西南航空 (LUV) 2009 Q3 法說會逐字稿

Good morning, my name is Carla and I will be your conference operator today.

At this time, I would like to welcome everyone to AirTran Holdings third quarter 2009 earnings conference call.

Today's call is being recorded.

(Operator Instructions) Now for opening remarks and introductions, I would like the to turn the conference over to Mr.

Jason Bewley, Director of Corporate Finance.

You may begin, sir.

Thank you.

Good morning everyone.

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

Joining me today are Bob Fornaro, Chairman, President, 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 that this call will contain forward-looking statements.

These comments are not historical facts instead you should consider them as time sensitive forward-looking statements that are only accurate as of October 21, 2009 If you would like additional information concerning factors that could cause our actual results to vary from those in 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 will also be discussing several non-GAAP financial measures that we believe are helpful in gaining an understanding of our operating performance and providing 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 website at airtran.com.

Today we'll be discussing our third quarter results and our outlook for the fourth quarter, 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 and good morning everyone.

As you may be able to tell, I am suffering from a case of mild laryngitis so Arne will handle the prepared remarks and I will save my voice, or what little of my voice, for Q&A.

Thanks, Bob.

Today we're pleased to report our third consecutive profitable quarter.

Highlighting the continued year-over-year improvement in AirTran's financial position as reflected in our quarterly earnings results.

For the third quarter of 2009, we earned net income of $10.4 million.

These results do include certain one-time items.

During the quarter we recognized a $6.4 million gain primarily related to the retention of deposits from a terminated aircraft sales contract.

We also recorded an unrealized loss of $6.3 million on the decline in the value of our future fuel hedge portfolio.

Excluding these items, we reported net income of $10.6 million or $0.08 per share.

To highlight the tremendous turnaround at AirTran, our third quarter pretax profit is more than $120 million higher than in the same quarter last year.

Year-to-date, our net income of $117.6 million is a record for profitability after the first nine months and represents a year-over-year pretax improvement of over $300 million.

We are pleased to be profitable in what has traditionally been a weaker season.

However, our results have been impacted by the rapid rise in fuel prices.

Since the beginning of the year, oil prices have risen from $40 a barrel to well over $70 a barrel despite record inventories and continued weak demand for distillate products.

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This clearly is not because of supply and demand.

Rather, it is driven by excess speculation.

AirTran is committed to working with members of Congress and other consumers including airlines to take action including the following key initiatives.

to bring transparency to all energy trading, to establish strict position limits and close the London and Enron loopholes.

Our performance this year represents a true team effort by all of the hard working crew members of AirTran Airways.

Our year-to-date load factor represents an all time company record and our nonfuel costs came in lower than we had projected, largely because of the diligent management of our expenses by our crew members.

We are also very happy with the evolution of our network over the past year.

Our performance in Milwaukee has produced excellent results this year.

Our Atlanta network which now represents 50% of our capacity has been reoptimized to match the changes in demand, is solidly profitable and now we have begun adding Caribbean destinations.

Our Florida franchise has grown and been strengthened by relative cost structure, competitive capacity changes and our complementary hub network via Atlanta.

While we believe that the worse of the year-over-year declines in industry unit revenue appear to be behind us, the pace of economic recovery and the price of fuel remain uncertain.

We continue to work actively to position the company for both good economic times and bad.

We have dramatically slowed our growth profile, improved our capital structure, continue to diversify our network and have built a solid portfolio of fuel hedges.

Now I'd like to take you through the details of our financial.

Our capacity decline of 0.8% year-over-year was attributable to AirTran having three fewer operating aircraft in the third quarter of 2009 versus 2008 but slightly higher aircraft utilization this year.

Our traffic as measured by revenue passenger miles declined 1.7%.

Accordingly, we experienced a third quarter load factor of 83.8%, the second highest in company history.

Third quarter revenues came in at $597.4 million, which was down 11.3% year-over-year.

Passenger unit revenues declined 16% year-over-year to $0.0858 as a result of a 15.2% year-over-year decline in yields.

Other revenues increased $30 million, or 79%.

The increase in our other revenues continues to somewhat offset the decrease in passenger unit revenues, resulting in a 10.5% decrease in total unit revenues.

In July, when we provided our initial guidance for third quarter unit revenues, we noted that the year-over-year change in our advanced booking levels had improved from the levels we observed in May and June.

We expected September to be the weakest month in our outlook due to the seasonal nature of our large Florida franchise.

While our actual total unit revenue performance was about one point behind our expectation, it was largely due to weaker revenue performance in the back half of August as the later Labor Day holiday this year did not provide as much revenue benefit to late August as we expected.

