西南航空 (LUV) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to today's AirTran Holdings first quarter earnings conference call.

Today's call is being recorded.

At this time, I would like to turn the call over to Mr.

Jason Bewley, Director of Corporate Finance.

Please go ahead, sir.

Good morning, everyone.

I would like to thank everyone for joining us today for a discussion of our first quarter results.

Joining me today is Bob Fornaro, Chairman, Chief Executive Officer and President, Arne Haak, Chief Financial Officer, Senior Vice President of Finance and Treasurer, Steve Rossum, Executive Vice President of Corporate Development, and Kevin Healy, Senior Vice President of Marketing and Planning.

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

These comments are not historical facts and, instead you should consider them as time sensitive forward-looking statements that are accurate only as of April 22, 2009.

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

We also will be discussing several non-GAAP financial measures that we believe are helpful in gaining an understanding of our operating performance and provide a period to period comparison, excluding special items.

A copy of today's press release, our SEC filings 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'll be discussing our first quarter results and our outlook for the remainder of 2009.

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

Now, I would like to turn the call over to Bob.

Good morning, everybody.

And thanks, Jason.

Thanks for joining us today.

I'm very pleased to report our first quarter results.

For the first quarter we earned a net income of $28.7 million, which represents an all-time first quarter record net income for the Company.

At a time when businesses are facing tremendous economic headwinds, reporting profits alone is an accomplishment.

Reporting all time quarterly records for load factor and profit are significant accomplishments that our Company and crew members should be proud of.

While our results were aided by 47% year-over-year decline in fuel costs, fuel savings alone are not enough to produce these type of earnings.

This is evident in the results of many other US airlines this quarter.

Our ability to post a profit today is rooted in our industry-leading unit cost position, and the many difficult decisions we made last year.

During 2008, we completely restructured our growth profile with a sale and deferral of 46 airplanes.

We completed a series of financial transactions totaling $375 million, revamped our fuel hedge portfolio, closed underperforming cities and made significant changes in how we allocate our capacity across our network.

We were one of the first airlines to react to the changing economic environment last year.

We made some of the most dramatic moves to our business, and as a result we are among the first airlines to show signs of recovery.

The operational team at AirTran continues to deliver outstanding service levels.

The kind of service that has earned us on consistent high rankings in the airline quality ratings.

This study ranks 19 airlines and five performance attributes.

On time performance, baggage delivery, completion factors and boardings and customer complaints.

For the second year in a row, we earned the highest quality ratings of -- in 2008 for any major airline.

All of these accomplishments have required significant efforts by all members of the AirTran team.

I'm also proud to say that as a result of our firm fleet plans for the year, we have issued recall notices to all of our pilots and flight attendants who were furloughed last year.

As a result of new city growth and natural attrition, we are also hiring new crew members in our operations, in flight and maintenance groups, primarily in Milwaukee, Baltimore, Orlando and Atlanta.

It is our combination of great product, hard-working crew members, and industry-leading costs that enable us to provide value to our customers at a time when they are being more selective in how they spend their money.

I am very proud of our great crew members and of the financial and strategic decisions we've made, but we've only completed the first steps in what I believe will be a long recovery for our Company in the industry.

The economic challenges our industry faces are some of the largest that I've seen in my career, which includes the first Gulf War and 9/11.

I believe that our industry faces a long and slow recovery from the current downturn.

However, with AirTran's industry-leading cost profile, and nimble can-do mindset, we are well suited to this type of environment.

I would now like to turn the call over to Arne Haak who will give you more detail on our financial performance.

Thanks, Bob.

And good morning, everyone.

As Bob just mentioned, we reported record net income for the first quarter of $28.7 million or earnings of $0.21 per diluted share.

Included in these results are unrealized gains on fuel derivative contracts and miscellaneous expenses not related to our current operations.

Excluding these items, which net $2.4 million, our earnings would be $0.20 per diluted share.

During the first quarter, we had $542 million in revenue, as our passenger unit revenues declined 7.6% year-over-year.

Primarily due to an 8.7% drop in passenger yields.

Our total unit revenues were down only 2.1% year-over-year, as our other revenues increased by $26 million due to a whole series of changes to how we priced our ancillary customer services.

Our capacity reduction of 7.2% year-over-year was due to operating four fewer aircraft in the first quarter, and slightly lower aircraft utilization this year.

This capacity reduction helped offset a 6% decline in our traffic as measured by revenue passenger miles.

As a result, we experienced a record first quarter load factor of 76.3%.

During the quarter, we saw the year-over-year change in our total unit revenues deteriorate, going from positive in January to negative in both February and March.

On the cost side of the equation, our total operating costs decreased by 21.8% as a result of our capacity reductions and the decline in fuel prices during the quarter.

Our productivity remained high as our full time equivalence per aircraft once again declined by over 2% to less than 58 FTE's per aircraft.

Our adjusted non-fuel unit costs were up 6.8%, which was better than the estimates we provided at the beginning of this quarter of about 8% to 9.5%, despite de-icing expenses that were over $3 million higher than our plan.

