西南航空 (LUV) 2011 Q3 法說會逐字稿

Good day and welcome to the Southwest Airlines third-quarter 2011 Conference Call.

My name is Tom and I will be moderating today's call.

This call is being recorded and a replay will be available on Southwest.com in the Investor Relations section.

At this time, I'd like to turn the call over to Ms.

Marcy Brand, Director of Investor Relations.

Please go ahead, ma'am.

Thank you, Tom.

Good morning, everyone.

Welcome to our third-quarter 2011 Conference Call.

Joining me on the call today is Gary Kelly, Southwest's Chairman, President and Chief Executive Officer; Bob Jordan, Executive Vice President and Chief Commercial Officer, and President of AirTran Airways; and Laura Wright, Senior Vice President Finance and Chief Financial Officer.

Today's call will begin with opening comments from Gary, followed by Laura providing a review of our third quarter results and current outlook, and then Bob will discuss our progress on the AirTran integration.

This morning's release includes Southwest's third quarter 2011 consolidated results, which include AirTran's results for the full quarter.

Southwest's year-to-date 2011 consolidated results include AirTran's results since the May 2 acquisition date.

Prior year results do not include AirTran; however, in order to provide what we believe to be a more meaningful year-over-year comparison on today's call, we will also be discussing specified results on a combined basis.

Combined results is the sum of Southwest and AirTran stand-alone results for all periods prior to the acquisition without any retrospect application of purchase accounting.

In addition, outlook commentary will be provided on a combined basis as compared to combined prior year results, unless otherwise noted.

We provided supplemental financial information on a combined basis for year-to-date 2011 and for prior-year results in this morning's press release, along with related reconciliation.

Before we get started, please be advised that today's call will include forward-looking statements.

Because these statements are based on the Company's current intent, expectations and projections they are not guarantees of future performance, and a variety of factors could cause actual results to differ materially.

This call will also include references to results excluding special items or non-GAAP results.

Please reference this morning's press release in the Investor Relations section of Southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now I'll turn the call over to Gary for opening remarks.

Well, thank you very much, Marcy, and thanks everyone for joining us this morning.

We had $122 million third quarter profit, excluding special items.

That's $0.15 a share, $0.01 better than the Wall Street estimates and of course, that's very satisfactory.

However, the results are 37% below last year's third quarter and that's not satisfactory.

But I am very proud of our people.

The challenges to earnings are cost related and especially fuel cost; they were up 33.8% on a per-gallon basis compared to last year and were it not for that, our earnings would have been outstanding, excluding items.

Our people deserve a lot of praise, because we had a stellar revenue performance.

We had record load factors, record yields, record revenues, we had an all new Rapid Rewards program that was a very significant contributor, and we also had much improved operations performance.

All of that was accompanied by very strong customer satisfaction ratings.

Of course, our GAAP results include a markdown on a minor portion of our fuel hedge portfolio and that's because of the swoon that occurred in energy prices following the US government debt crisis in August.

Since the end of the quarter, by the way, prices have increased and that markdown has essentially reversed itself, so the accounting is complex.

It is overly complex.

In my opinion, it's confusing so we, along with Wall Street, count all of our portfolio when the hedges actually settle.

Speaking of hedging, we have reduced our hedging portfolio over the next several months to, I would call, actively manage what we believe will be a lower price environment.

We have significant hedges in place for second-half 2012 all the way through 2014 and somewhat into 2015 and that, of course, is to protect against a surge in prices.

In our view, the fundamentals suggest that there is significant upside price risk from where we are today.

All of that assumes no slowdown in growth here in the United States and especially in Asia.

I would like to highlight just a couple of things for the third quarter, just to make sure that you are aware.

First of all, we had a very strong revenue performance.

We saw no weakening in overall demand and, I think, perhaps more importantly, we saw no softening in business travel.

So we've had very stable business travel trends since the spring.

We had a very strong performance of our all-new Rapid Rewards program and it's the second full quarter of results and across-the-board, we saw very strong metrics.

Our membership numbers were up significantly, up almost 50% compared to last year.

The flight activity from our more mature members was up more than system activity.

We saw the premium in fares paid by Rapid Reward members increase.

We saw the number of members applying for credit cards increase.