On the cost side of the equation, our total operating costs decreased by 22.2%, principally as a result of the decline in fuel prices during the quarter.

This reduction in the average cost of jet fuel reduced our third quarter fuel costs by over $175 million year-over-year.

We continue to work hard on our nonfuel unit costs this quarter.

Our adjusted nonfuel unit cost per ASM was $0.061, and increased 3.7% year-over-year which was well ahead of our July nonfuel unit cost expectations of up 4 to 5%.

Across the company, we remain committed to preserving our nonfuel cost advantage which is a key element of our sustained success in this challenging industry.

The two areas which continue to see the greatest cost pressure are maintenance and airport expenses.

Our maintenance cost for ASM were up 26.6% year-over-year, largely as a result of an increase in the number and the level of airframe checks and rate increases in our power by the hour maintenance agreements.

Airport expenses also remain an area with significant cost challenges for the entire industry as unit costs for landing fees and other rents were up 5.2% per ASM in the quarter primarily due to increased airport rates.

This is a disturbing trend as airports have not cut their costs in line with industry decreases in passengers and departures.

As a result, they are now seeking to raise rates to fund their shortfalls and are lobbying for even higher PSEs for new capital projects.

During the third quarter of 2009, we recognized a $6.4 million gain primarily related to the retention of deposits due the cancellation of an aircraft sales contract.

At the nonoperating level we realized a $3.3 million gain during the third quarter from the final redemption of our investment in an enhanced cash investment fund.

This gain which was recorded in the interest income line offsets mark-to-market losses that we had recorded on this line in previous quarters.

I would now like to spend a few minutes giving you an update on our financial position.

Since the end of the second quarter, we have accomplished several significant balance sheet transactions.

We have amended our credit card processing agreements with our two largest processors with revised terms that are favorable to us.

We have also extended our $175 million credit facility which is currently comprised of $125 million revolving line of credit and a $50 million letter of credit facility.

This enhancement lowers our total level of indebtedness under the facility and increases the availability of our revolving line of credit.

As of September 30th, our unrestricted cash and investments balance was $408.2 million, which included a full draw on our revolver.

In early October, we completed $115 million convertible debt offering, and 11.3 million share common stock offering.

These offerings were for general corporate purposes an give us flexibility in addressing the potential put to us of some or all of our 7% convertible notes in July 2010.

On a pro forma basis, our September 30th cash and investments balance would be well in excess of $550 million, when adjusted for our October 2009 capital rates.

Our non-aircraft CapEx for the quarter was $4.7 million.

We have continued to add to our fuel hedge portfolio during the third quarter.

As of today, we have fuel contracts for approximately 55% of our fourth quarter fuel consumption and for 40% of our first quarter 2010 needs.

For the full year 2010, we are now approximately 34% hedged with hedge benefits beginning around $60 a barrel of crude oil.

Our portfolio consists primarily of crude oil based call options, and wide collars based on crude oil and heating oil.

In regards to our capacity plans, our operating fleet in the fourth quarter will be 138 aircraft, a slight decrease over our fleet size a year ago.

As a result of the two additional aircraft, a return to normal aircraft utilization, and our successful expansion in Milwaukee, we expect our fourth quarter capacity to be up approximately 7% year-over-year.

We expect our annual capacity for 2009 to be a reduction of 2 to 3%.

We have no other aircraft deliveries scheduled until 2011.

The revenue environment has remained weak throughout this year as lower yields have eroded total unit levels to levels we haven't seen in three or four years.

Our advanced bookings continue to improve albeit slowly and while the pace of the recovery is uncertain, it is clear that so far this quarter, we are seeing an improvement in the year-over-year decline in unit revenues, despite a tough comparison of all-time record fourth quarter unit revenues last year.

Based on our current outlook, we expect our total unit revenues to be down 7 to 8% year-over-year.

If our fourth quarter outlook is correct, our total unit revenues will be closely in line or even slightly better than those we observed in 2007 which were the second highest fourth quarter unit revenues in company history.

As evidenced by our third quarter unit costs, we have seen that the year-over-year growth in nonfuel unit costs has slowed as we start to round-trip our capacity reduction.

Airport and maintenance costs remain a challenge and scheduled for the fourth quarter is the last contractual step increase on our 717 power by the hour engine maintenance agreements.

We continue to work diligently to offset these cost pressures and expect our nonfuel unit costs to be up 1 to 2% in the fourth quarter.

Despite recent fuel price increases, our fuel cost outlook for the fourth quarter is down year over year and is further aided by a hedge portfolio that covers approximately 55% of our fourth quarter consumption.

