西南航空 (LUV) 2009 Q2 法說會逐字稿

Good day, and welcome to the AirTran Holdings second quarter earnings conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, would I like to turn the conference over to Mr.

Jason Bewley.

Please go ahead, sir.

Good morning, everyone.

I'd like to thank you for joining us for a discussion of our second quarter results.

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

I'd like to remind you 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 are accurate only as of July 22, 2009.

If you'd 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 annual report, Form 10-K, Forms 10-Q, and other SEC filings of the Company.

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

A copy of today's press release, recent SEC filings, and a reconciliation of these non-GAAP financial measures are available in the investor relations section of the Company's web site at airtran.com.

Today we'll be discussing our second 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'd like to turn the call over to Bob.

Thanks, Jason.

Good morning, everyone.

Thank you for joining us today.

I'm pleased to report the continued improvement in AirTran's quarterly financial results.

For the second quarter of 2009, we earned net income of $78.4 million.

Our results include certain one-time items as well as substantial unrealized gains on the value of our future hedge portfolio.

Excluding these items, we reported a net income of $46.6 million or $0.34 a share.

These results represent a substantial improvement over last year's second quarter results and complement our record earnings in the first quarter of 2009.

This industry continues to have its challenges and the second quarter of 2009 was no exception.

We saw oil prices rise from less than $50 per barrel to over $70 and all North American airlines felt the effects of the swine flu virus on air travel.

Despite these challenges, we posted record operating profits of $113.7 million (Sic-see press release) for the first six months of the year.

I'm particularly proud of our crew members who continue to work as a team to help deliver these results.

We achieved a record load factor for the second quarter and posted solid operating metrics.

We are especially pleased with our industry-leading baggage [business], which improved by nearly 50% from the best in the industry level last year.

During the quarter, we also enhanced our product offering by adding high-speed Internet to our all Boeing fleet.

Our maintenance and engineering team and partners at Gogo In Flight Internet rose to the occasion and we are now the first major airline to offer high-speed Wi-Fi service on every flight and on every air fare in our fleet.

Our results were aided by a 54% year-over-year decline in the price of fuel.

However, fuel savings alone are not enough to produce these types of earnings.

We continue to benefit from the many difficult decisions we made last year, impacting our growth profile, capital structure, network and fuel hedges.

We were one of the first airlines to react to the changing economic environment last year when we implemented dramatic changes to our business.

As a result, we are among the first airlines to show signs of recovery.

A dramatic decline in the industry's revenue environment is one of the greatest economic challenges I have witnessed in my 30 years in this business.

I believe our industry likely faces a slow recovery from the current downturn.

However, with our industry-leading cost structure, expanding network, product offering and hard working crew members, AirTran is outperforming most of its competitors.

Despite the difficult economy, our industry faces, AirTran is well positioned to deal effectively with this type of environment.

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

Thanks, Bob.

Good morning, everyone.

As Bob just mentioned, we reported net income of $78.4 million for the second quarter or $0.56 per diluted share.

Included in these results are unrealized gains on fuel derivative contracts, miscellaneous expenses related to aircraft disposal and a gain on the open market repurchase of a portion of our outstanding 7% convertible notes, which are not related to our current operations.

Excluding these items and the related tax expense, which nets $31.8 million, our earnings would be $46.6 million or $0.34 per diluted share.

Our capacity decline of 7.6% year-over-year was attributable to having seven fewer aircraft in the second quarter of 2009 versus 2008 and lower aircraft utilization this year.

This reduction was slightly higher than our initial guidance of down 7% as we did not take delivery of two aircraft late in the second quarter.

Our traffic as measured by revenue passenger miles declined 6%.

As a result, we experienced a record second quarter load factor of 80.7%.

Second quarter revenues came in at $603.7 million, which is down 12.9% year-over-year.

Passenger unit revenues declined 11.8% to $0.09 as a result of a 13.2% decline in yields.

Other revenues increased $31.9 million or nearly 92%.

The increase in our other revenue somewhat offsets the decrease in passenger unit revenues resulting in a 5.9% decrease in total unit revenues.