The credit card activity increase, other related partner revenue growth was up more than expected, and then we had a very, very healthy amount of revenue associated with the sale of points, mainly for future revenue recognition, but very, very pleased with the results of the program.

We think that we've got the best program in the industry and certainly believe it's a bold move, but a big improvement over our Rapid Rewards program of the past.

Secondly, we had significant progress with the AirTran integration.

Planning continues.

Importantly, a lot of work has been completed in terms of reaching labor agreements with our pilots, so the Southwest pilots and the AirTran pilots each have votes under way.

We're working with the FAA, of course, to achieve a single operating certificate.

A lot of technology construction is under way.

A lot of preparation is in place to begin our aircraft conversion in the first half of next year, and we also have been preparing our flight schedules in terms of optimizing Southwest and AirTran flying activity and also preparing to connect the 2 and convert airports next year.

To proceed with the integration next year, that assumes that everything is ready.

That assumes that we do have the single operating certificate, that we do have labor agreements in place and obviously, that is our focus and will continue to be here.

In the meantime, the AirTran business has been very solid.

You have some supporting schedules in the press release to give you some indication of how they performed, but if you look at their individual unit revenue performance compared to Southwest Airlines, it's actually better than Southwest.

So, my hat's off to the prior AirTran leadership group.

I think they handed off a very good business and I'm very appreciative to them and in turn I'm very appreciative of what Bob Jordan and his AirTran leadership team have done.

So, we have a very solid business in place there, until we can get it integrated.

Finally, we've had substantial progress made on bringing a new fleet type into Southwest Airlines as of March of next year, which is a 737-800.

We're very excited about that.

It brings some enhanced economics, especially on long-haul routes -- that again, we're expecting to bring that online in March.

And it also will come with the new Boeing Sky Interior which is very exciting for us.

It is a very nice upgrade and, in fact, we are looking at that to determine whether we want to utilize that interior on the rest of our fleet.

In terms of the outlook for Southwest, at least what we can see, the revenue environment continues to be strong and stable.

The cost outlook, as we provided in the press release, we're expecting some inflation in our non-fuel cost but nothing extraordinary.

We are, of course, keeping a very close eye on fuel and I know Laura will provide a lot of detail on fuel.

I think in terms of the macro environment, we're cautious like everybody else, but as an editorial comment, like almost every other business leader I talk to, people say, Hey, my business is good, not sure what's going on with the next guy, but at least we're seeing the same thing here at Southwest.

Our business is quite good.

Nonetheless, we're going to plan very cautiously and of course we're not hitting our profit targets because of high fuel costs yet, so we'll continue to plan for a fleet in 2012 as well as flat-to-down available seat miles.

But aside from that, near-term planning, we are definitely investing in Southwest and preparing Southwest for significant future route and fleet growth opportunities, and sort of well under way on a 5-year plan and I'm very, very pleased with the progress so far.

So with that overview, Laura, I'd like to turn it over to you to take us through the quarter.

Thank you, Gary, and good morning or afternoon for some of you.

Including net unfavorable special items, totaling $262 million, we reported a GAAP third quarter net loss of $140 million.

Excluding special items, we reported earnings of $122 million or $0.15 per diluted share.

This exceeded Wall Street's expectations by $0.01.

The special items this quarter primarily consisted of a $239 million net related to non-cash hedging losses primarily related to reduction in the quarter end valuation of our 2012 through 2015 hedge portfolio.

At the end of the third quarter, future period hedges that were deemed ineffective or not eligible for hedge accounting resulted in a $227 million net markdown that is recorded in other gains and losses.

This markdown is a non-cash unrealized item in our third quarter.

We believe it's more meaningful to report our economic quarterly results accounting for all of our hedges consistently over time.

Our economic earnings, or earnings excluding special items, do not exclude the impact of fuel hedging.

They reflect what we actually paid for each period's fuel consumption, inclusive of the realized hedging gains or losses on that period's hedges.

With the current market volatility, the valuation of our hedge portfolio continues to fluctuate.

At September 30, the market value of our hedge portfolio was a liability of approximately $662 million.

As Gary mentioned with the rise in fuel prices since the end of the quarter, our portfolio value just as of Monday this week, was a liability of approximately $314 million, so we had a $350 million recapture of value in 17 days.