Based on an average spot price of $75 for crude oil and $6 for jet fuel refinery spreads in the fourth quarter, we currently expect our economic fuel cost per gallon to be between $2.08 and $2.12, all in, inclusive of taxes, transportation, fuel hedging and end of plane fees.

In closing, we are proud of the results the AirTran team has turned in so far this year.

Our core competencies of managing our unit costs and providing high value, high quality service are well suited for this current set of economic challenges.

We remain focused on sustaining our low costs as we believe this is our key competitive advantage.

We are prepared for a variety of economic scenarios.

Our growth plan is more conservative.

Our network and our profitability are more diversified and AirTran is better capitalized.

If the economic recovery comes more quickly, we believe that our investments in the series of high quality amenities like business class, our corporate sales program and fleet-wide Wi-Fi Internet, should allow us to participate in a recovery that may be driven by higher business travel demand.

We have demonstrated that as one of the first airlines to react aggressively to the changing economic environment last year, we are among the first airlines to show signs of recovery.

Our success is built around a solid foundation of industry leading low costs, a highly desired portfolio products and services, a team of hard working crew members and loyal customers who appreciate our high quality/high value service.

The results is that AirTran has outperformed most of its competitors and we believe that we have positioned the company to succeed in both an economic recovery or if economic conditions remain weak.

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

Thank you.

Mr.

Fornaro (Operator Instructions) We'll take our first question from Jamie Baker with JPMorgan.

Good morning, gentlemen.

Good morning, Jamie.

I'm having a bit of difficulty reconciling Southwest's September and October RASM out performance.

I realize it may not be apples to apples with AirTran, given different capacity philosophies, but it looks like you may be starting to seed them a significant pricing advantage, presumably given their no fee policy.

Any thoughts on this and where your Baltimore RASM might reflect such a phenomenon, given that's where most of your head to head Southwest competition takes place.

Hi, Jamie.

It's Kevin.

At this point, there really isn't anything that you can point at that says that we're either being harmed by having the fee or anyone else is gaining an advantage.

I think there's a significant change for Southwest in terms of how they sort of approach pricing this year, plus the capacity decrease.

While their loads are way up, they're still at levels that are somewhat consistent with the rest of the industry and we're setting record loads at the same time.

So I haven't seen anything and it's something we continue to monitor.

I don't think there's much share shift occurring as a result of having or not having a bag fee.

Is that suggestive that there's any opportunity for you on the pricing front to do something to narrow that RASM disparity between yourselves and Southwest?

Again, I think you're seeing a big differential in capacity.

We are seeing improvement on the yield front, as we move into the fourth quarter.

Albeit slow, average fares are moving up and demand, particularly as you look into November, December, is very strong.

Okay.

That's helpful.

Thank you everyone.

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

Hi, thanks, good morning.

Wondering if you could give us any sort of range on 2010 capacity growth and specifically given no deliveries, what's the upper limit on capacity growth next year if things turn out to be better than expected?

And along those lines, do you have an opportunity to actually shrink your ex-fuel cost profile into 2010.

Let me address the capacity piece and I'll let Arne address the cost.

The expectation right now for 2010 is around 2 to 4% ASM increase.

As we noted before, got a couple more airplanes, a lot of that's going to depend on what's going on in the marketplace, utilization and some other things that we can do.

So we can move that number up and down a little bit.

Duane, on the costs, I think we're pretty pleased with where things are playing out, except for the two areas we've talked about and that is the airport areas and what's happening on maintenance.

Really, the 717 engine costs are something we're working very hard on but that's going to provide a bit of a headwind for us on costs.

And I think it's too early to give any kind of range on nonfuel unit costs but I think it's unlikely, given what we're seeing happening in the airports and what's happening in maintenance that we would have a material decline in our nonfuel unit cost next year.

I would add one thing, once we take this next increase on our 717 engines, it will be the last one for eight years.

So once we take this step up, there's not a big increase after that.

Great.

Thank you.

And then just just in terms of your fourth quarter RASM guidance, is there any detail you could give us on the impact of Milwaukee and capacity growth in Milwaukee?

I don't know if you have any sort of -- if you could remind us of what your footprint was year to year there and what RASM might be looking like in Milwaukee on a same store sales basis.

Yeah, this is Kevin again.

The footprint really for the last couple years, each year we pretty much doubled our -- the size of the Milwaukee market for us.

On a same store numbers are very strong, which is the reason that we're continuing to move.

We've built a very strong leader network, moving into more business markets now and some of the seasonal routes of the past are now on the year-round basis.

