarter was up 4.5% and meals were flat year-over-year.

We believe that our unit revenues would accelerate as we reduce our capacity growth and we are pleased with this trend.

We continue to work on expanding our ancillary revenue efforts as well.

So far this year we have rolled out additional revenue initiatives such as higher call center revenues and change fees as well as second bag fees and other revenues.

As a result, our other revenues increased by 41.1% to $38 million on a 3.6% increase in capacity.

This is a factor year-over-year growth rate from what we even observed in the second quarter.

I again want to sincerely recognize and thank our front-line crew members who are integral in supporting and executing these efforts.

Moving on to our costs.

Our total operating costs for the third quarter increased by $149.3 million or 26.2%.

Excluding the gains on aircraft sales, our total operating costs for ASM was up 23.6%.

Nearly all of this increase was due to the higher price of fuel.

The economic cost of jet fuel rose 63.1% from $2.25 per gallon last year in the third quarter to $3.67 per gallon in the third quarter of this year.

We hedged just over 80% of our fuel consumption during the third quarter and, as a result, we realized $16 million in savings related to these contracts, or $0.17 per gallon.

In the last 12 months, we have saved over $61 million from our fuel hedging program.

Excluding the impact of the gain on aircraft sales, our non-fuel operating costs for ASM was $0.0588, which was down 0.7% over the prior year.

AirTran continues to have the lowest non-fuel unit cost of any major U.S.

airline when adjusted for stage length.

As of September 30th, we have unrestricted cash and investments of $318.1 million.

In addition, AirTran had $84.2 million of restricted cash.

On the credit card processing front, we executed amendments with our two largest processors during the third quarter, which extended our agreements to December 31st, 2009 and September 30th, 2010, respectively.

We also closed on our $150 million asset-backed letter of credit facility in August.

As part of these extensions, we have agreed to financial covenants that set whole back requirements related to our balance of unrestricted cash.

We are in full compliance with the terms of our contract and we have additional credit available to us under the letter of credit facility.

We have also bolstered our liquidity through the sale of aircraft.

During the third quarter, we sold three aircraft and have agreements to sell three additional used aircraft through the end of the year.

We have two new 737-00 deliveries currently scheduled for December of this year, which have been sold to a third party.

These deliveries are now delayed until 2009, due to the current Boeing strike.

Earlier this year, we deferred 22-737-700 deliveries from the Boeing Company from 2009 to 2011, to 2013, to 2015.

Based on our aircraft sales and these deferral agreements, we are now projecting that we will end the year with no more than 136 aircraft, down from our original plan to end this year with 147 aircraft.

Our order book with Boeing is for 53 additional 737 aircraft by 2015, seven of which are scheduled to be delivered in 2010.

We are currently in discussions with Boeing about our fleet plan needs for 2010, and may defer some or all of our 2010 position based on the current economic outlook.

As Bob highlighted in his opening remarks, under the right circumstances we would be willing to further reduce our fleet size.

As we look out into the fourth quarter in 2009, we are easily reminded of how difficult it is to make predictions and offer meaningful guidance in an industry where there is tremendous volatility and fuel prices and now potential weakening of consumer confidence.

As little as 90 days ago, we were contemplating whether oil would rise above $150 a barrel and today the price is less than half of that amount.

In the past 30 days, we have also seen the financial markets roiled by uncertainty and volatility which are affecting economies worldwide.

While the recent decline in fuel prices has the potential to provide hundreds of millions of dollars in cost relief to us next year, as a company, by an uncertain economic backdrop that makes us grateful that we took the actions we did earlier this year to slow our growth, cut costs, raise capital, hedge our fuel, and raise revenues.

Given the uncertainty that exists, we have a firm conviction that our decision to proactively reduce our capacity was the right one.

Our capacity for the fourth quarter is now projected to decline by 6 to 7% year-over-year.

Full year capacity is expected to be up 5% year-over-year as a result of our growth through August.

While we are encouraged by our increasing unit revenue, the long-term effects of this worldwide financial crisis are still unknown.