Other third quarter special items included $14 million net of taxes in AirTran integration costs, primarily for consulting fees and facility transition costs, as well as $9 million in net impairment costs related to our decision to discontinue the RNP program on our 737 Classic fleet.

Again, as Gary mentioned we are not satisfied with the year-over-year decline in our third quarter earnings, excluding special items, but given the high fuel prices we experienced, our third quarter results were solid and they were driven once again by a very strong revenue performance.

We had record operating revenues of $4.3 billion, which was up 35% from last year and we set a number of third quarter revenue records, including passenger revenues of $4 billion, a load factor of 82%, record passenger yield, record passenger unit revenue and total unit revenues, and record number of in-plane passengers and traffic.

My kudos to our revenue management team for these tremendous results.

Our passenger revenues grew by $980 million or 32% from last year's $3 billion Southwest only results.

2/3 of the growth was attributable to AirTran's revenues that were included in third quarter of this year and the remaining $325 million was due to organic growth at Southwest.

On a combined basis, our passenger unit revenues grew 6.4% versus last year and our total unit revenues grew 6.7%.

In July, our combined PRASM was up 1% to 2%.

In August, our combined PRASM was up 6%, and in September, we were up 12% to 13%, boosted by strength in month-end close in bookings.

Our third quarter revenues did include $44 million of the $57 million for fare increases that we realized during the period that the ticket tax lapsed.

For the fourth quarter, the benefit for the ticket tax lapse is approximately $9 million, and we expect that to be relatively even each month throughout the quarter.

Our average fares on a combined basis grew 10.4% and as you well know, we've taken 10 fare increases since the third quarter of last year including a system-wide increase taken just yesterday.

That's aggressive, yet it's necessary in response to the surge in fuel prices.

Our mix of full-fare passengers for the quarter was 17%.

That's down about 2 points from second quarter and 1 point from 3Q last year.

The decline in our full fare mix since our historical highs has been impacted over time by the significant growth in our passengers and our load factors, coupled with a change in customer, both consumer and business booking behavior, and isn't necessarily indicative of business travel demand.

In fact, our corporate travel trends during the quarter were stable.

Our Business Select product had another strong performance with $22 million in incremental revenues and our bookings thus far in October look strong.

However, with our short booking curve, we don't have much insight into winter bookings.

Our aggressive fare sale activity recently is really a function of revenue management, and not any strong indication that our booking trends are being impacted by the current economic uncertainty.

And based on the current revenue and booking trends that we see, we expect that our October passenger unit revenues will increase in the mid-single digit compared to the combined October 2010 PRASM.

Our third quarter freight revenues were $35 million.

That was up 12.9% versus last year, slightly ahead of our guidance.

We currently expect our fourth quarter 2011 freight revenues to be comparable to third quarter's $35 million.

We also had a strong third quarter other revenue performance of $262 million.

Our other revenues were up $39 million versus last year's combined results of $223 million.

The increase was largely due to growth in our business partner revenues which were up $13 million from the previous year, as well as EarlyBird check in, which grew $8 million from last year to a $37 million in total.

Year-to-date, our EarlyBird revenues totaled $106 million, exceeding our $100 million annual target with 1 quarter to go.

We're currently expecting that our fourth quarter 2011 other revenues will increase from fourth quarter 2010's combined $236 million likely in the mid- to high-single digit percentage change.

I'd like to spend a few minutes touting the success of our all new Rapid Rewards program.

As you all know, the benefits of this program are reflected in both passenger revenues and other revenues on our income statement.

I just mentioned a $13 million increase in the quarter in our other revenue line for business partner income.

In addition, we're estimating that the increase in passenger revenue, which was attributable to the growth that Gary talked about in terms of the increased O&Ds and fare differentials by our members, we're estimating that added $55 million to passenger revenues in the third quarter.

Although we haven't recognized as revenues in the quarter, the cash sales from points that we sell to our business partners increased by over $50 million in the third quarter versus 3Q 2010.

The majority of this revenue is deferred and will be recognized into passenger revenue in the future as flights occur.

So, so far the results that we've seen since our March 1 launch and, clearly in the third quarter, fortify our confidence that our all-new Rapid Rewards program will generate the hundreds of millions of incremental revenue and other revenue that we have targeted by 2014.