So while overall capacity is up in a lot of our -- a lot of that 7% is a result of growth in Milwaukee, as well as Baltimore and Florida in general.

The majority of that is in Milwaukee and the numbers look very good.

I think Jim may have a question.

Yeah, just good morning, guys.

Just regarding your expansion into the Caribbean, it appears that you are -- your growth, a significant part of it is coming in the Caribbean.

A question in that regard is, is the market that attractive or do you have -- you've got two airplanes that you thought you weren't going to have and you've got to find some places to operate them and also, we've seen over the past year JetBlue expand pretty substantially in that market as well as Spirit.

So what's the relative attractiveness of the Caribbean?

Jim, part of that is -- this is Kevin again.

About one and-a-half points of the growth is -- could be attributed to the Caribbean market and we've taken our time getting into those routes, mainly to understand -- have a better understanding of distribution and other sort of unique characteristics of the market.

We went into San Juan a couple years ago.

That has worked very well.

Our goal really isn't to be in every Caribbean market but be able to enter into routes where we can service from key cities like Atlanta, Orlando, Baltimore, potentially Milwaukee.

Over the last couple years we've done a fair amount of sort of scheduled charter work for some of the larger tour operators.

That's given us experience in the market and I think we're very well prepared to move in.

So this has always been part of the plan.

The new aircraft really are the sort of thing where we're fairly neutral and if we could have sold them at a good price, we would have.

Otherwise, we had the opportunity to deploy them profitably.

So it isn't looking for a place to put planes.

One last point, Jim.

The Caribbean, there's two areas to the Caribbean.

Ethnic which is Southeast Florida and New York and then there's the leisure which is Mid-Atlantic, Northeast and I'd say the Midwest.

And that's where our company's strongest.

So I think it's a natural extension of what we're already doing.

Average fares to the Caribbean are substantially higher than Florida.

So actually, the current footprint that's really a natural extension of what we've been doing to Florida.

You don't have the same type of capacity opportunities because the markets aren't that big but the profit potential is quite good.

So it's a -- I would say over time, you could see the Caribbean in total end up being 7.5 to 8%, maybe even 9% of our capacity in a few years.

Again, we're not in any rush, again, you can't deploy a lot of airplanes but we can certainly add a few airplanes per year profitably.

Okay.

Thanks.

Okay.

And now we'll hear from Bill Greene with Morgan Stanley.

Hi, good morning.

If I look at your EBITDAR margins, the last time they approached these levels was back in 2003 and you placed a large plane order at that time.

So I realize you're talking sort of 2 to 4% ASM growth in 2010, but would you say you sort of philosophically changed how you think about reinvesting and about your growth.

Is the returns calculation, does it have to be more durable for you going forward?

How do you thing sort of about managing growth versus the margins versus returns?

Can you just add some color there?

Bill, this is Bob.

I'll start and I'll turn it over to Arne.

Pardon my voice.

We placed an order for 50 firm and 50 options in July of 2003.

At that time, oil was about $28, $29 a barrel.

And I think we had assumed it was five or six years, oil could be $45 to $50, which would have been considered a stretch if you went back to 2003.

And I think you have to say we're certainly a long way from that and quite frankly, the higher oil prices are going to mean less capacity in the entire industry going forward.

Business travel will be more expensive and so will leisure travel and so I think growth from four or five years ago when we were growing 20% doesn't make any sense and I think you're going to see us more a sustained moderate growth rate of, say, maybe 3 to 6% as we move into 2011, 2012.

And I think certainly, again, philosophically you have to adjust to a much, much different reality.

We hadn't seen a spike in oil prices, this would all be much different.

Arne, do you have anything else to add?

No, Bill.

Just I think we're very cognizant here that the hurdle rate has to be higher.

The costs of financing aircraft today are certainly higher.

The volatility in the fuel markets require more hedging which, again, is another capital market cost.

And so I think we as Bob has outlined have a much more conservative view on growth.

We do think we have the right mix of costs and product that we do have the potential to grow this business, but nowhere near the type of growth levels we had in previous years and certainly our aircraft order book we think is sufficient to match those growth desires.

Okay.

So if I think about the longer term growth rate of 3 to 6%, does it make sense that that should be expanding your current network or do you really need to add something out west?

Is that a geographic region that you've got to go to next just to balance out the network or do you not think that way?

I think -- I think you've got to take it in steps and, again, certainly we think there's room to expand in the Southeast and the Caribbean which we just spoke about and I think, our initiative in Milwaukee, we're pretty happy with it right now.

I think our priorities really to establish ourself in the Midwest and I think we're on our way.