We expect our October unit revenues to be up about 10% year-over-year, with closing bookings largely keeping pace with last year, despite the reduction in capacity.

We are also projecting November unit revenues to be up year-over-year, although somewhat weaker than the trends we have seen in September and October.

In part, because of the election and the timing of the Thanksgiving holiday.

On a similar note, December advanced revenue is trending well ahead of last year and is clearly aided by the timing of Thanksgiving return travel and the Christmas holiday.

Our best estimate of unit revenues for the fourth quarter at this time is for an increase of 7 to 9%.

Similar to other airlines, our non-fuel unit cost began to rise as we have removed aircraft from the fleet and reduced our utilization.

For the fourth quarter, we are estimating that our non-fuel unit cost will be up 5 to 6%.

For the first nine months of this year, fuel expenses represented approximately 50% of our operating costs.

Therefore, as a result of very low non-fuel unit costs, our cost structure potentially will receive a bigger benefit from the current decline in fuel prices on our unhedged fuel relative to the industry.

Earlier in October, we proactively unwound some of our fuel hedges that we felt were unlikely to provide upside protection in the near future.

As a result we are currently hedged for 51% of our anticipated fourth quarter fuel needs and approximately 35 to 40% of our anticipated 2009 use.

Our hedge portfolio provides savings to us with crude oil prices in the mid-90s per barrel in the fourth quarter of this year and in the high 80s per barrel in the first quarter of 2009.

With an underlying assumption of $80 crude oil and a $22 refinery crack spread, we are estimating that our GAAP average cost of fuel per gallon will be between $2.85 and $2.90 in the fourth quarter.

Our regular debt payments not related to aircraft sales and deferrals is $15.8 million in the fourth quarter.

Our current outlook for non-aircraft CapEx for 2008 is now slightly lower and expected to be only $12 to $15 million.

In summary, the challenge from fuel was larger than almost anyone could have imagined six months ago.

We set on a course of dramatic action earlier this year, whose effects began to gain traction late in the third quarter.

The financial uncertainties from fuel prices is now replaced by the potential for economic weakness which began earlier this year in the United States and is now showing signs of spreading worldwide and could affect airline revenues around the world.

We have adjusted our fleet plans, made structural changes to our network, and have moved to capitalize on opportunities that we see in cities like Milwaukee, Harrisburg, Columbus, and Cancun.

We are convinced that there will be additional opportunities in the future and are focused on restoring our company to a healthier financial position so we can continue to be a successful, strong, and low-cost leader in the U.S.

marketplace.

When we look back on the last nine months, we have taken aggressive and decisive action on multiple fronts to reposition our company for uncertain economic times.

We remain uniquely positioned with low costs, high quality service, a young (inaudible) fleet, and friendly crew members.

Christy, with that, I'd like to now turn over the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) We'll pause for just a moment to compile the Q-and-A roster.

Your first question comes from the line of Kevin Crissey of UBS.

Good morning, everybody.

Hi, Kevin.

First check bag fee, you don't have one, do you?

And will you?

Kevin, good question.

Let me tell you what we've done on the first bag fee.

We have the programming in place to initiate a first bag fee.

And at this point, we have elected not to do it, primarily because our largest competitor in Atlanta where we have 60% of our flights hasn't done it.

And I think, we don't think we want to be in a position to be out there alone with a competitor who we compete on, has two-thirds of our nonstop flights and probably 80 to 90% of our revenue is not doing the same thing.

So I'm not saying we won't do it.

But at this point, I think we prefer to be a follower in a situation rather than a leader right now.

But if they were, you'd consider it?

It's not a matter of practice?

We would strongly consider it, yes.

Okay.

Terrific.

And what are you seeing from Delta?

In terms of capacity or --

Capacity, competition.

In any which way you want to describe it's fine.

You know, again, having been here now, Kevin, almost just over nine years, I think, again, it's just the very, very beginning.

The competition from Delta has always been aggressive and sometimes it's more difficult than others.