Turning to costs, on a combined basis, our third quarter operating expenses, excluding special items, increased approximately 18% or $600 million year-over-year, largely due to a 37% increase in economic fuel costs per gallon.

On a unit basis, they were up 12.6%.

Our third quarter economic fuel cost per gallon including fuel taxes was $3.18 which was better than our guidance, and that was due primarily to a $20 million refund of fuel sales taxes that were received late in the third quarter, accounting for a $0.04 per gallon savings.

Our actual unfavorable cash settlements on our third quarter hedges, which are included in our earnings, excluding special items, were $13 million, or $0.02 a gallon as expected.

If you go back to the legacy hedges that we terminated in late 2008, we came into the third quarter with hedging 1 losses of about $52 million.

During the quarter those were offset by hedging gains for the hedges that we put in place since then of $39 million.

So, in a sense, we reduced an $0.11 per gallon hedging penalty from late '08 to '09 with $0.09 of gains on our new hedges for the net $0.02 hedging loss during the quarter.

For purposes of illustrating how significant the economic fuel price increase was for us in the third quarter, if we would have paid the third quarter 2010 economic fuel price of $2.38 per gallon last quarter versus the $3.18 that we paid this year, our economic fuel expense in the third quarter would have been approximately $400 million lower.

So, turning to fuel.

In regards to our fourth quarter hedges, we did report in mid-September that we had essentially restructured our fourth quarter fuel hedges to significantly reduce the percentage hedged, as well as to restructure the remaining protection at catastrophic levels in excess of $100.

Although our fundamental philosophy has not changed with respect to protecting our cost structure against catastrophic price increases, with the current worldwide economic outlook and weak demand in the US and Europe, we don't believe it's time to be long in energy in the near term.

So in addition to restructuring the fourth quarter hedges, we did also recently restructure our first quarter 2012 hedges in the same fashion to reduce the percentage of consumption hedged, as well as to restructure the remaining protection at catastrophic levels varying above $100.

With this hedge restructuring, we eliminated the vast majority of our fourth quarter floor exposure and we significantly reduced our first quarter 2012 floor exposure also.

As a result, the estimated hedge penalty for the fourth quarter, again based on the October 17 forward curve, is at around $0.11 a gallon, and that basically represents the locked-in losses from the legacy hedges that relate back to '08.

The estimated hedge penalty first quarter '12 again based on the 10/17 curve is about $0.08 a gallon which again relates to the 2008 hedges.

These adjustments that we made to our hedge portfolio did enable us to reduce our premium expense in fourth quarter by $17 million to an estimated premium expense of $14 million, and that reduction in premium expense is roughly equivalent to about $0.04 a gallon.

And for the first quarter, the adjustments have enabled us to reduce our first quarter '12 premiums to $6 million which is a $16 million reduction from previous forecasts.

So, the end result for what we did in 4Q and 1Q '12 was essentially a swap in benefit coming out of fuel and oil expense and into lower premium costs, which are recorded below the line in other gains and losses.

The legacy hedge portfolio from 2008, as we've outlined before, will continue to generate some level of hedging penalty each quarter through 2013.

However, our hedging portfolio that we have built since 2008 has the ability to provide gains to help offset these losses in the right market conditions.

Based on the October 17 forward curve in our existing fuel hedge positions, we're estimating our fourth quarter fuel costs including taxes to be approximately $3.30 per gallon.

That includes the $0.11 hedge penalty I discussed, as well as fuel taxes of approximately $0.13 a gallon.

Looking at the forward curve as of October 17, fourth quarter WTI crude prices are expected to average around $86 a barrel.

Using Monday's prices, that's up about $10 a barrel since September 30.

But the real story regarding jet fuel prices, once again, is the refinery margins, which have continued to price to a much higher Brent Crude price based on worldwide demand.

Fourth quarter crack spreads are currently averaging around $39 a barrel compared to third quarter crack spreads at $35.70, compared to $10 the last year.

So, just the difference in crack spread in 3Q, 2011 versus 2010 was about a $0.61 per gallon increase.

Turning to non-fuel costs on a combined basis, our third quarter operating expenses, excluding fuel and special items, increased 6.5%.

On a unit basis we were up 1.5%.