I want to personally thank our customer service crew members who have done a tremendous job executing our pricing initiatives.

In April, when we reported our initial guidance for unit revenues for the second quarter of 2009, we indicated that it was our then current expectation that the year-over-year change in total unit revenues would deteriorate throughout the quarter going from positive in April to negative in both May and June.

Our prior expectations were directionally correct but the magnitude of the declines in May and June were much larger than we anticipated due to continued economic weakness and the impact of the H1N1 flu virus on travel across our entire network.

On the cost side of the equation, our total operating costs decreased by 27.3%, principally as a result of our capacity reductions and the decline in fuel prices during the quarter.

Our crew member productivity remained high as our full time equivalent per aircraft declined by approximately 1% to 58 FTEs per aircraft year-to-date.

Our adjusted non-fuel unit costs were up 9.8%, which was slightly higher than the up 8.5% to 9.5% estimates we provided at the beginning of this quarter.

The higher unit costs are due primarily to lower capacity levels resulting from the disposal of two aircraft in the quarter.

Our maintenance costs per ASM were up 23.9% year-over-year as a result of an increase in the number of air frame checks and rate increases in our power by the hour maintenance agreement.

Marketing costs per ASM were up 13.3% as a result of increased advertising and promotions to stimulate demand particularly related to sale fares, and also the launch of our fleet-wide high speed Wi-Fi service on every aircraft.

Airport expenses also remain a cost challenge.

As unit costs for landing fees and other rents were up 21.2% for ASM in the quarter, due to increased airport rates which result from lower airport revenues.

And in many cases, airport budgets that continue to grow despite contraction in passenger and cargo numbers industry wide.

As of June 30, our unrestricted cash and investment balance was $389.4 million up nearly $49 million over the 2008 year end balance.

During the second quarter of 2009, we repurchased in the open market just under $28 million of our 7% convertible notes which we discussed during our April 2009 investor conference call.

Our nonaircraft Cap Ex for the quarter was $3.6 million.

During the second quarter this year, we have continued to add fuel hedges, largely in the form of purchase call options with protection beginning at $60 per barrel in both 2009 and 2010.

Our combined hedge portfolio now stands at 49% in the third quarter, 55% in the fourth quarter, and nearly 30% in the first quarter of 2010.

For full-year 2010, we are now approximately 20% hedged.

We've also hedged approximately 40% of our refinery margins for jet fuel in the third and fourth quarter of this year.

These jet crack hedges are most heavily weighted in the hurricane prone months of September and October with over 70% of our refinery exposure protected during each of these months.

As a result of our cash balance and improved financial results, we have earned reductions to the amounts eligible for holdback by our two largest credit card processors.

Based on our current outlook, we do not believe we will have any cash held back by our two largest processors for the remainder of the year.

Our fleet plan for the year continues to reflect a reduction in annual capacity of 2% to 4%.

Our fleet size is expected to remain in the 136 aircrafts.

While we have two remaining Boeing 737 aircraft to be delivered this year, we currently have a contract secured by deposits and other collateral to sell these two aircraft in the third quarter to one of our previous aircraft buyers.

We have no other new aircraft deliveries scheduled until 2011.

Our capacity outlook by quarter assumes no additional aircraft sales and is down 1% to 2% in the third quarter and up 4% to 6% in the fourth quarter.

Our fourth quarter increase is due to higher utilization and our Milwaukee expansion.

The revenue environment has been and remains weak.

The weakness in unit revenues continued throughout the second quarter, and our advanced bookings were particularly soft in May.

In late June, we began to see signs of stabilization and a modest improvement in the rate of advanced bookings.

While advanced bookings are improving over the levels of May and June, we currently expect our load factors and yields to be down year-over-year in each month of the third quarter as a result of continued economic weakness.

September is by far the weakest of the month in our outlook and the most difficult to forecast.

Putting this all together, we expect that the year-over-year change in our total unit revenues per ASM to be down 9% to 10% which is a slight improvement over our May and June results.

Our nonfuel unit costs continue to be pressured in the third quarter, the result of the reduction in our fleet size and the suspension of our growth.