As we move into the fourth quarter, I think if you look at what's going on, call it east of the Mississippi, the capacity scenario is pretty good, but it's not as good, let's say in the southeast as it is in other parts of the country.

Delta is up, flat to up in some of our routes, although we've pulled back in Atlanta.

And also U.S.

Airways capacity in Charlotte's probably up a little bit in the fourth quarter as well, so.

Yes.

The southeast is not getting, let's say the same type of benefit that we're seeing in the rest of the country.

But I think again that we're still seeing benefit and certainly we're seeing a lot of benefit in the connecting markets, which makes up two-thirds of our traffic that moves via Atlanta.

I guess the last thing I'd say is I think -- I still think there's going to be some reductions in capacity as we move into the first quarter.

I think Delta will be reducing some of their capacity.

And I think you'll see a few more reductions in the first quarter from us as well.

Okay, terrific.

That's nice color.

One last one if I could maybe.

This is for Arne.

The 5 to 6%, I think you said [cap mx] was a little higher than we had modeled.

Maybe we just underestimated the impact of the reduced capacity.

But as we look forward into 2009, that type of run rate which would be a little higher than what we have modeled, is that something we should be thinking about?

Well, Kevin, it's probably a little early to give you any kind of firm guidance on 2009.

The fourth quarter here, we're obviously transitioning to a smaller fleet size.

And that is we have pilots moving between aircraft types, there's training.

And as we -- we are currently going through our 2009 budgeting.

So I think it's -- the hardest thing for me to tell you about 2009 is I don't think we're done yet with our fleet plan.

And until I actually know we've locked down our fleet plan for 2009, it's hard to do because the mix of aircraft changes so does the potential for our cost structure.

With that, I'd say, it's probably as close a data point as I can give you in the near term, but we are, I can assure you as we go through our budgets and our planning this fall, working very hard to ensure that we get as much of these fixed costs out.

What I will say to you is that we are for -- you know, this is something if everybody cuts back their capacity and their utilization, this is a challenge that everyone is facing, that every airline will face.

And what we are committed to and what we have said is our goal in the past is that we are committed to preserving our low-cost, relative low-cost advantage.

So while our cost may go up, we believe that we will be able to preserve our relative low-cost advantage.

Thank you.

Sure.

Your next question comes from the line of Gary Chase of Barclays Capital.

Good morning, guys.

Morning.

Good morning, Gary.

Couple questions for you.

First on the capacity plan and on the topic of aircraft sales.

I'm curious, as we move into year end, are any of the sales that you've talked about completing, are they contingent upon the buyers getting aircraft financing?

And, if so, how comfortable are you that that will develop?

And then the second question just on this topic is, do you need to sell additional aircraft in order to get to the down seven, the upper end of the capacity cut guidance for 2009?

And again, same question, now, where would we be relative to the current financing market?

Hey, Gary.

This is Arne.

Let me take the first half of that, and then I'll turn it over to Bob to kind of talk about where we need to go on the fleet plan to get to that range of guidance.

In terms of the current financial market and the credit challenges that some airlines are having in terms of financing, none of our aircraft sales that have contracted have any provisions in it that are contingent upon them securing financing.

And none of our deliveries so far have had any problems in terms of closing, in terms of timing, that are related in any way to the inability to get financing.

So I think we're very pleased.

And if you look at kind of where the planes are going, they aren't going here in the domestic U.S.

marketplace.

They're going to other parts of the world and in many cases these people are cash buyers, so.

And, really, along with the second part of the question, it is tricky, because we start putting together our budgets and we start doing that in August, and I think we were probably still looking at oil at 120.

I think if oil is 75, 80, I think we might fly slightly higher utilization.

Our preference is to run an 11-hour utilization.

We think that's better for us.

Our preference is to get rid of airplanes, get rid of fixed costs and ultimately try to run the most efficient airline that we can.

So as we put together our plans, there's a number of things that we did this past summer that didn't work at 130 or 140, but would work very well with oil at 100 or 90 or even less.

And, for example, that could be the capacity that we added in Milwaukee which certainly would be very, very effective with a sub-$100 barrel capacity.