The primary non-fuel cost drivers on a combined basis were increases in our salaries, wages and benefits and maintenance costs, along with increases in our revenue-related costs of approximately $11 million, due to the 11.3% increase in tax revenues.

To date or during the quarter, we recognized approximately or -- I guess, since the closing of AirTran on May 2, we've recognized approximately $30 million in cost synergies and that's primarily from finance contract renegotiations at more favorable Southwest rates.

On an annualized basis these synergies equate to about $60 million in annual cost synergies.

But of course, we have a lot of efforts under way on more cost synergies that we expect to realize down the road.

Based on our current cost trends we're expecting our fourth quarter 2011 unit costs excluding fuel and special items, to increase in the 2% range from fourth quarter 2010's combined $0.0772, primarily due to higher airport costs, salaries, and revenue related expenses.

Our third quarter GAAP tax rate was approximately 38% and for the full year, we're currently projecting an effective GAAP consolidated rate in the 40% to 45% range.

We ended the third quarter with $3.7 billion in unrestricted cash and short-term investments.

Cash balance, as of close of business yesterday, was $4.1 billion.

At 9/30 we also had cash deposits with our counterparties of $458 million.

As of yesterday, those deposits were $304 million.

In addition, we have $800 million credit facility that's fully undrawn and available.

Our leverage, including our off-balance-sheet leases, remains at approximately 50%.

However, we expect it to fall by year-end to the 45% to 50% range with planned debt repayments.

We generated almost $1 billion of cash flow from operations for the first 9 months of the year, which is net of a $429 million increase in cash collateral posted.

Our capital expenditures were $276 million during the quarter, and $548 million year-to-date, and for the full year we're expecting our capital spending to be in the $800 million to $900 million range.

Although we're still doing planning for 2012, we're currently expecting our capital spending to be in the $1.3 billion to $1.4 billion range next year.

Our Board of Directors authorized a $500 million share repurchase program on August 5, and during the quarter, we repurchased approximately $175 million or approximately 21 million shares of Southwest stock at an average price of $8.27.

We have manageable scheduled debt maturities for the remainder of the year of approximately $447 million including the repayment of $400 million notes in December, and we also have debt obligations of approximately $560 million due in 2012 with $385 million due in March.

Finally, let me finish with a quick fleet and capacity update.

We ended the quarter with 699 aircraft in our fleet.

This factored in 7 new -700 deliveries during the quarter from Boeing and 2 -300 retirements.

For the fourth quarter we have 3 more deliveries, and 4 -300 retirements.

That will put us at a fleet of 698 airplanes at year-end.

For next year, we currently plan to add 33 737-800s to our fleet.

We have a like amount of retirements planned, if not more as we continue our classic fleet retirements.

On the capacity front, we expect our fourth quarter ASMs to increase approximately 1% to 2% year-over-year.

That results in a full-year 2011 capacity increase in the 4% to 5% range compared to last year.

In addition to our flat fleet plans for next year, we continue to expect our 2012 combined capacity to be roughly flat or slightly down compared to combined 2011.

And again, given the fragile economic environment and persistently high fuel prices, we continue to cautiously manage our 2012 capacity plans.

And with that financial overview, I will turn the call over to Bob Jordan for an AirTran integration update.

Well thank you, Laura, and thanks, everyone for joining us.

We continue making great progress on our integration plan and I'm really pleased to give you a status report today.

But I want to start by thanking the people of both Southwest and AirTran that continue working on integration on a daily basis.

They're doing a superb job and I'm very proud of them.

I also want to thank the people of AirTran for not losing focus, despite all the changes that are going on around them.

Since May, they have continued to turn in excellent operational results, including industry-leading baggage handling, and I am just very proud of them.

I'll start with an update on our station transitions and insourcing.

Since May, we have completed 17 station transitions.

That means that we have now co-located our gates, ticket counters, offices and operational areas in these airports and are basically now operating side by side.

And we have some important conversions coming up in November with Orlando, Boston and Baltimore.

In 9 of the stations, so far, we have also taken the added step of insourcing.

Insourcing means that Southwest employees are now providing the ground handling and ramp services for AirTran flights, and despite the complexity of all that, I'm really happy with the station transitions and the insourcing, because they are both going very smoothly.