We have seen this trend since the fourth quarter of 2008 and we expect that the year-over-year growth in non-fuel unit cost will begin to slow as we start to round trip our capacity reductions.

Our nonfuel unit costs will likely be in the range of up 4% to 5% in the third quarter.

As we detailed in January, the unit cost growth is in large part due to rising maintenance cost, where we'll see the number of Boeing 717 seat checks go up nearly 80% year-over-year due to timing and in the fourth quarter 2009, the last contractual step increase on our Rolls Royce 717 engine maintenance agreements will go into effect.

Other areas of cost pressures are increased compensation and benefit costs, training expenses resulting from 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 remains positive.

Based on an average spot price of $63 for crude oil and $8 for jet fuel refinery spreads in the third quarter, we expect our economic fuel costs per gallon to be between $1.95 and $2 a gallon all in, inclusive of taxes, transportation, hedging and into plane fees.

While there is uncertainty in the revenue and fuel price environment, we currently expect to report a small economic profit in the third quarter of this year based on the outlook assumptions we just shared.

In closing, we are very proud of the results the AirTran team has turned in for the second quarter of 2009.

While our strengths of extremely low cost and high quality service are well suited for this current set of economic challenges, we cannot become complacent.

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

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

Thank you.

Our question and answer session is conducted electronically.

(Operator Instructions).

We'll go first to Mike Linenberg with Merrill Lynch.

Please go ahead, sir.

Hey, guys.

Good morning, everyone.

Good morning.

Couple questions.

Just first, back to on the holdback, Arne, you had talked about that.

The cash position, because I didn't hear the number, or I just caught the tail end of it, what the number was at the end of June, and does that actually -- the fact that these holdbacks are going away, does that at all show up in the June quarter, subsequent to the June quarter, how much cash does that free up?

If you could just give us some additional color on that that would be great.

Sure.

The cash balance at the end of the quarter was $389.4 million.

Okay.

During the quarter, we were returned -- $17 million was returned to us by one processor and an additional $10 million in cash will be returned here -- had already been returned here in July.

So you'll see that reduction in part when we do our second quarter 10-Q in the balance sheet information and the rest of it will come out by the end of the third quarter.

We've already received that money today.

Perfect.

The swine flu or H1N1 you talked about the impact in the quarter.

Have you guys put a number on that, maybe what the impact was to your revenue?

Hello, Mike.

This is Kevin Healy.

Hi, Kevin.

Swine flu, really there are a couple ways to look at it.

It had a direct impact certainly in the Cancun services, and that number's probably in the $4 million to $5 million range.

I think the bigger impact is when the scare and sort of the new cycle occurred really occurred in the midst of what is the strongest booking period for spring and summer.

There's a broader impact related to all the new cycle around swine flu, it could be another $4 or $5 million.

But it certainly reduced the base of bookings coming into the third quarter and really put a lot of pressure on the catch up.

Okay.

Thanks, Kevin.

Just my last question with respect to these fees, you had Continental put through a few days ago, they increased some of their fees.

And one was related to bags.

Then I think yesterday we saw Delta actually match -- you paid $5 more.

When I think about, the history of AirTran and implementing fees, number one, is that something that you are looking at closely?

Number two, do you have the capability -- are your kiosks set up, you can differentiate between the two versus the online book, whether you get the $5 savings booking online and/or the $5 co-penalty to pay for back at the airport?

Mike, as a policy matter, we're not going to comment on any specific pricing or fee issues.

Fair enough.

Okay, thank you.

Great, quarter, too, guys.

Thank you.

We'll go next to William Greene with Morgan Stanley.

Please go ahead, sir.

Yes, good morning.

So AirTran's back to profitability.

So I'm wondering if you can talk a little bit about then how you want to think about capacity going forward.

We could argue that one of the changes that you made that had very positive impact on profits is the capacity cuts, but we could also argue that now that you are back to profitability, maybe you're thinking about how do we justify or how do we think about growth going forward.

I'm curious how much you think you could push utilization up, how much could capacity go or are you looking at this and saying, we'd rather be disciplined for longer on keeping capacity where it is?