As of March 31 our unrestricted cash and investments balance was $389.6 million, up nearly $32 million over the balance a year ago.

As of March 31 we also had approximately $26 million on deposit as collateral for our outstanding derivative contracts.

Our non-aircraft CapEx for the quarter was $1.5 million.

During the first quarter of 2009, we also took several steps beyond our operating profits to continue to restore the financial health of AirTran.

At the beginning of the year, we had fuel hedges for approximately 9% of our consumption in 2009.

During the first quarter we have added incremental hedges, primarily in the form of purchase call options, with protection beginning at $60 a barrel in both 2009 and early 2010.

As of today, our combined hedge portfolio is now 32% in the second quarter, 49% in the third quarter, 54% in the fourth quarter, and nearly 22% in the first quarter of 2010.

In addition to the fuel hedges, we also added interest rate swaps during the first quarter to convert floating rate debt to fixed rate debt on 11 aircraft.

Because the fixed underlying LIBOR rates remain depressed, all-in interest rates for these aircraft are now locked in at no more than 4.5%.

Finally, we have bought back nearly $30 million of our 7% convertible notes at a significant discount to par.

The majority of these purchases will be settled in the second quarter.

These combined actions will reduce our overall debt and mute the potential impact of rising interest rates and significant increases in fuel prices.

Our fleet plan for this year remains to reduce our annual capacity by 3% to 4%.

We have four 737, 700 aircraft to be delivered this year from Boeing, two of which were delayed from December of 2008 as a result of the Boeing strike.

We currently have an agreement and deposits to sell two of these aircraft to one of our previous aircraft buyers.

And we continue to explore opportunities for two to four additional aircraft sales.

At this point, it is uncertain whether the market for narrow body aircraft will support the type of economic returns that we require for these transactions.

We do have committed financing for our remaining two aircraft that are to be delivered this year, and we have no new aircraft deliveries scheduled until the second quarter of 2011.

Our capacity outlook by quarter assumes no additional aircraft sales, and is down 7% in the second quarter, down 1% to 2% in the third quarter, and flat to up 2% in the fourth quarter.

Like many businesses today, we are seeing fewer customers, and those who are choosing to buy are paying less.

Through the use of sales and promotions, we've been able to increase our load factors, particularly during peak travel period.

We currently expect our load factors to be up in April year-over-year, but down year-over-year in both May and June.

We expect to see year-over-year declines in our average yields in all three months of the second quarter.

As a result, we expect to see the year-over-year increase in total unit revenue in April due to the shift of the Easter holiday from March last year to April this year.

We expect that the year-over-year change in our total RASM will likely be negative in May and in June.

Based on our outlook today, we are expecting our total revenues per ASM to be down 2% to 4% year-over-year for the second quarter.

Our non-fuel unit costs continue to be pressured in the second quarter as a result of the reduction in our fleet size and the elimination of our growth.

We have seen this trend since the fourth quarter of 2008, and we expect that the year-over-year growth and unit costs will likely be in the range of up 8.5% to 9.5% in the second quarter.

The increase in year-over-year non-fuel unit cost growth is due to increases in maintenance and aircraft costs.

When combined with our first quarter results, our non-fuel unit costs remain on track with our initial projections at the beginning of the year of up 8% to 9.5% during the first half of the year.

As we detailed back in January, the unit cost growth is in large part due to rising maintenance costs, where we'll see the number of 717 C-Checks go up nearly 80% year-over-year due to timing, and in the fourth quarter of 2009, the last contractual step increase on our 717 engines will go into effect.

Other areas of cost pressures are increased salary rates among crew members, pilot training expenses resulting from the changes to our fleet plan, increased airport charges, and a larger percentage of leased aircraft.

Despite recent fuel price increases, our outlook on fuel costs is still positive.

Based on an average spot price of $52 for crude oil and $10 for jet fuel refinery spreads in the second quarter, we expect our fuel cost per gallon to be between $1.75 and $1.80 all-in, inclusive of taxes, transportation and in-to- plane fees.

While the underlying economic backdrop may be gloomy, the tailwinds provided by declining fuel prices and a host of ancillary revenue initiatives are stronger than the revenue headwinds in the overall economy.

Based on the outlook assumptions we have just shared, we expect to report a solid profit in the second quarter of this year.

We are pleased with the results the AirTran team has turned in for the first quarter of 2009.

Our Company faced a very demanding year in 2008.

We made a lot of difficult decisions that helped reposition our airline, and now we're beginning to see the fruits of those efforts.

The airline industry is facing unprecedented economic challenges in 2009.

Our financial strategies of buying back debt, locking in low interest rates on our debt, and hedging our fuel exposure signals our strong confidence in our profit expectations for this year.

However, one good quarter does not mean we can become complacent.

Our strength of extremely low cost and high quality service are well suited for this current set of challenges.

Our Company was one of only two major airlines to be consistently profitable from 2002 to 2007, which was a recent period of uncertainty for our industry.