But I would say the seven, probably down seven, would probably require a few more airplane sales.

If we could sell some airplanes at the right price, we would do it, because that would tie in with our priority for the next 18 months is to improve the balance sheet versus growth.

It's a very, very clear priority for us.

We're going to hopefully have low oil prices for a year, maybe more.

But the fact of the matter is we are going to plan for oil prices to be higher some point down the road.

So at the right price, we would do additional airplane sales and that would push us to the lower bound of the capacity growth.

Okay.

So it sounds like you're working towards -- it sounds like as long as you can get good transactions in the aircraft market, you're willing to do that because that's a good way to get the balance sheet repaired; is that fair?

Absolutely.

Okay.

Just also on the revenue guidance for the full quarter, you said October plus 10, I think 7 to 9 for the fourth quarter, if I heard you right.

When you think about November and December, obviously, particularly December, not that visible yet, is that conservatism or is that what you would expect given booking trends that you've seen all year and what's on the books now.

Just trying to get a sense of whether or not you're seeing enough to believe November and December will be worse than October or you're just introducing some conservatism given everything we're hearing about the economy?

Well, we're convinced that November will be weaker.

Again, there's a number of factors in there.

A little bit of concern that the -- especially with the timing of this Thanksgiving holiday does influence it a little bit.

But it may well be that Thanksgiving may not be as robust as past years, given some of the uncertainty.

The election, the area around election day, that week, I mean, I think it's -- I think that's going to be a weaker than normal period as well.

Our trends have been telling us that November looks a little softer than October did and December.

The flip side, December looks very, very, very good right now.

But that's where we'll probably be the most conservative.

You have, in effect, what looks like a longer Christmas holiday this year.

If you use the 9/11 experience, that was still a pretty good holiday even after 9/11.

So we think December's going to come out pretty good.

But we all read the newspaper every day and, again, there's a lot of anxiety out in the economy.

There's an opportunity to beat these, but we think this is a good range for us to be in right now.

Okay, guys.

Thanks.

Thank you.

Your next question comes from the line of Ray Neidl of Calyon Securities.

Yes.

Arne, I just wanted to verify something you said when you were talking about reduction of ASMs.

You said that the company would be willing to reduce fleet size, not types; is that correct?

Correct.

Okay.

You're going to hold on to the 717?

Absolutely.

Okay.

We are very pleased, I think with the operation of both the 71 and 737.

And they both kind of serve different roles within the company.

We aren't at a point where we are just trying to get rid of airplanes for getting rid of capacity sake.

But to the extent that there continue to be smart transactions out there that serve the joint goal of providing additional liquidity and reducing capacity and giving us more certainty on [rising] growth for next year, I think we certainly would pursue that.

Okay.

Great.

And the other thing is, with the Delta/Northwest merger about to happen, I know you commented on what's going on in Atlanta.

But what effect do you think that is going to have on your system, particularly in Milwaukee where Northwest was a supporter of Midwest?

It's a good question, Ray.

And, certainly, again, I don't have a crystal ball.

But if you look at the, as I read what Delta's up to, I think we've seen some big pull downs in Cincinnati and Salt Lake, Florida, and really kind of hanging on to their biggest asset in Atlanta.

I think you can imagine, you know, I think you're going to see some reductions in Minneapolis and probably particularly Detroit.

Detroit's going to go through a rough time, if 1990 recession is any indicator.

But, so, yes, we expect, again, the competition in Atlanta to be persistent.

But, again, as Cincinnati comes down and even if Memphis comes down a little bit, what it does is, it does start boosting the opportunities in the connecting markets.

And in Atlanta, again, it's still about, say 60% of our traffic.

So we're always going to get some type of benefit there.

So I think in general it's going to help the overall economic situation on the, I'd say east of the Mississippi.

Again, the bulk of the capacity in those hubs are east of the Mississippi and I think it's going to help the entire region.

Okay.

Bob, did you say that there was going to be some additional attempts at cash raising going into the slow winter season?