Any comments on that especially as it relates to 2010?

Bill, right now, the capacity is we outlined before will be down slightly in the third quarter.

The fleet now is pretty much fixed.

Capacity on a year-over-year basis for the end of the year fourth quarter is going to be up around 4% to 6%.

You probably got about a 2% or 3% leeway, 2%, 3%, 4% in terms of utilization and our ability to adjust capacity to what we're seeing in demand.

So, over the next year or so, I think being more disciplined on capacity is certainly going to be beneficial to us going forward.

The growth really in the fourth quarter -- as Arne noted in his comments -- is more related to the expansion in Milwaukee.

We'll see a bit of an increase in the average stage.

And a lot of it is some seasonal flying that we had done last year will be year round this year as we continue to expand Milwaukee.

And Kevin, how has Delta been competing with you post merger?

I don't know that anything's really changed between pre and post merger.

For the most part, as we saw last year, Delta made a number of capacity adjustments in the Southeast.

They did not decrease capacity in AirTran markets.

Right now, I guess as we look at our capacity in Atlanta, we're comfortable with it.

Atlanta's performing well.

It's more impacted by business travel weakness than other parts of our system, but I think the changes that we made last fall have served us well.

We're doing a little bit less in the short haul routes in the Southeast and we're flying a little less capacity to the West Coast.

I think that's very appropriate in the kind of market that we're in today.

All right.

That's helpful.

Just one quick question on bag fees.

Did you give us how much they added in the quarter?

I don't think I caught that.

No.

We talked about ancillary revenues on the whole.

We had very good growth in ancillary.

We're really not going to break out any of the components within that number.

Generally, what we're finding, what we're learning is that consumers are adapting fairly well decoupling of the airfare and ancillary services.

I think it's safe to say, right if we look at the growth rate in 2008, it was roughly 30%, now it's jumped to close to 90.

I think it's safe to say that that differential should be mostly bags, no?

I'll let you draw your own conclusions, Bill.

Appreciate it.

Thanks fort time.

And we'll go next to Duane Pfennigwerth with Raymond James.

Sorry if I missed it.

Did you say you're going to grow next year?

Next year -- no.

We didn't.

What would probably be flat next year and we got a little latitude based on utilization and some stage changes that could be up slightly to down slightly.

So maybe in the range -- zero to 10 (multiple speakers).

What could be the upper end range just on increased utilization?

I think you're probably looking at 3% to 4% is, off of an otherwise flat base.

Okay.

Thank you.

In that context, how should we think about ex fuel unit cost, I guess, progression in 2010 given, I guess, a flat assumption that you're pointing us now to in growth?

This is Arne.

We are seeing the costs come down as we start to round-trip the capacity growth.

The biggest -- there's two areas, I think that we are keeping an eye on.

One is the maintenance line.

We talk about the increase in the contractual rate on the 717 engines.

That's going to be a big head wind for us on the costs.

The other area is really the area of airports.

We're working very hard to try to figure out what we can do to offset what is really an unending stream of increases what we see coming out of airports.

Those are the two areas I would say we probably expect a modest increase in our nonfuel units costs next year, but we're not at any point to give any specific guidance for next year.

Okay, thanks.

Lastly, Arne, could you give us -- I know you'll give more detail in the Q, but could you give us general details on your hedges in terms of price, where those hedges are set for the positions that you've mentioned?

Sure.

They're largely going forward.

We had about 10% of the hedges -- legacy hedges left over from last year -- in the third and fourth quarter.

Really none of those hedges are left in 2010.

Those hedges typically start kicking in around the $80 a barrel and give you upside protection.

All of the new hedges that we have added are generally -- most are in the form of call options.

The protection is $60 to $70 a barrel is the bulk of those hedges is where the call options are.

And that applies for both the third and fourth quarter this year and for next year.

Okay.

And anything more specific, I guess, 3Q, 4Q, $60 to $70 is a big swing in terms of earnings estimates.

There's so many individual pieces of it.

It's kind of hard to give a one answer.