Our focus this year remains to return to our record of consistent profitability and to continue to strengthen our balance sheets, primarily through profitability and reduced investments in growth.

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

Stacy.

Thank you.

(Operator Instructions).

And we'll take our first question from William Green with Morgan Stanley.

Hi.

This is actually John filling in for Bill.

Just had a couple of quick questions here.

Arne, if I caught that correctly, I think you mentioned the total RASM would be up year-over-year in April, but I'm sort of surprised to see that total RASM guidance for the full quarter is still showing sort of a sequential deterioration.

Can you just talk about what you're seeing in May and June versus March, and if the core trend is deteriorating or stabilizing ,or your general view there?

I don't think we would say it's deteriorating.

I think the big difference between the two quarters is the improvements we saw in January in total RASM are bigger than the improvements than we're seeing in April in terms of total RASM.

Our advance bookings are roughly in line for the quarter year-over-year, but we are seeing yield pressures.

And I think the yield pressures we've seen will continue, and that's what is the underlying assumption for our RASM guidance.

And just on ancillary revenue, that's certainly been boosting the revenue trend pretty significantly, this quarter for sure.

Can you just talk about how you see ancillary revenues kind of developing throughout the year, if there are any kind of important times that we should be aware of when different fees came on, and what other ancillary revenue initiatives, if any, you are currently considering.

John, this is Kevin Healy.

We're not going to get into the specifics of the ancillary programs that we have, but we've made a number of changes over the last year or so, and tweaked the way that -- in some cases, how we present it as well.

So I think changes in the presentation and some potential new programs for competitive reasons we won't go into.

The one thing that is clear that we've learned is that consumers are accepting a new pay for services price structure.

And I think that -- you see that in the numbers and you expect to see that going forward.

Great.

Thanks a lot, guys.

And we'll take our next question from Duane Pfennigwerth with Raymond James.

Hi.

Good morning.

I wonder if you could comment on the take rate, specifically, on your bags, what you think the contribution was in the quarter and if any of that flows through the passenger revenue line?

Duane, this is Bob.

Just again briefly, in terms of really breaking out the individual components of other revenues, for competitive reasons, we're a pretty small company, and quite frankly, we don't want our competition to know everything in our numbers, but clearly, in terms of baggage, obviously I mean -- it certainly contributed to our numbers.

And we've seen at the same time some customers take fewer bags.

As we expected, and that was anticipated.

But, a number of our ancillary programs are in the passenger revenue lines such as upgrades which is a very large program for us, it's really one -- its something we've been doing for a very, very long time and probably our most significant ancillary program.

In the other line are the baggage fees, the reservation fees, the pet fees and the like.

Kevin.

Any thoughts?

I think that pretty much details where we're at.

Okay.

That's great.

And then Arne, could you confirm for me that you had no gains from the debt repurchase in the March quarter?

They were small.

We broke it out in the table at the end of the press release.

I think it's about $300,000.

And that's when we exclude the net to the $0.20, that's included in the adjustment.

Okay, great.

And then regarding your tax rate, given your profitability improvement, when do you think you might have to show a tax rate on the P&L, even if your cash tax rate remains nominal here?

I guess the very short answer is not in the near future.

For us to start recording a tax in the P&L, we have to have earned back the amount of money we lost last year, and that kind of goes to our first step in a long recovery, so we have a ways to go before paying taxes.

I think Jim may have a question.

Good morning.

I want to ask Bob, Bob, you've been in the industry for awhile, and I want to ask you, it looks like currently having less capacity is a good idea, but just looking down the road, what conditions would need to exist to have AirTran actually add capacity, and when do you think the industry -- what conditions need to exist for the industry to add back some capacity?

Well, as I look at it, and first of all, we expect to have a good year, and we expect to be profitable in every quarter.

But having said that, I would not be considering any capacity this year, because again, we have our weak revenue environment.

And we are waiting for it to turn.

Our position is, we want to rebuild the balance sheet.

And when we start growing and taking airplanes, that requires deposits and the like.

And so our priority is to strengthen the balance sheet.

And again, a key goal for us is to make sure we never get put into the position that we were in in 2008 and that's really what motivates us.

I don't see -- I don't think you're going to see much reason to see growth in 2010.

And I think if you're going to see any growth in the industry, it's at least 18 months to 2 years off.

That would be my guess.

Because again it's -- revenue environment is weak.

And so this is a time when your focus is on reallocating your assets and manage your expenses.

And quite frankly, it's a pretty good environment for us.

If we have to -- if you see a need to school up for growth, I would say that it's secondary right now.

We will have 3% to 4% growth in 2011.

And really from where we stand, I don't see any reason to increase that.

Bob, one other thing.

Of course Atlanta would appear to be your sweet spot in your root network, but you've built up BWI and now you're building up Milwaukee and it looks like you're going to build up Orlando.

What's the relative profitability of those non-Atlanta concentrations of AirTran flights?

Orlando and Baltimore have been around much longer.