Well, yes, at this point, we've been going on actively and looking for financing opportunities to improve our liquidity situation.

And I can tell you we continue to do those.

And, quite frankly, we're optimistic that we'll be successful in being able to raise some liquidity if we feel we need it.

I will tell you this, low oil prices, again, will help AirTran more than anybody else.

And as you start looking out into the middle of the first quarter, late January, February, that's when we get into our seasonal cash building situation.

We see a lot of benefit from fuel prices.

And I think all the sudden, the declines that we've been seeing over the past 4 to 5 months will begin to take off.

I think we do have the opportunity to arrange, we believe arrange additional financing if we feel we need to do so.

Okay.

Good.

Thank you.

Great.

Your next question comes from the line of Dan Mckenzie of Credit Suisse.

Hi.

Good morning.

Thanks.

Good morning, Dan.

I guess just a couple questions.

I guess my first is really a wrinkle of the question that was just asked.

But given the cuts in capacity, what is AirTran's revenue exposure to Atlanta, or say Delta today.

And I appreciate it's hard to know this looking out.

But just assuming all else equal, where we might be six months from now or a year from now.

Well, I think, again, in terms of the Atlanta local market, I guess it's probably 20% of our overall revenues, the origin market, if I had to guess.

And again, what we're seeing is if you evaluate it, Delta has pulled back in non-AirTran markets and is largely flat to up slightly where they compete with us.

But I still think you get a benefit in the connections in general.

But I think I have to add this, Dan.

Delta has capacity against AirTran in the market, in most of the markets they have more capacity.

The one thing we do know is it generally impacts them a lot more than it impacts us.

And it's -- so I think it's not as if they had capacity and it's a one-way street.

I mean, I think we've proven over time that we're a pretty tough competitor.

And at least in the near term, we've got a lot more flexibility to manage our revenue base because oil's come down quite a bit.

And we are a low-fare carrier.

We can be a lot more tactical and we can be a lot more aggressive with oil prices down here versus where we were last year.

I mean, clearly carriers with large international operations have a huge advantage in the second and third quarter, because most of those tickets were bought 8 to 9 months ago when the economies were generally better and everybody was getting huge advantages.

But I think some of these cross-subsidization of the international is not going to be so good as these international markets begin to weaken as well.

So again, for us, I think this is a good opportunity for us to get a little bit more aggressive in the marketplace.

We can be more tactical.

Again, our fares are up in Atlanta, but at the same time allows us to be a little bit more promotional if necessary.

And it may take that if in a situation right now where the consumers' got a lot of worries.

I mean, the consumers' got it in their minds that airfares are through the roof.

And I think there's an opportunity, especially off peak times, to fill in in some of these off peak days.

So I think that the environment for us to compete is going to be a lot more favorable over the next five or six months than it was over the past six months.

Very good.

Yes, I appreciate the response.

And I guess the second question is, as you think about strengthening your revenue base, wondering if you could talk about why, say a [co-share] with Southwest might or might not make sense.

And if it would, what are the things that you need to think about?

Good question, Dan.

And just talking about co-shares in general, we have a different reservation system.

And historically, it's a very low-cost simple, very simple system so we can train people.

There are some huge benefits in the system.

Historically it lacks some of the traditional things that the TDS's lack.

But we've developed over the last two years the ability now to do co-share.

And I think, again, under the right circumstances, we would certainly be willing to sit down and talk to Southwest.

We have strength in some markets that they don't participate in and vice versa.

Again, I can't tell you that they have a similar interest.

But if the opportunity is there, certainly we'd be willing to talk about it.

And I think, again, the principles are the same.

The same principle that helps improve the revenues under -- with a legacy carrier would work with us as well.

So again, I think that option is always out there.

We all have our own different priorities.

But I think if Southwest was interested in talking, we'd certainly be willing to listen.

Okay.

Good.

Thanks.

Appreciate that.

Okay.

Your next question comes from the line of Duane Pfenningwerth of Raymond James.

Hi.

Thanks.

Good morning.

Good morning.