We'll give you that table in the 10-Q when we file it; that'll give you a sense of the sensitivities as the underlying price of oil changes.

I would say it's probably a little bit lower in the third and fourth quarter like $63, $64 in the third and fourth quarter and probably there's more in the mid to higher $60s in 2010.

That's great.

Thanks very much.

We'll go next to Gary Chase with Barclays Capital.

Good morning, Gary.

Wanted to ask one, any number you could probably give some color on it.

The way you describe the bookings situation, and I can't remember if it was Arne or Kevin in the prepared remarks talking about the way the bookings had come in.

I'm curious about two things.

First can you give us the sense of where July is and do you believe that, you're really getting the kind of revenue you ought to be getting given the demand you saw because of what you described that you sort of had this swine flu impact during your booking window and the nervousness that created and the catch up that needed to happen?

And then, just secondarily about your thoughts for the fall.

I understand the source of the concern.

I'm curious, though, if you have any actual data that suggests that we'll sort of take another leg back down from where we were during the summer months or if that's more, just general concern about the fact that off peak periods have been tough?

Gary, let me see if I can add a little bit of color.

Really, when you look at second quarter certainly benefited from the Easter holiday, but if you took the Easter holiday out and you just looked at the RASM change, second to third quarter we saw some -- seeing some slight improvement now and expect that to continue to improve into the fourth.

Really was sort of mid to late June that you started to see a trend or change in the trend, which we, for advanced bookings for both near and longer terms.

A little bit of strengthening whether you call it stabilization -- still a little early in the quarter to be, to say that it's as -- that the trend's going to continue, but otherwise it's very encouraging.

Okay.

But I guess what I'm driving at, Kevin, is, it's great to have the bookings, but I think we all know the reality that the sales have been real aggressive, and, I'm wondering if we're actually going to get an improvement in revenue reality instead of just the bookings?

Gary, I think -- this is Bob here.

This ultimately I have to tell you (inaudible) we've got the lowest cost structure of any large carrier in the industry, and we can make money at these prices.

And we actually feel pretty good.

We've got a lot more flexibility right now due to our cost structure.

Again, although I'd like to see fares a little higher, we can operate in a weak revenue environment, and over the years, we've had some of our best performances when the revenue environment has not been strong.

I think as we look at the quarter, we see improvements in July and August over May and June.

September is always a weak month, and traditionally, we don't focus too much on it.

As we look out into the fourth quarter, our fourth quarter is generally better than the third quarter.

I think as we stand today it's shaping up that way.

So it's -- I think it's a slow improvement as far as we could tell.

We had a big hole to make up because the bookings in April and May were not strong.

They weren't strong versus last year.

They weren't strong versus 2007.

So we're in the process of trying to make that up.

So as long as customers react to, fare sales or moderate pricing, that's not a bad environment for us to operate in.

Gary, this is Arne.

Let me just add kind of one thing.

As you know, obviously predicting into September and October is challenging for any airline to say what the revenue environment looks like.

What we have seen throughout the spring into the summer, and I think you're hearing similar comments from other people, is there's a fairly decent leisure base of business here.

What is really hurting is the lack of international strength, international being very weak and the lack of business demand.

The business demand is not that big of a piece of our business.

While, it becomes a bigger piece as we go into the fall, most of our customers are traveling on leisure.

They are shopping on price, and as Bob said that kind of plays to our strengths.

So given that the underlying, I think you're hearing comments similar to that coming out of other airlines that the underlying leisure is holding up pretty well.

What's really hurting is business and international.

That's, I think what gives us encouragement.

We're seeing that in the bookings as we look out, even deeper into the fall and early winter.

The base of leisure bookings is holding up well.

That plays well to us.

So when you said September was by far the worst month, you are thinking more in terms of the year on year comp, right?

Yes.

Okay.

Yes.

Year on year comp and of course in absolutes.

I mean, if we could find a way not to fly in September and January, it would be fantastic.

Yes, well, you have to lease the airplane ten months of the year.

Okay.

Thanks, guys.

We'll go next to Jamie Baker with JPMorgan.

Please go ahead, sir.

Good morning, everyone.