And the relative profitability is stronger in those routes.

Orlando particularly, it's more leisure oriented, and the leisure markets have not been hit as hard.

In our opinion, at least in our world.

And Atlanta is much more business oriented than us, and that's where we're seeing bigger yield degredations.

All of those entities are profitable and all will be strongly profitable this year.

But we're looking at, again, trying to develop a more balanced network.

There is a lot of changes going on in the industry, and we have the ability to move fast and reallocate.

For us, whether we operate 250 flights in Atlanta or 220, it's still a large operation.

And quite frankly, focusing on the exact number of flights is not really that important, and it's really of secondary importance.

So I think there are some really good opportunities out there to be opportunistic.

We just announced a few new cities to Orlando, because they're all going to be 717 flights.

717 is ideally suited to develop a route like Allentown or Knoxville, and so again, responding to those opportunities, and quite frankly, we see probably our biggest opportunity in Milwaukee.

We had a very, very strong winter.

We're going to double our capacity in the marketplace this summer.

I think the timing is right for us to finally gain a foothold in the Midwest.

Okay.

Thanks.

Thank you.

And we'll take our next question from Jamie Baker with JP Morgan.

Hey, good morning, gentlemen.

Good morning Jamie.

Another question on the ancillary topic.

Just trying to clarify, so does everything other than base fare show up in the other category?

For example, if I buy a ticket on your website but pay for the window seat at the time of the booking, is it segregated out or does that flow-through to the passenger revenue line?

Jamie, everything but the seat -- the seat fees do go in passenger revenue, and the business class upgrades go into passenger revenue.

Those are the two big ones that go into passenger.

Everything else is in other.

Okay.

And you know, with Jet Blue having decided to now participate in the ATA monthly yield report, any potential change of heart at AirTran?

I think not likely.

We've considered it.

I think the concern is this industry has a habit of being very self-destructive by sharing too much information with your competition, and I think that's the thing that we are focused on.

So we may in the future.

Right now we decided not to.

Okay.

That does it for me.

Good quarter.

We'll go next to Kevin Crissey with UBS.

Hi, guys.

Good morning.

Good good morning.

Can we talk about the way you view Allegiant.

You mentioned a couple of the markets that -- I think you're now flying up against Allegiant.

How do you view them as a competitor and so forth?

It's Kevin.

What we're looking at really is our position in Orlando.

And it's really not a new strategy so much as an extension of something we've been doing for quite sometime.

We are the lowest cost producer with a very good product.

This summer we'll be flying to 36 destinations from Orlando.

More than 60 flights a day.

So Orlando has really been something we've been building for a number of years.

And we're the second largest carrier here.

We feel pretty good about what we can do in our position working with other travel companies in this region.

So I take it from that, that it's unrelated to AirTran that you happen to go to those markets?

Is that what I'm getting from Allegiant?

It's unrelated to Allegiant, yes.

This is an AirTran strategy that we're continuing to expand upon.

We compete with a number of airlines.

We compete very successfully with Southwest in a number of cities, and Delta in others.

So I feel we're in a position with our cost structure, we can really expand whatever market we choose to go into.

Just to go a step further.

For almost 4 or 5 years we added 20 planes a year.

And right now, again, over the next 18 months, again, we do not have a whole series of airlines to establish positions, we need a bigger solution when we were getting 20 planes a year.

We're reallocating and reoptimizing our system right now and, again, they give us an opportunity to really focus on where our strengths are.

We can be profitable in a city with one flight a day.

And we have a great developmental airplane.

And one thing Kevin did leave out, is we've really enhanced our position in the business community as well.

And so again, our strategy in Orlando is not only a leisure strategy, we've become a much stronger business carrier out of here as well.

And the focus is really Orlando.

Our focus is on, again, our breadth in the city.

And again, I think it's more of a coincidence because, yes, we got 36 cities, some of them I understand Allegiant is flying to.

But we have Atlantic City, we added St.

Louis a couple of years ago, and Kansas City, so we've been doing this over a long period of time.

Okay.

And what percentage of Orlando traffic then is kind of the leisure Disney versus other?

I think we're always guessing on these numbers but 5 or 6 years ago, you would probably say three-quarters or 80% of the business was in bound in leisure, and that's changed.

Our percentage now of originating business has got to be at least a third or more, which is ultimately improving our yields in the city and ultimately making it more profitable.

And again, because now we have breadth of service.

As I guess for us, being headquartered here, we stop treating Orlando as a destination and began to focus on it as an origination city and it has helped us quite a bit.

Terrific.

Thank you very much.

Great.

And we go next to Gary Chase with Barclays Capital.

Good morning, guys.

I wonder -- and I apologize, I'm juggling between two calls here at the same time which is interesting, but I understand in an answer to another question you had said regarding future growth, that you really weren't looking at much until we hit 2011.

And I wondered if you could flesh that out a little bit.

Obviously, the results -- I mean, if the first quarter is not your best and based on what you've reported here, it looks like you're headed for a good year.