Just wondering, Arne, if you could give us a little more detail on the hedges, where the floors are in the fourth quarter, and if you have any detail on the first quarter.

So when do you get the payoff from lower fuel prices, should they persist?

Sure, Duane.

In the fourth quarter, our hedges begin to become a liability for us in the high 90s.

And as you go out into the first quarter, it's in the 80s.

So today they are not providing benefits to us.

But as we said in the prepared remarks, we've unwound some of our higher positions that they gave us protection at much higher prices over 100.

And we really felt that in the near term that wasn't likely to be a need.

So we've unwound those positions.

So right now we are about 50% hedged in the fourth quarter.

And so we will start to get benefit on our unhedged numbers.

And that hedge percentage of 50% is really heavily weighted towards October.

We are probably over 70, 75% hedged in October and probably more now like 30, 40% hedged in November and December.

And the reason was because of the active hurricane season and the exposure we faced there before.

So we've taken some action.

First quarter is probably about 40% hedged at this price.

So we are getting benefit.

And after that it declines down to being about 30% hedged.

The remaining portfolio, as we said, once we get above the mid-80s, which it's very easy to be excited about the price of oil dropping.

Three weeks ago were at 100.

And so the volatility, potential volatility is still there.

In the long term, it could come back.

So what we've tried to do is preserve the longer term portion of our hedge program at a price that we know that we can be a successful airline, under normal economic conditions.

We await to see what's going to happen with the revenue next year.

But I think we feel pretty good about that we've kind of stepped through this pretty carefully, so.

Okay.

That's great color.

Now, just on the network side.

As you cut capacity here in the fourth quarter, where are you cutting?

What types of routes are sort of most attractive for you to cut?

And then can you talk about any anecdotal -- I don't know if you have it yet.

But sort of [razz] in performance in more of the sort of point-to-point flying around Atlanta, not going through Atlanta, not going through Atlanta, versus some of your connecting traffic through Atlanta?

Thanks a lot.

Good, Duane.

Again, a couple of points.

In terms of the capacity adjustments, again, our capacity adjustments are larger in Atlanta than throughout the system.

Again, I will say, as you look at November and December, I guess AirTran seats in November, so we're probably down double digits.

So what have we done?

We've closed Savannah.

We closed Newport News.

And we trimmed back --

Stuart.

Oh, Stuart.

Excuse me.

And we've reduced some frequencies.

I mean, during the seasonality and Atlanta traffic anyway, I can tell you, certainly, in the late winter in the first quarter, Atlanta is generally weaker, you know, not dissimilar to other hubs around the country.

And we pulled down some of our Florida flying in September and October harder than we have historically because those are weak months and we just went under the assumption they would be weaker.

But prior to the quarter, what we had seen is that Atlanta was generally weaker in our point-to-points and Baltimore were stronger.

Again, that was a pattern.

We think the biggest problem we had in Atlanta was our own capacity.

Again, in not necessarily Delta's capacity, but our own capacity.

Just to go back, we came into the year with a double digit growth rate.

And if oil was at 90, I think this year would have turned out a lot different.

We didn't expect oil to get to 140.

In fact, on April 1st, it was still around 100, and we kept our summer capacity plans in place.

And again, unfortunately, a lot of things that we did, even on the east/west routes, they ended up being uneconomic.

But as we go forward, I think the pullbacks in Atlanta will be greater than the system and I think that's just a reflection of our needs and really less a reflection of what Delta's up to, including more of, you know, we don't want to outgrow our own revenue base, quite frankly.

So Atlanta, just to summarize, is systemly down, I'd say 6 to 7%.

Atlanta will be down more than that, and the, say the point-to-point environment will be down a little bit less.

Hey, Duane, for the benefit of the airport director at Newport News who might have had a heart palpitation and also our crew members, there are no plans to close Newport News.

We are very pleased with our performance there.

Thanks for the color.

Okay.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Mike Linenberg of Merrill Lynch.

Yes.

Hey.

A few questions here.

One, and I apologize if you actually provided this on the call.