I realize the future's uncertain, probably an understatement.

I'm sure it's crossed your minds that some growth opportunities that don't currently exist may in fact, become available next year.

I'm just wondering what sort of geographies might rank more highly on your wish list, you know?

Would a shuttle work well in your network?

Do you think you need more of a West Coast footprint?

Any thoughts on that would be helpful.

And also, before you answer, sorry, but if you think it's a terrible question and highly unlikely, then you can also tell me that.

It's always an interesting question because, again, the industry's having huge issues, but sometimes, the way these issues resolve themselves creates opportunities.

And, again, I think we're an airline that was able to improve its competitive position in the US post-9/11, because we rebounded faster.

If you look at the way our airline's structured, clearly capacity reductions in the East Coast benefits us the most.

As we look, I think we're probably most focused right now, really, on the Midwest, because, again, it allows us to, I'd say, kind of capitalize on our operation to Baltimore and Atlanta and Florida.

So I think realistically, the Midwest is still probably, I'd say that the best area for opportunity is probably the most overhubbed area of the country as well in terms of excess capacity.

Mm-hmm.

And if the opportunity presented itself, we certainly believe that there would be plenty of aircraft to find.

Right now, airplanes are available.

The market has gotten cheap.

I think we could move quickly if that opportunity presented itself.

But, again, our game plan right now is to through 2011 or mid-2011 is to reallocate and try to, again, look for better opportunities than we have now.

But so I come back and say East Coast capacity, that's the best area of improvement, and then the Midwest.

And based on your guesstimate as to what slots might go for, you know in the Northeast, do you have the firepower to be able to bid aggressively in that type of a scenario or do you think you'd have to go out and raise capital?

It's interesting.

It depends on the way it happened.

I think if we saw a capacity reduction, we would be able to finance it because we'd have a very quick improvement in profitability.

So it depends on how it plays out.

I think one way or the other we'd be able to show that we could benefit.

But again, if it was East Coast capacity reductions, I think our profitability would really improve.

Exciting times, indeed.

Thanks, guys.

I really appreciate the color.

Right.

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

Can you just comment at all on some of the new routes like Milwaukee out of Baltimore, some of the new stuff that you've been doing and how it may match up with your system load factors and if you are seeing, better acceptance -- I don't know that's not the word I was looking for, but what the trends are there relative to the sort of core business?

Helane, it's Kevin.

With regard to Milwaukee, we're very pleased with the progress there.

We've invested quite a bit in the community over the last several years obviously more so in the last year.

The main statement about Milwaukee is it's profitable.

We have a very strong base that we'll continue to build off of.

I think it fits very well with our overall network.

The other growth that we've really done this year tends to, again, leverage, our position in Atlanta and in the East with services to Florida.

We've added a number of point to point markets to and from Orlando in particular and had very good results with that.

As we noted before with our cost structure, the consistency of our product, now adding Wi-Fi to the mix as well, that's a good combination in this environment.

I think we're well positioned to continue what we're doing and see going numbers as a result.

Okay.

Thank you.

And then, Arne, just a tax rate question.

I think you're a nontax-paying company, so how should we think about that?

I think you have something like $400 million in NOLs, and I guess we don't book taxes for you.

Can you just kind of talk to the tax rate for a minute?

That changed last year, Helane.

I think we talked about it in our guidance at the beginning of the year.

The easiest way, taxes are always complicated, but the easiest way to answer your question as to when would we start accruing taxes again would be when we have earned back what we have lost last year.

That's when we would start accruing taxes.

We have a long way to go before we start paying taxes because of the level of NOLs we have.

There's no state taxes or anything we have to think about?

It's very small.

The tax effect here was -- in the quarter -- was entirely related to the buyback of the debt.

Okay.

Thank you.

All right.

We'll go to Kevin Christie with UBS.

Did you guys talk about labor and the status there?

Maybe you could touch on that?

Sure.

I'll talk about it really in two pieces.

First, you go back about two years, we had a tentative agreement, which was not ratified.

We actually went -- this is regarding our [pilots], too.

We really went almost two years without a proposal.