To really go out and create a map that looks good, I think by adding something out west doesn't necessarily make a whole lot of sense.

I think for us, having a diversification which I think -- when you look into next year, Atlanta will probably be less than 50% of our capacity, probably 45%.

Milwaukee and Baltimore will be 11 to 12%, Florida will be about 30%.

So we're looking kind of broad, from where we've been over the last four or five years, we've kind of changed the network substantially and I think over the next two or three years, we don't really have a strong focus beyond the Midwest.

Okay.

Just one quick follow-up for Kevin You mentioned that November and December were strong.

Can you talk about the holiday bookings?

Are they what's really driving that or is it something else?

And how do the yields look on those holiday bookings in.

Right now, it is, Bill, the holiday bookings driving November, December at this point.

But it's been very encouraging with the advances that we have there and the average fares are very good.

One thing that is missing in September and October for a carrier like us with a lot of Florida capacity is the weakness in the meeting areas.

Those -- meetings were cut last year, cut in the first quarter, and right now we're seeing the impacts of the lack of meetings especially in Florida.

Companies are either cancelling or staying close to home.

The meeting in convention area is now seeing bookings again but we're not going to see the benefits of that until next year.

Kevin, you want to add anything else on that?

That's really one of the underlying issues in September, October is that you don't have the traditional base of meeting travel.

There was sort of a demonization of meeting travel back in March and April.

It's a long lead time for that to come back but when you -- the various CVBs and others that we speak with, you are getting indications that that travel is starting to come back as well and their future bookings are building again.

Thanks for the time.

And now we'll open the line up to Mike Linenberg with Banc of America.

Yeah, hey, good morning everybody.

Good morning, Mike.

Two questions.

When I look at your guidance for the fourth quarter, and appreciate the fact that you at least try to make a stab here on revenue guidance, when you look at that versus where your capacity's going to be it looks like top line is going to be flat and I know the last two quarters your top line has contracted around 11 to 12%.

Now, Arne, when I listen to your commentary, though, it was a very cautious tone.

I know, Kevin, you highlighted the fact that some of the holiday bookings book look strong.

When we look at all the different pieces here, it would seem that it's more of an aggressive forecast unless maybe a lot of this is just being driven by the comps being easy.

Is that really what's driving it, it's maybe more optics here and as a result, we could see top line flat or, are you -- anything that you can -- any additional color on this would be helpful.

Actually, I think we tried to highlight -- I think the comps are pretty tough.

Okay.

We had our highest fourth quarter TRASM that we've ever had in terms of revenue last year and now we are growing into it.

The idea of flat top line I think is certainly possible and I think that's an encouraging trend.

We are coming around to also as well the yield declines aren't coming in as strong as they have been last summer.

So I don't think that's an unreasonable expectation and -- but the comp is still pretty tough.

Okay.

Okay.

So --

I mean, fourth quarter last year we had planned to grow by about 9.5%.

We ended up shrinking by 6.5%.

Some of the question that Jamie was asking as well of relative performance, so it is a tough comp for us in the fourth quarter but we're feeling pretty good about the direction we're moving in.

Okay.

That's actually what I was trying to get at that maybe things are picking up a little bit better than what you would see at least in the press, and what at least has been indicated over the past month or so.

My second question is -- and this is probably more for Arne, is just looking at your cost guidance, you've had good cost performance over the past couple quarters, your capacity is going to be up 7% after being down the past couple quarters, the fact that your guidance X-fuel is that you're up 1 to 2%.

I would have thought that the cost performance would be better.

And I realize there's a couple line items that you highlighted, for example, the airport inflation, the costs that you're seeing there that have been moving up.

I mean, is there anything else out there that's driving that up or are you just trying to be conservative here?

I don't think we're being conservative.

I think it's all in the area of maintenance.

Okay.

It really goes back to the unique engine agreement that we inherited from when the 717s were originally ordered.

It's not uncommon to see step increases as an aircraft ages but the way this maintenance agreement is worded is that on the -- at 10 years of the whole program, so we have now passed in the fourth quarter here we will pass the tenth year anniversary of the first 717 and that triggers a cost increase across the whole fleet at one time.

Okay.

86 airplanes.

Yeah.

So normally you see this stuff kind of bleed in at year one, two, and then it kind of builds some momentum.

We're taking the whole bite at once here and that really is what's driving it.

If you strip that away, I think you would see the kind of cost guidance that you're expecting on the other nonfuel cost items.

Perfect.

All right.

Great.

Great.

Thanks.

Good job, guys.

Thanks, Michael.

Now we'll hear from Dan McKenzie with Next Generation Equity Research.