On the labor front, our pilot unions, SWAPA and ALPA, reached a tentative agreement on seniority list integration and that has now been put to a ratification vote and that vote concludes on November 7.

This is a major accomplishment.

Integrating labor groups is not easy, and both SWAPA and ALPA showed tremendous persistence in reaching a tentative agreement.

I believe this agreement is fair and equitable for both sides, and ratifying a negotiated agreement of course avoids the uncertainty of the arbitration process and it gives both groups ownership of the list.

I'm also proud of our flight attendants unions which are TWU and ASA.

They recently reached a process agreement for seniority list integration.

The process agreement is not an agreement on seniority but it does establish the ground rules that they will follow in order to reach a seniority agreement.

It's a very important first step and it lays the foundation for engaging in the seniority list integration discussions, and again, I'm very proud of them.

On the headquarters front, the vast majority of headquarters functions at AirTran have been transitioned to Dallas.

That includes finance, marketing, technology, people, revenue management and network planning to name a few.

I'm very pleased also that to date, approximately two-thirds of AirTran headquarters folks have accepted an offer to join the Southwest family.

And just overall, we are making great progress bringing the 2 airline families together.

For example, last month, we held an employee celebration in Atlanta for the 2 companies and it was attended by over 4000 people from both Southwest and AirTran.

Significant work also continues on track to receive a single operating certificate from the FAA in the first quarter of next year, which would be less than a year after the close of the transaction.

As Laura mentioned, we've realized $30 million in cost synergies to date, which we expect will produce over $60 million in annualized synergies.

While a significant revenue portion of synergies comes with the connecting of the networks, which continues on track for the first half of 2012, there are very meaningful revenue synergy opportunities in the areas of schedule optimization, revenue management, combining our Frequent Flier programs, distribution, and cargo, to name just a few.

In the area of schedule optimization, earlier this month, we published our coordinated flight schedule for Southwest and AirTran through June 1 of 2012.

In addition to being coordinated, that schedule also represents the first optimized AirTran schedule since the closing of our transaction that was optimized utilizing Southwest optimization technology.

And going forward, all future schedules will be both coordinated and optimized as we work toward network connectivity and of course 1 fully integrated Southwest schedule.

We believe there are significant opportunities to continue optimizing our combined network.

Which in turn creates significant revenue synergy opportunities.

And similarly to the network, all of our revenue management activities, pricing and marketing and advertising activities are now coordinated between the 2 airlines.

On the Southwest side, we had some exciting news.

We announced our initial service into Atlanta, launching February 12 of next year with 15 daily departures to 5 destinations and beginning March of 2012 that will increase to 17 weekday departures to 7 destinations by adding Phoenix and Las Vegas.

AirTran will continue to maintain our 173 daily flights out of Atlanta.

During the third quarter we also announced our first step toward blending the Frequent Flier programs by making top tier members from both programs reciprocal in terms of benefits.

What that means is, for example, an AirTran Elite Member will now receive extra Rapid Rewards points, priority boarding, access to priority security lanes and more when flying on Southwest Airlines.

On the flip side, Southwest A-list and A-list Preferred members flying on AirTran now receive free business class upgrades and no bag fees, to name just a few.

So again, in my mind, just fantastic progress thus far on our integration plan.

Of course, it's all due to our people and to their daily commitment to the integration.

We've made really great strides and they should be very proud of the milestones that they've hit so far.

I am very proud of them.

I am very proud of their unwavering warrior spirits on both sides, Southwest and AirTran.

And with that, I will turn the call back over to the operator to provide instructions on queuing up for questions.

Tom?

Thank you.

(Operator Instructions)

Thank you for waiting.

Michael Linenberg with Deutsche Bank.

Laura, with respect to your fuel hedge, I think in the press release, I think you said something about $450 million-some-odd that was on deposit with the counterparties related to the fuel hedge.

And then I think you talked about the movement in fuel over the last 17 days and how that liability changed.

I think you said something, recapturing several hundred million, and the numbers, they seem pretty far apart.

Can you just reconcile the differences there and maybe it's a function of also the fact that you've changed your hedge position over the last several months?

So Mike, let me make sure I understand your question.

You want me to reconcile the June 30 mark-to-market to the one that I referred to?