So since that time, what we've seen is our pilot union, which was the MPA, merge with ALPA and we have got back and resumed negotiations.

We've had -- since our pilot union's merger, I think we've had two negotiating sessions.

We have a few more scheduled in the next month.

So beyond that, I don't really want to comment any more on the status of the negotiations.

Our flight attendant agreement is open, and we are having regular meetings .

Our agreement with our mechanics, represented by the Teamsters, that becomes open in

Okay.

Terrific, thank you.

Okay.

We'll go to Michael Derchin with FTN Equity Capital.

Please go ahead, sir.

Thank you.

Curious how many fare increases you guys actually put in for this year?

I noticed that your average fare is about $86, which is about $14 less than it was a year ago.

Asking that in light of your comment, Bob, about you'd like to sea fares a little bit higher than they are right now.

It's Kevin, Michael.

At this point, I think we've taken about two to three fare increases this year.

I think when you look at the average fare, you have to take into consideration as well the ancillary revenues that don't show up there.

We'll keep focusing on both aspects to that.

I think as the business trends improve and the sale mix improves somewhat, we'll continue to inch the averages up.

A separate question on the Wi-Fi.

Any early results from consumers?

How's the acceptance rate?

We're pretty excited about the performance of the system so far and a lot of good feedback.

We're working through adapting -- working with Aircell to adapt the pricing, and we've -- still making some adjustments there.

But we're seeing a steady increase in the number of passengers.

Not surprisingly higher usage in the longer hauls, a little less in the short hauls, but we're addressing that with some of the promotions.

But generally, I mean, it's early in the program.

We finished the fleet a couple of weeks ago.

And really since the point of completing it, you're seeing some response and consumers now can book with confidence knowing that they'll have Wi-Fi on every, single flight.

Thanks, guys.

All right.

We'll go next to Kim Zotter with Imperial Capital.

Please go ahead.

And your line is open if you could check your mute button.

Good morning.

Hey, Kim.

Hi.

You just mentioned you find that the Midwest is the kind of the best opportunity for growth.

Now, with all of the changes in the competitive landscape, especially surrounding Milwaukee, including Southwest pending entry in the Midwest or public [feel], does that change your thinking there at all?

No, it doesn't.

This is Bob.

It doesn't.

Again, first of all, we're not surprised that Southwest is there.

Southwest is showing a pattern of entering most of the large cities throughout the country, and so really just a matter of time before they were going to show up there.

I think we've proved we can compete head to head with Southwest Airlines.

In many respects, our product is better.

And certainly, we're really the only airline that's ever had a cost structure to match them.

So I think, again, we're going to compete.

Quite frankly with both of us competing, we expect that to probably help draw traffic from Chicago even at a faster rate.

So I think there's some positive aspects of that.

Really, regarding the deal between Republic and Midwest, I think, quite frankly, this is basically a patchwork of regional aircraft.

I guess masquerading as a once proud brand.

I mean, it is Midwest was well liked, but there's really nothing left of the old Midwest.

And right now, you've got multiple regional aircraft, flying around out there.

So it is -- does not -- the competition we're facing does not resemble what Milwaukee enjoyed from Midwest over the previous decades.

The cost structure's inferior.

Quite frankly, I'm not sure how their results are going to differ compared to the - - whenever the regional characters have gone into the competitive marketplace, the track record's very poor.

I think you may see the same thing happen up here at Midwest.

If we had to pick somebody to compete against, we don't mind competing against a regional carrier, again, who really has never competed in a competitive marketplace.

It's a lot different and the track record of those carriers has been very, very poor.

So I think, our -- we've announced our plan.

We've added more services, and I think over time we've made a lot of progress.

Our reputation in Milwaukee is good.

I think as I said before, we're fortunate that we did not win the Midwest deal because it would have come at the wrong time in the business cycle.

But we built a very good foundation in Milwaukee because we've delivered on everything that we said.

We've established ourselves well in the community.

So we think, again, it's going to be competitive, but we've got a pretty good root structure.

We've got good quality, and we've got the best cost structure right now in this industry.

I would be betting on AirTran in Milwaukee.