Obviously, I understand there is a lot of uncertainty out there, but normally you think you might want to be back with a little bit of growth, and I'm curious for the thought process around that.

And wondering if maybe the lesson learned was a lot of the return you're getting and a lot of the reason the earnings are up is a function of the fact that the growth was just so dilutive that you're really seeing the reversal of that process, because obviously the industry trend is different than what you're experiencing?

Gary, that's a very good question.

After the five consecutive years of 20% growth, we entered 2008 at double digit, around 10% to 12%.

And that proved to be way too much, because the domestic economy began to weaken up first and, again, oil was going up daily.

We got hit harder than any carrier.

Carriers who had diversified networks in 2008 had the benefit for six more months of strong traffic and revenues.

We restructured, again, we went from a 12% growth rate in August to a negative 8% in September.

So as we think about growth, again, we had a strong fourth quarter, $55 million operating profit, which largely went overlooked, but we're not surprised.

There was actually two strong quarters in a row.

But it's still too early to talk about growing.

Right now we have to think about deposits.

Over the past 4 or 5 years airlines have been able to finance PDPs, and now that's more difficult.

What we would pay on future interest rates, Arne mentioned we financed previously owned airplanes 4.5% to 5%.

What will the finance rates be on the airplanes in 2011 and 2012.

Recent indications, you could be at 10%.

And so you've got think about the cost of ownership, and we're really focused on that.

We're very, very focused on, again, rebuilding our balance sheet and managing the in lows and out flows.

Again, our key focus is, we want to diversify, but the balance sheet is going to be strengthened.

Maybe 3 or 4 months from now, maybe we'll feel a little bit differently, if the revenue environment improves.

But right now I think AirTran will do very well over the next two years if there is no revenue improvement.

Yes.

We're in a pretty good position right now.

It's a lot like the -- kind of the post 9/11 period where a number of carriers struggled and some other ones went forward.

That created a lot of opportunities for us.

This right now is a cost-based environment.

Ideally suited for us.

Right now.

So I think we have time to evaluate growth in the future.

It may be possible that cheap airplanes come on the market via leasing companies, but I think it's too early to begin to focus on, again, growth, I would say in 2010.

But it sounds like, Bob, it goes beyond that.

If let's just say magically cheap airplanes were to become available or you could somehow solve the financing issues, it sounds like the answer to this goes deeper than that?

Is that fair or do you think it's the right thing for AirTran to not be in growth mode?

I think it's the right thing for AirTran, certainly in 2009.

Without a doubt.

There's been a lot of conversation about whether the industry is at a bottom or not.

I don't think anybody knows.

What we do like is a weak economy means weak commodity prices.

And again, that's a very good position for us to be in.

And again, we always have an opportunity to again evaluate opportunities.

And I think, again, if numbers continue as we expect, we'll have opportunities to debate in the growth.

But again, right now, our goal is to earn our way out of the losses that we had in 2008.

Okay.

Thanks, guys.

Thanks, Gary.

We'll go next to Helane Becker with Jesup and Lamont.

Thank you very much, operator.

Hi guys.

Good morning Helane.

So Bob just on the comments that you're making with respect to business, I think that over the last couple of weeks we've seen some other airlines try to actually raise fares, and I'm just wondering what you think that they're seeing that would cause them to want to do that if you think -- if you're right in thinking the revenue environment really hasn't shown signs of improvement?

Well you know I -- if they are reading some of the comments by 4 or 5 carriers, quite frankly, I think the messages are quite mixed.

But yet at the same time, we do not have to raise fares.

Right now the fares -- we like to see a little bit fewer sales, but right now the underlying fare structure is very, very strong, and it's going to produce very good results.

So I do not necessarily believe that the carriers are seeing a lot of strength.

Quite frankly, I think it's really kind of a game of issues this year.

It is not really an environment where you want to go out and play a different game.

This environment is ideally suited for AirTran.

And if a weak revenue environment, weak commodity environment, if this continues for quite awhile, we're in very, very strong position.

And again I -- right now, I can tell you our focus on fare increases, that's a very low priority for us.

Got you.

And then just in term of markets.

There is this whole thing with Cuba kind of coming up and it looks like at some point maybe in this administration there may be free travel to that market.

That's not the right word.

But is that a market you guys would consider.

Do you have aircraft that could do that, or do you have to have modifications to your aircraft?

Helane, this is Kevin.

We have in the past operated charters into Havana from Miami with certified tour operators, and they're having discussions going forward.

And certainly are looking at what opportunities may be there should the rules change.

Got you.

And it would be my guess that it's probably 4 or 5 airlines that would like to enter the Havana market, and perhaps other markets down there when the time comes.

I don't think there will be any lack of service initiatives, because I think there will be a lot of interest.

And then just one last question.

I think you said or maybe Arne said you were recalling some furloughed employees, and so there are two unrelated questions as we look ahead to the model.

On the one hand, you're reducing capacity, so we would think that salaries, wages and benefits would come down, but on the other hand you're recalling some people.