Yes, just it seemed like with the movement in fuel that you would have actually gotten back more cash from your counterparties than -- I thought it was just over $100 million was the change over the last couple weeks.

But it seemed like that with the movement it would have been greater than that, but I may be doing my math wrong here.

You're right.

The cash collateral as of yesterday was, I think I said, $304 million compared to say $458 million or $459 million, so it's down about $150 million.

We have a lot of -- we have more than 1 counterparty and the counterparties that are in profit or asset or liability situations.

So it is a little more complex than just looking at the market value.

The other thing that we have, Mike, as you know, is we have an aircraft collateral facility that we can use, too,

Yes.

And we -- if you look at where we are, we didn't choose to use the aircraft facility at September 30 just because of some of the economics with the earnings that we're realizing on our cash holdings aren't very high, it made more sense to post cash.

So at this point, there's no aircraft being used as a -- pledged against some of the fuel hedge positions?

That's correct.

Okay, perfect and then--

But we have that possibility if we would like to.

Okay, great, no thank you.

And then just my second question, Gary, I believe you had mentioned you had talked about how the unit revenue performance at AirTran was very good during the quarter.

I think you indicated that it had exceeded Southwest and I realize there's obviously different mix and gauge and the markets, or length of haul.

There's a lot of considerations here and I was just curious that over the last several months, to some extent you've been able to run a little bit of a laboratory experiment here and I was just watching the recent fare sale that you did where the base fares for AirTran and Southwest were similar in some of the markets that they fly head-to-head and I'm just curious on -- because they do offer different products what you've seen, what sort of uptake from say someone whose flying in the front of the cabin versus someone who maybe chooses Southwest over AirTran in the Baltimore/Orlando market because they can fly, they don't have to pay for bags.

What sort of data and maybe what best practices that you're -- and I realize it's still early but maybe some of the initial read on people sort of moving between the 2 carriers in the same market.

Well, I'm going to let Bob pitch in here, if he has insights he wants to offer.

I don't, to be perfectly honest with you, I don't know that I have that much granularity into AirTran's business yet where I have that kind of a feel.

The macro trends at Southwest and AirTran over the last 4 to 5 years have just unfolded differently.

We were really accelerating our revenue growth dramatically 2008, '9, '10 and we've sustained that in '11 and they've been less robust.

So they've had somewhat easier comps.

You know, their capacity is probably up a little bit year-over-year, if you just look at them as an entity so I don't think you've seen a lot of schedule changes and probably any schedule changes that Southwest has done with the AirTran entity.

That probably is fourth quarter -- and if I remember right, in fact I think it was a November 21 schedule that they had in place when we closed on May 2.

So really, Southwest has had an impact on the schedule post-November 21 so really no impact yet.

But I think that they had some concerns early after May 2 about the sustainability of their Frequent Flier membership and business travel and if you'll remember back in August, we expressed some reservations ourselves about what was going on with business travel.

I think both airlines now, in October, looking back over this time, same time period, I think we would both conclude that business travel has been very, very steady.

I think a long story short, what we were, I'll just repeat what I said earlier, what we were handed from the AirTran leadership was a very solid business.

We've seen the AirTran employees respond enthusiastically to the notion of being merged into Southwest Airlines.

We've seen their operating performance sustained if not improved, so we feel real good about that separate operating entity.

But Mike, I'm sorry, but anymore depth there I don't know that I can just offer.

Bob, is there anything you would add?

Well I would just echo some of the same things.

Of course, we're watching what's happening with their business and their traffic and there's no erosion in their business that we can detect.

In fact the business looks pretty strong just like Southwest, as Gary indicated.

There's no erosion of particular passenger groups or elites, which is very meaningful.

In other words, we are not losing their Frequent Fliers or losing their elite Frequent Fliers.

There's no reluctance to move to Southwest.

In fact the data and the anecdotes both would tell you that people are eager to be able to travel on Southwest -- current AirTran passengers are eager to travel on Southwest Airlines and be able to travel on Southwest.

And the first schedules where we've made meaningful changes in overlap markets that would really test that theory are still to come, so those are schedules for early summer, late summer.

But so far, we've not detected any erosion in business performance or any reluctance in terms of passengers, their customers to convert to Southwest Airlines.

Okay, no that's helpful.

I realize it's still early in the process.