Great.

Thanks so much for the color.

One other really quick question for Arne.

The $389 million cash balance that you gave for the end of the quarter does that include a fully drawn line of credit?

It does.

Similar to what we had at year-end and end of the first quarter, it does.

Okay.

Thank so you much.

Great quarter, guys.

(Operator Instructions).

We'll go next to Dan McKenzie with Next Generation Equity Research.

Please go ahead.

Yes, hi.

Good morning, guys.

Good morning, Dan.

Most of my questions have been asked, but one question.

I know that your guys' focus is primarily domestic but a couple of your low-cost counterparts have actually worked on lining up or are in the midst of working on international codeshares.

Given your presence at Atlanta, obviously, I think that there's probably enough critical mass there that maybe perhaps, international codeshare could be a potential revenue opportunity for you folks.

I'm wondering, first of all, what your reservation system is or whether or not you have state-of-the-art reservation and revenue management capability to do something like that?

And then secondly if that's something that you folks would even consider?

Hey, Dan, it's Kevin.

From a technology perspective, we do have the capabilities to do codeshare if we choose to.

Our focus really has been on building routes mainly through our own.

We've looked at codeshare opportunities and will continue to do so.

If we see one that makes sense, we'll do it.

There is a lot of effort, time, effort that go into that sort of thing with relatively little benefits out of it.

There's other ways to get some of those benefits.

Regarding international services, we've expanded a little bit into the Caribbean following the San Juan service that we've had, now Cancun.

We're doing quite a few sort of scheduled subservice with tour operators and other things and getting more experience in the reach than we'll be able to build off of and expand into schedule service going forward.

That, for the time being, is the focus of the international revenue, as it were, for us.

But, if the right opportunity were to come up, we could pursue a codeshare if we thought it made sense and was worth the time and effort.

Okay.

That's it.

Thanks a lot.

Thanks, Dan.

We'll go next to Steve O'Hara with Sidoti & Company.

I had a question about -- first about the Wi-Fi, is this a product that you think would appeal more to the business traveler and if that traffic returns en masse that you'd see a better adoption?

There's two aspects.

What's so exciting about the Wi-Fi -- Gogo Wi-Fi service on every flight really is that it appeals to business and leisure travelers.

It gives you the option of increasing functionality from a business perspective, but also puts the entertainment choice in the hands of the user rather than us trying to figure out what people want to see or look at.

It also is a great base for building other programs off of it.

There's lots of tie-in things that we'll be able to do going forward and some promotional efforts.

But I think from a -- with regard to the impact of brand, it is big for a business traveler to be able to know with certainty that you'll have the service when you need it.

And have you talked about in terms of, numbers percentage, like penetration of how it's been?

It's really too soon.

We just got to fleet wide.

We announced it about eight weeks ago.

We got to fleet wide two weeks ago.

So at this point, it's too soon to be talking about what those numbers are.

They are growing steadily.

Just real quick.

In terms of the guidance you gave for RASM it was down 9% to 10%.

I wasn't sure if that was for the quarter, for the third quarter, for the year, and if that was passenger or total.

That was for the third quarter, total RASM.

Thank you very much.

Sure.

That does conclude our question and answer session.

At this time, I'd like to turn the conference over to Robert Fornaro for any additional or closing comments.

Once again, I appreciate everybody joining us on our call this morning.

Although we are mindful of the economic challenges our industry faces, I'm confident that we have the right combination of aircraft, cost, product and crew members to successfully execute on our strategic plan.

Our results in the June quarter build upon our strong performance in the previous two quarters and have us on a steady path towards financial recovery.

Although the jump in oil prices since early April impact our second half profit outlook, our outlook is still positive.

The early decisions we took last summer allowed us to reposition our aircraft order book and minimize our capital expenditures in what we expected then to be a long recovery.

The capacity changes we've made have created a more diverse and profitable network.

Although it hasn't been easy, I feel better about our future prospects today than at any point in the last several years.

With that, thanks for joining us today.

And I look forward to talking to you in the next quarter.

That does conclude today's conference.

Thank you for your participation.

Thank you.