So how should we think about that?

And then another mundane modeling question.

With the aircraft profile, how should we think about the maintenance and that.

Because typically when you're taking new aircraft you get this huge -- low unit per cost per seat mile maintenance benefit that may start to dissipate with the fleet profile changing.

So maybe Arne could talk to that.

I'll let Arne answer the maintenance question.

Let me just mention to you the issue of the recalls.

When we announced our restructuring plan, at that time, oil was still about $120 a barrel.

And -- or maybe even slightly higher.

And our expectation was that our capacity would be down 7% to 8% in 2009.

And I think now we're looking at down 3% to 4%.

We were fortunate enough to sell 11 airplanes at the time we thought we could sell more.

We got out early and were able to do a lot of favorable things, but the airplane, the market weakened very, very quickly as we entered the fall.

So again, at the time we made our decisions, we made our decisions under the assumption that we could move more airplanes and the oil would be above $100.

So again, we're flying more capacity in 2009 than we expected late last summer.

So in terms of ,again, the recall, the pilots, we need all of the pilots and certainly the flight attendants, because of that 3 to 4 point capacity change.

Okay.

And also some natural turnover as well.

Got you.

Helane, this is Arne.

In regards to the maintenance, we are seeing upward pressure in the maintenance cost line.

I think you've seen it here in the first quarter.

And that we've kind of highlighted that in our guidance.

Most of the aircraft and most of the components on the aircraft are on power by the hour agreements, so we probably have less of those ultra, ultra low initial operating costs because we are in power by the hour agreement.

And so they will be going up over time ,and that is the cost pressure we're going to have to work to offset.

The one thing I would highlight is that in the fourth quarter we have a step increase across our whole 717 fleet that will go up, but it's our last big step increase that we have on that fleet.

Got you.

Okay.

Thank you.

Great.

And our next question comes from Bob Mcadoo with Avondale Partners.

Hi, guys.

You talked about restructuring, how you did the schedule in Atlanta to kind of improve that.

Could you kind of go through conceptually what you've done to Atlanta.

We know what you're growing in Milwaukee and things like that, but what is it that you did to Atlanta that will help you there.

I'm going to start, Kevin help me out.

We did close a few routes last year.

We dropped Atlanta, Stewart and Daytona Beach.

Routes that I say when you're growing 20% a year, may look okay, but in an environment that turns negative, they are really the first to go.

So we focused on that.

We evaluated our frequency levels, and most of our routes are high frequency, but this summer we're going to have fewer frequencies to the West Coast.

We do not expect -- I think longer whole routes will suffer more.

I think international routes will suffer.

I think longer haul routes will suffer, and for us, mid-haul roots are probably, again, our biggest focus.

There will be less capacity going to California, and see how those places from AirTran this year.

And I think, also, we've also got to change our philosophy.

Over many, many years, every city that we went into, we've always started with Atlanta and then began to build around it.

And we said to ourselves, we do not have to do that, we can be flexible.

They can go into big cities, small cities, Atlanta can be part of the mix initially, or Atlanta could be an option 3 or 4 years down the road.

So we have looked at the business a little bit differently.

And again, I think we're a lot less focused on growth by definition.

And I think you need to make smarter decisions about how you act and manage your assets, and that's we're trying to do.

Kevin?

And then, Bob, what I'll add is we'll take Atlanta down to about 60% of the network.

So it's still the key piece, but the approach is really looking at the network, not in building what is the strongest in terms of adding routes to the network, whether -- Portland, Maine is a good example, where we went into Portland from Baltimore because it made more sense in strength in the network, but then this summer we'll fly Portland to Atlanta for the seasonal period.

So Atlanta is still very important, but it's structuring it in a way that best fits the overall network and then building some diversification around it as well.

So Portland, Maine to Atlanta is going to be more of a seasonal kind of operation?

Yes.

Okay.

Thank you.

That's all I really had.

Thank you, Bob.

And we get next to Mike Linenberg with Merrill Lynch.

Okay, thanks.

Bob, you were talking about the revenue environment, and you indicated that the underlying fare structure is actually very strong.

And it may have been in the context that it's strong relative to where your costs are and also where your fuel are, but that sort of brings up another point when you think of where industry RASM was for the March quarter, it was domestically down about 10% and your yields are down 8% or 9%, that's versus 2008 and off or a pretty high fare structure.

If we look at where fares are now, maybe they're not that far away from where fares were in 2005, 2006 and maybe even early 2007, but you had oil prices at higher levels.

I mean, is that the way we should rate it?

Because the absolute levels are still pretty high by historical standards.

Is that what you were trying to state there?

Yes.

Our costs have been historically been cost based, and if you go even deeper, they're probably a little higher in the Atlanta marketplace than they are throughout the network.

And then it's worth going back and looking at that and say whether those are the right prices for this kind of environment that we have.

Again, it's -- we don't want to be in a situation where high fares are discouraging.

A walkup is -- we know companies are cutting back.