Hey, good morning, thanks, guys.

Good morning Dan.

One house cleaning question here.

What's the WTI or jet fuel equivalent for the hedges in the first and fourth quarters and also for 2010.

It's kind of a hard question to answer because it a portfolio of hedges, Dan.

The way I would describe it is most of the hedges -- and we will put this in when we file our 10-Q later this week, we will give you kind of the dial a fuel that you guys have come to appreciate.

But the fourth quarter hedge book is largely a call options in the 60s, low to mid-60s.

Next year, probably the first -- I would say 15 to 20% of the hedge book is, again, call options in the low to mid-60s.

The remainder of the hedge portfolio is largely collars with protection in the I guess high 60s, up to about 80 is probably the highest crude equivalent where we are.

Okay.

And then I guess I'm hoping you could talk a little bit more about Milwaukee.

Appreciate the comments that you guys have made already but based on the schedules data, looks like the new owner of Midwest does not want to give an inch, looking ahead to the fourth and first quarter and looks like AirTran is expanding to more business markets, from leisure markets.

I'm wondering if you can talk a little bit more about how you're viewing the competitive dynamic looking ahead and any potential marketing campaigns to target corporate spend there.

Dan, this is Arne.

Let me give you kind of some brief thoughts, then Kevin can expand upon our expansion into more year-round flying and into more business markets.

You do have Midwest Airlines trying to resurrect itself.

If you look at the results for the first half of the year, even in a low fuel environment, they have some pretty disappointing margins, if you look at kind of where their pretax margins were for the first six months of the year.

And so they are trying to see if there's something there that they can salvage but when you compare it to what we've been doing in Milwaukee, we've been very pleased at our performance.

We are solidly profitable in Milwaukee and I think our optimism about this opportunity and about the performance here is reflected in our capacity.

I'll let Kevin kind of talk more about the different kinds of markets that we're growing into.

As Arne said, we've been in Milwaukee since 2002 and really have been developing the network steadily over time since then.

I think one of the key pieces is we have the cost structure to be able to compete really with both the Republic as well as Southwest and we have a product that, beyond just, I think, being superior, is consistent.

We have the jets in the key markets and Wi-Fi on every flight and such.

So we've been at it for a very long time.

As we said, initially we built the leisure base, carry an awful lot of people there, now number two in terms of carriers in the marketplace and now are expanding into the business markets as you noted and I think we're very well positioned and feel real good about how we're doing.

Fantastic.

I would just kind of go back and really add one more thing.

Midwest over a 20 year period, John did a great job in the local market and the community that really rallied around them.

Not going to fool anybody.

Midwest is gone.

You can call it what you want.

But any business traveler in that part of the country knows that what used to be Midwest doesn't exist.

I think that's an advantage.

They lost -- they have no home town advantage and that now gives us an opportunity to make some in-roads in the local market.

And again, you've heard those kind of speeches over the years but the Midwest brand is gone.

Right now it's just a name and that really opens the door for us.

And like I said, it's -- the big increase of growth is historically we took it in steps, and this year we're going to fly the West Coast capacity and flights to Boston year-round.

So we are taking the step.

It really is -- the step began in the spring and it continues through the fall and we'll see what happens.

We'll give it a year.

I think we'll see.

Republic's got no track record right now from a marketing perspective and so I think, again, we've got our hands full, certainly, but they've got a real challenge on their hand as well.

All they've done is basically done a few paint jobs and cut a few costs and laid off some people but the fact is, ultimately they've got to start carrying some customers.

Well, thanks for that comprehensive answer.

Okay.

And now we'll go to Gary Chase with Barclays Capital.

Good morning, everybody.

Good morning.

Wanted to ask a few things.

First, on the revenue progression through the quarter, could you give us any flavor for how July, August, September progressed?

And then I also would like to get some thought from you.

I know in the past you've talked about the thought that September had a lot of very soft bookings and steep fare sales that you had to overcome.

How does that look as we move into October, November, December?

Do the headwinds really abate there and how much impact could that have on the comps?

Hey, Gary, this is Arne.

I think as we look through the quarter, July was the best.

I assume you're talking about kind of a year-over-year, not just an absolute seasonality.

But how are the year-over-year trends playing out.

Right.

And as we said in our prepared remarks, I think we thought with the later Labor Day that we would see that phenomenon extend a little bit deeper into August and it really didn't and so August was a little bit behind kind of where we thought.

September was weak but I think it was dead-on what we thought it was and actually in a couple of ancillary areas has done a little bit better.