But when we look at capacity growth -- or excuse me -- the contraction in capacity of the 3 to 7% next year, what should we be thinking about for the first question?

I think we'll -- why don't you go on to the next question, and I'll have somebody look that up.

Okay.

Not a problem.

It may be a simple --

And my second -- and this --

We'll have a second -- have you got the other part of your question, Michael?

Yes.

Yes.

And, yes, and this is probably maybe more to Arne.

If you could just -- if you could walk us through the change in cash quarter-over-quarter.

It was down, as you would expect, with, you know, call it the seasonal falloff in advance ticket sales.

But restricted cash was up a bit.

Is that tied to that second credit card processor agreement?

Any color on kind of a cash down and the movement up in restricted cash would be great.

Thanks.

Sure, Mike.

The biggest change in cash, which I think you highlighted in your notes, is the seasonal decline in our air traffic liability.

Mike Linenberg Yes.

And that is probably over [$60] million --

Mike Linenberg Okay.

-- just from quarter-to-quarter in terms of change in air traffic liability.

The other increase in restricted cash is primarily related to our credit card processing and there is an amount that they are holding today, so.

Arne is there a -- can you give us maybe what the aggregate amount held by the two processors and maybe what percentage that represents of tickets that are sold by credit card that are processed by those processors?

Any color on that?

Our agreements are confidential.

Okay.

And we're not -- I don't think we want to get into breaking down by who has what and what form of protection do they have.

I think we have a good relationship with our processors.

I think they are -- they understand what's happening at AirTran.

I think they feel comfortable.

We have regular dialogues with them.

I think they are comfortable with their ability to protect themselves in terms of their risk.

So I think we have made some good progress there.

They've been good partners in working out a -- working out solutions that I think work for both of us.

Okay.

Okay.

If you just have that capacity number.

Yes, I do.

I think right now we're looking probably at about down 6%.

Okay.

So kind of similar.

Obviously, that can still change too in terms of what we do in our fleet.

Okay.

But where we stand today with contracted sales and everything else, we're probably looking at down around 6%.

Okay.

Great.

Thank you.

Your next question comes from the line of [John Reardon] of [Krahl, Weeden and Company].

Good morning.

Good morning, John.

I'm going to assume that most of your traffic into and out of the Orlando market is related to the theme park business down there.

Correct me if I'm wrong.

And I was just wondering, could you give us some color on how that business has been holding up?

I can tell -- give you a few guesstimates.

But I think, George (sic), first of all, we've gotten our traffic in Atlanta which is our biggest operation to Florida.

Again, it comes from a couple places; clearly leisure passengers.

But the convention business is large as well.

And our percentage of the business market has improved because there are actually other people -- there's actually some businesses down here besides Disney and Universal.

So, I mean, it's kind of a broader base over time.

But I think what we're hearing from some of the various hotels down here is that traffic or bookings are down about 8 to 10%.

I think September was a little weaker than last year.

And expectations in October and November have been weaker as well.

On the flip side, you have the capacity, the airline capacity, to Orlando is probably down more than that.

So I think, I'd say the local businesses are being hit a little bit harder because they can't moderate their capacity like we can.

So again, Florida capacity in general, in many markets is down quite a bit on a year-over-year basis.

I think Orlando seats are down in September 14% and I think October and November seats are down about 11%.

So the airlines still have fairly high load factors.

But, in general, I would say the local markets or the local businesses are probably getting hit a bit harder.

Okay.

Thank you.

All right.

There are no further questions at this time.

I will now turn the conference back over to management for any closing remarks.

Yes, thank you.

Just briefly, again, I'd just like to thank everybody for being on our call this morning.

Clearly, this has been a tough year for us at AirTran and I guess most carriers.

And our results have clearly been disappointing.

But we have done a lot of hard work and we are beginning to see the benefits.

The drop in fuel prices going forward has the potential to reduce our costs several hundred million dollars.

So while we do face risks due to the uncertain economy, we believe we are well positioned to participate in the industry's turnaround in 2009.

So thank you for joining us this morning.

This does conclude today's conference call.

You may now disconnect.