They're taking fewer trips, they're combining trips, and we do not want to have the fair structure that is a dis-incentive for, again, quick trips.

And again, I don't want to make it easier for travel managers to manage this expense.

And the higher the walk up fares go, the easier it is for someone to say, yes, you're not going, it's too expensive.

So I think we've done a lot of experimenting over the years, and we have historically done best with a moderate pricing environment, with some sales layered in, rather than a high-price environment with deeper sales.

I think, at the same time though, Mike, I've seen -- we've seen a lot of transcontinental fares at $99, which quite frankly, we kind of have no interest in.

And there have been some real lowball fares in some of those markets.

And I think those kind of markets are going to be very, very competitive this summer.

But we're still searching for the right balance.

And again, I think we can live very well in an environment like we're seeing today.

Okay.

And then just to follow-up.

You did mention about corporations becoming more price sensitive, and while we know premium travel is definitely taking a big hit sort of on a global basis.

We've heard it from the major carriers, and obviously, within that category is business travel.

It has been in the past, as I recall, you have usually actually been able to use times like this to gain share on the business side.

At first you're coming in with a pretty low business fare relative to what other carriers follow, the value proposition becomes that much more compelling.

Are you seeing that?

Have you looked at the degradation of leisure versus business is the type of degradation you're seeing on the business side.

Maybe not all that great because you're picking up passengers from other carriers?

Is there any color you can give on that front that confirms or --

Yes.

I think you're right there.

There are a couple of things going on.

As you said before, when you get into these sort of environments, we tend to do a little bit better, and we carry people that we may not have in the past.

The things that have changed really is the network itself has improved, but we've also made a lot of efforts and a lot of strides in distribution and improving our ability to sell the business travelers, and fulfill some of the value added aspects of our program.

Being able to give seat assignments and upgrades and things like that in a more automated position in the past.

I think we're in a better position now than in the past a couple of years ago.

So I would agree, that I think as the lowest cost producer in a moderate to even low fare environment, we're in a much better shape to take advantage of the marketplace with our product and the ancillary revenues that come along with higher volume.

And that's one last thing.

We're having -- for the last 6 months, the upgrade levels and the business class levels are the best they've ever been.

And again, it's really helped us dramatically.

I think the legacy carriers have tremendous frequent flier programs but it's getting harder and harder for a number of people to use those.

And the value of our upgrade program is especially strong right now.

And I think, again, it's been a tough message to get out.

We are the only airline in the country that has business class on every flight.

And most of the seats -- more than half of the seats in our competition are in RJs.

And I do not think there is any comparison in the products.

So it's -- we think we're seeing some shift .

It's always hard to tell at this point.

I think when it's over, that we have to look back and get a much better understanding of what really happened and what's really going on.

But certainly we like what is going on with the upgrade

And if I could squeeze in one last one, just capacity, you gave it for the year.

I may have missed the June quarter.

Arne, maybe you have that just by quarter what we should anticipate for the capacity change, the year-over-year change, quarter-to-quarter to quarter 3 and 4..

Down 7% in the second quarter, down 1% to 2% in the third and flat to up 2% in the fourth.

Full year down 3% to 4%.

And there is a table at the back of the press release that has it as well.

Oh, perfect.

I didn't see that.

Well, great job this quarter.

Thanks.

And we'll go next to Michael Derchin with Ftn Equity Capital.

Hi, Guys.

Did you indicate how the late Easter affected you if the first quarter.

I assume it was a substantial negative, given your Florida exposure.

I think compared to most of the larger carriers, the Easter shift probably impacts us more.

It's got to be a four or five point swing between the months.

So obviously it was -- March was clearly the weakest month of the quarter, and April will be the best month of the second quarter.

Again, nonetheless, what was unique about the Easter period this year is we had very good loads, but you never really quite got the premiums on the weekends that you normally get.

And I think that's the sign of a fairly strong economy, is a consumer will pay up on Fridays and Sundays on key weekends.

So that is really baked in our numbers.

Again, a pretty good April, getting back to again your weaker May figures.

And you have given out the percentage of your traffic on walk-up fares versus advanced booking?

We have.

And Mike, historically done that, and I think in terms -- the most we ever talked about in terms of mix, we would think that our mix is probably about 40% to 45% business, and the balance leisure.

And recognizing that's probably a higher leisure mix than most airlines, but we also have a higher portion of our capacity in Florida than most other carriers.

And just one more more of a big picture question, really related to consolidation and mergers.

Traditionally in this kind of environment, you do get a shake out on consolidation.

What do you think will happen over the next few years in that regard?

You know, I don't want to be guessing.

I think you probably remember that we tried to play a role in consolidation two years ago by purchasing Midwest.

I think as we step back and look away, at the price that deal ultimately went for, I think we're glad we did not win.

And now we have an opportunity to grow organically.

In terms of consolidation going forward, I think you have to look at -- your Delta and Northwest have done a pretty good job in terms of bringing people together.

And the next merger, that integration will get more difficult.