And so I think September kind of played out the way we thought, if not a little bit better and really I think the surprise for us was really kind of the back half of August that we didn't get kind of the summer season extend as far into August as we thought.

Looking into October, as Kevin highlighted, the meeting convention piece in Florida is really where you are seeing a little bit more weakness than you have seen.

As the family and vacation travel kind of dies down with the start-up of school.

That stuff is coming back.

It looks very good as we move past here the first part of October and into the back half of the quarter.

That part of the business is coming back.

Wasn't September, though, quite a bit weaker than what you posted for the rest of the quarter in terms of year on year change?

In terms of year-over-year unit revenue?

Right, right.

Yes, it was.

It was the weakest month of the quarter.

And that's to be expected.

We have a large seasonality issue here in Florida and last year if you look at what we did in September , we cut our utilization way, way back because of record high fuel

I guess what I'm driving at is was there some headwind in September that dissipates as we move into -- and I know you noted the convention business, thanks for that color, but I was under the impression that some of the fare sales had really put a dent in September that is not going to be repeated in October.

I think you're right.

This is Kevin.

I think you're right.

Some of the fare sales were more dramatic in September for travel in September.

You're starting to see the average fares improve moving into the fourth quarter and some of the recent fare activity or increases are having a bit more traction.

Again, in September, yield was by far the weakest on a year-over-year basis.

So we averaged -- the average yield was down 16% for the quarter and with September being clearly the worst month and above that average.

Which, again, is expected.

If you broke September down last year, we're booking into a planned 8.3% increase in capacity and ended up down almost 10%.

So it's a fairly significant swing last September, just to try and put yourself in a position to get through it and the unit revenue as a result actually looked good on a year-over-year basis last year.

It's probably the hardest comp in the last four months of the year.

Okay.

Then, as I look at what you're doing with network with Atlanta coming down, other parts of the network growing at least as filed in the schedules, I guess the question is are some of those adjustments tactical?

Would we expect to see that reverse next year in an environment where business travel gets better?

And one of the main reasons I'm asking is if I just look at normal seasonality of your capacity, based on the 7% growth you're guiding to in the fourth quarter, it feels like you're going to want to break out of that 4%, that 2 to 4, you're going to want to be higher than 4 next year.

I'm just wondering if maybe some of the seasonality shifts in here with network.

Well, talk about Atlanta a little bit.

I think we've gotten Atlanta to a size and optimized it to a way that it really is working very well now.

So we're done in terms of shrinking the Atlanta portion of the network.

Most of the growth that we're -- that is in the number for the end of the year is Milwaukee, which is now more business than leisure.

Certainly, the growth aspect of the network is into more business routes than leisure.

We still have a lot of flexibility to be able to move capacity around, work with utilization, so I feel real good about where we're at in terms of the network and what we can do next year.

Gary, the one area that, again, it's way too early to tell.

If you wanted to, say, increase the utilization, it would probably be more likely what are you going to do in the West Coast markets, say from May to August.

So that's where you have the most flexibility and it really is too early to tell.

I think right now the moderate growth makes sense.

It wouldn't -- there may be some other opportunities to increase that growth if someone approached us with the right deal, and number of airlines who aren't going to be able to take their airplanes in 2010 and 2011.

And so we could conceivably consider taking an airplane early if the price was right.

But I think for us-- the key thing is to-- again -- our primary goal is to be solidly profitable first, and, again, solidify the network as it now stands.

Again, I think after last year, I think profits come first right now.

Okay.

And then just a very quick one for Arne, is there any reasonable shot that the collateral posting requirements will exceed the revolver?

No.

I mean, maybe if you could put a dial-up posting along with your dial-up fuel that would be helpful.

It would be a very boring chart because it would be zero, zero, zero, zero.

You don't have posting requirements on the hedge book?

Oh.

on the hedge book?

On the fuel hedge book, yes

Very modest.

We have -- most of the portfolio is call options which have no posting obligation, so there are some very broad collars but they are not costless collars.

The floors on those things are down around $50 a barrel so we paid for them so to a certain extent by paying the premium on the collar, we kind of taken a lot of that risk away.

Okay.

Because you hate to hear when fuel's collapsing that that might be a bad thing.

If fuel goes below 50 I have to get Bob off of his desk.

Thanks.

And now we'll hear from Helane Becker with Jesup & Lamont.

Thanks, operator.

Hi, gentlemen.

Most of my questions have been answered but Bob, I just kind of wanted to pursue something you talked about earlier in terms of the cost side, that's airport fees.

How much flexibility do you have with the airports to get them to lower their fees and to make that cost more in line with what you're seeing from your other suppliers?

Well, I think -- first of all, it's very hard, because they don't necessarily have the same P&L constraints.

Some airports are hungrier than others because they're looking for service.

I think the key place to draw the line is-- are BPFCs really where they are and really stop the increase in spending.

There have been a number of announcements about various projects going on.

Right now, with the industry in the kind of condition it is, we've got to be focused on functionality.

And cost.

And everything else is a luxury.

So, I think we've got to start out certainly with no more increases.

Then, it's also a matter of managing headcount, like all we're supposed to do in times of crisis.

And again, there isn't as much leverage, perhaps, but there's always some.

I mean, for airports to maintain their budgets when traffic has gone 7, 8%, it's ludicrous.

So they need to make a certain number of tough decisions but I think the key thing is stop the spending and try to keep spending more in line with passenger revenues and, again, it's -- it is -- it's hard to convince airports and others that a dollar or two is very, very important and we've been trying to bang that drum but you know better than anybody, $2 to an airport versus $2 to an airline is a very, very big deal and that message just doesn't get through.

So repeat one more time.

Stop the increases, that's the best place to start.

No more.

Okay.

Thank you.

Okay.

(Operator Instructions) And now we'll go to Michael Derchin with FTN Equity Capital.

Hi, guys.

Couple of quick ones.

One, a status on the labor situation?

Okay.

Good question.

Right now, there is -- I think as you know, we've had a long, drawn out negotiations with the pilots.

I mean, we are -- I think you could characterize that as we're meeting productively and we're actually making some real progress after a number of years with very little progress.

So I would just view it as positive, probably going to say no more on that.

Our mechanic agreement was amendable October 1.

We actually have an agreement out that is in the process of being voted on and we should know those results I think in fact today.

Which would be a real positive for us.

The flight attendants, we've been meeting regularly.

I don't see an agreement perhaps by the end of the year but I think early next year we could move forward there as well.

So I think most of our agreements are open now and I'd say we're making some very good progress.

Thanks.

Just one more question, relates to something you mentioned, Bob, actually on the ethnic Caribbean market which seems like JetBlue is doing a real good job tapping into.

It could with an be an opportunity for you, particularly with your base in Florida.

Is there a reason why that's something you're not pursuing?

No, it's -- I think the South Florida market is pretty crowded right now with JetBlue, Spirit and American.

So it's a pretty good market but it's -- if you get a fourth care carrier in there, you get to a point where it can become over-served.

Looking at Orlando we have added a few destinations here because in the greater Orlando area about a quarter of the population is Spanish speaking and growing.

So I think Orlando could create some opportunities and we have 65 flights a day here, so we could also bring a lot of feed from our Northeastern and Midwest markets.

So I think -- I don't see us, though, trying to be the fourth wheel in the Southeast Florida.

Kevin.

Just to add to that, it's not that we're not pursuing the ethnic market.

We are.

It really is more of our Caribbean strategy is designed to leverage our strength in our markets from the Atlanta hub, from our focus city in Orlando and Baltimore and I think we'll be far more successful doing that than trying to create new markets or as Bob noted, being the fourth guy in.

Thanks very much, guys.

Okay.

And now we'll open the phone line up to Steve O'Hara with Sidoti & Company.

Hi, good morning.

I was just wondering if you -- maybe you touched on this already.

The convert that's coming that can be put in 2010, have you guys bought any of that back and do you have any flexibility to do so between now and then?

Hey, this is Steve as well.

We purchased last year just short of $30 million worth of convertible debentures at an average price of just north of $0.81 on the dollar and we mentioned that in our public filings.

And we haven't done any repurchases of those indentures since then.

Right now it's our current expectation to pay those bonds off in cash if they are put to us next July but we are always looking at our corporate finance structure and our capital market structure to see if there are opportunities.

Okay.

And then maybe you touched on this as well.

The 2010 capacity, what's the top end given the fleet you have right now for growth possibility?

Again, depending on what's going on in the marketplace, it's probably 4 to 5% in terms of squeezing out additional utilization on the current fleet, out of the current fleet, rather.

All right.

Great.

Thank you.

Okay.

There are no more questions.

We will turn the call back over to Mr.

Fornaro for closing remarks.

I'll be brief.

I would like to thank everybody for joining us on the call this morning.

Again, we are happy to report our third consecutive quarterly profit and continue to feel good about the changes we have made to our business and our route network.

While no one can predict the pace of the recovery -- economic recovery in our industry, our industry leading cost structure and high quality product position us well in the coming months and years.

Thank you for your time this morning.

Ladies and gentlemen, that does conclude our conference for today.

Again, thank you for your participation.