And so I think the next merger, if it happens, it's going to have more difficulty.

I don't think there will be a third.

Because I think the labor forces will play too big of a role in the ultimate outcomes.

Do you think you guys will participate in one?

We're certainly not looking at buying anybody again.

I was thinking the other way.

That you look like a very attractive property right at the time -- right currently.

Well, I mean, these things ultimately come and go.

And obviously, we cannot control what anybody else thinks.

A year ago at this time we were on the down slope.

Right.

Fortunately we were able to turn the business around, and ultimately that's really where our focus is going to be now.

Sure.

Sure.

Okay, well guys, fabulous quarter, thanks a lot.

Appreciate it.

And we go next to Kim Zotter with Imperial Capital.

Good morning.

Just a real quick modeling question for you, and I may have missed this earlier.

I heard you brought back $30 million in your converts this quarter, but what was your debt balance at the end of the quarter, and how much were principal payments?

In the quarter, Kim?

Yes.

Give us a second.

We'll pull it right up here.

The debt balance you'll get when we do our 10-Q should be early next week or maybe even late this week.

In terms of in the quarter, we had debt principal payments in the first quarter of just under $20 million, and about $14 million in interest payments in the quarter, totaling $33.7 million.

Okay.

Thank you.

On the 30 million too, the bulk of that was -- while it happened late in the quarter and early in this quarter, the bulk of it is going to have to -- you'll see that when the Q comes out, the bulk of it will settle in the second quarter.

Okay.

Okay.

And actually, just one additional question.

Just wanted to see if you could comment on how Delta was behaving in your market.

I know that they announced a 10% 12% down mainline domestic capacity for the year.

Are you seeing any reductions in your overlapping routes?

No.

Regarding competitive capacity, I think it's been stable.

Certainly, Delta will not reduce capacity in head to head markets with AirTran by much, if at all.

Most of their cuts were in -- again, in other markets.

So we've lived most of the year with a high level of capacity in our markets and -- we've competed aggressively for the last decade, and I expect it will continue.

But at the same time, the AirTran play book is different.

We're in big cities, we're in small cities, and we're basically the only low cost carrier to establish a low cost hub.

And we feel pretty good about it, because our operating metrics are great.

So we think, again, we have a very flexible fleet and a flexible work force and I think having the low cost right now is probably a strong point.

Okay.

Thank you guys.

Good quarter.

(Operator Instructions).

We have a follow-up question from William Green with Morgan Stanley.

Hey, it's Bill.

I had one quick followup on the Delta commentary.

Since the merger, have you noticed a change in the way they compete with you, or is it the same game plan they've applied in the past.

Bill, this is Kevin, I really can't say what their game plan is, but it looks a lot like it did before.

So nothing has really changed.

So when you think about how you're going to grow going forward, when you think about the ancillary opportunity and fare opportunities, I would assume that it's safe to say that a lot of the way you've had to operate in the past, where you have to be at least somewhat cognizant or the actions or reactions from Delta, that still goes, including for ancillaries, is that fair?

We tend to bring out the best in our competitors no matter who it is and we stick to what we do in our business model based on being the lowest cost producer with the highest quality product.

Okay.

All right.

Well thanks for the color.

Thank you.

And we have another followup question from Duane Pfennigwerth with Raymond James.

Hi.

Thanks.

I was actually going to ask about the debt.

And I understand we have to wait for the queue, there.

But Arne, can you tell us if your $90 million line of credit was drawn at the end of the quarter.

It was.

Okay.

Thanks.

And this concludes our question and answer session today.

At this time, I would like to turn the conference back over to Mr.

Bob Fornaro for any additional or closing comments.

Great.

And thank you -- good morning again.

And thank you everyone for attending the call.

I think you can tell by our comments, we feel very good about the direction of our business, which is in stark contrast to the direction we were heading a year ago.

And again, a year ago we were growing at a double digit rate as the domestic marketplace was weakening and fuel was rising daily.

But we were one of the first airlines to restructure, and we did so decisively.

We deferred or sold 46 aircraft while the market was still strong.

And again, virtually overnight in the summer we went from an 8% growth rate to a minus 8% again, right around Labor Day.

And we unwound hedges when it was clear they moved against us.

Our business has turned quickly.

Underlying our fourth quarter performance last year was a $55 million operating profit, which was our best fourth quarter operating profit ever, and this quarter we had a year-over-year operating improvement of $63 million.

And probably most important, we've emerged as the industry's low-cost leader which is a goal we set out to achieve more than a decade ago.

We certainly have no illusions about the difficulties our economy faces, and we realize it will take time to rebuild our balance sheet, but we think we're in a environment well suited to our strengths and we're nimble and we're going to be opportunistic.

Our combination of low cost and high quality allows us to operate in a traditional hub environment in point-to-point markets in big and small cities.

And as we said before in the call, we expect to be profitable in every quarter this year.

Thank you for your time this morning.

This does conclude today's conference.

We thank you for your participation.

Thank you.