I appreciate it, thank you.

Hunter Keay with Wolfe Trahan.

Thank you very much.

I guess kind of a follow-up to Mike's question.

Maybe at a little more of a philosophical level.

Now that -- maybe it's a question for Bob.

Now that you've gotten a look to see how AirTran's bag fees can actually benefit that operation -- they still outperformed on PRASM with bag fees largely in place.

Has it given you maybe pause to the strategy because when I look at taking out $200 million of AirTran revenue and AirTran made $39 million last year, it just seems like such a big dissynergy.

Have you maybe thought about this strategy a little bit differently given now that you've gotten a chance to peel the onion and to see how it works within AirTran's business?

No.

I think if you look overall, of course, you've got to look at PRASM, PRASM and fees, and then RASM, so it's all the components.

I think just overall, we have tended to outperform them fairly significantly on a PRASM basis.

We've been fairly even on a RASM basis with fees, so I think we have a lot of opportunity there to just shift the components of revenue.

Second, a lot of this of course is about connecting the networks and driving additional traffic across the combined network that you just couldn't do today, so whether that's boosting load factors or that's moving folks up the revenue management process and change so to speak, there's a lot of revenue potential there.

So I don't have concerns in terms of moving, in terms of covering bag fee revenue with other revenue components.

Hunter, and again when you say outperform, their year-over-year growth is superior in the third quarter and perhaps in large part because they underperformed a year ago, or 2 years ago.

But if you look, they lag Southwest margins, which sort of sums all of this stuff up and the operate -- we see tangible opportunities to improve the AirTran route network, number 1, the mix of non-stop passengers number 2.

And again, it's our belief that the totality of the Southwest brand will also be a superior revenue producer as well.

And Hunter, as you know, our revenue synergies have always included the elimination of those fees, so that's always been a part of our assumptions with our synergies.

Yes, sure, no, of course.

And a lot of answers but the last thing I would add is -- this is a little harder to prove from an analytic perspective, but I think part of the -- I think you're already seeing it, so the lending of the Southwest brand to AirTran.

For example, we have some distribution between the 2 websites in place already.

Not connectivity but you can get to AirTran flights off of Southwest Airlines.

There are things going on that I think are providing an updraft to AirTran's performance already because of their connection to the Southwest brand.

So some of what you're seeing I believe is due in part to the fact that we're pulling the 2 brands together.

Okay.

Well thank you, and I guess just briefly on capacity, with 33 aircraft coming in, obviously a larger gauge.

What is sort of the most you can spool up or I guess maybe upside is what I'm wondering about, more so.

How much can you sort of grow if you really want to next year and what sort of triggers are you looking for to actually maybe defer some of the retirements?

Thanks a lot.

Well, that would have to be, Laura, probably the technique.

If we ask Laura to go get us airplanes, I suppose she could do that.

It would just come at a cost, so let's just assume that is a modest number of half a dozen airplanes potential there and then the other alternative would be to slowdown the retirements and what kind of flexibility do you think we have there?

We have a ton of flexibility with the 33 retirements, we own a good portion of them and certainly on the ones that are leased, I don't anticipate any of the lessors would have any problems with us extending them.

So we have a lot of flexibility.

It's just -- I think the bigger question is the lead time and what would be the signs to force us to think about that option, but lots of flexibility.

And I guess part of the retirement plan is set by trying to avoid major maintenance efforts, so we would have to undertake those maintenance efforts and make that decision to keep those airplanes, but long story short, we have a lot of flexibility.

Thank you.

Bob McAdoo with Avondale Partners.

Hi, guys, there's a sentence in the press release is, we expect to have the capability to connect the networks of both airlines in the first half of 2012.

What does that mean?

When you start doing that, what's the customer going to see as you start to connect these or what are they going to experience?

What does that mean?

So Bob, I think, if it were, if AirTran were a different airline, we would just say code share.

Code share means certain things to certain people but we'll be in a position in the first half next year where we can operationally code share between the 2 airlines.

So as you well understand, they've got their own reservation systems and operation systems, et cetera.

So we'll be able to publish, in a code-share-like fashion, common itineraries where you have a Southwest leg and an AirTran leg.

We'll have it published with a Southwest code if you went to AirTran.com, they would also have it published in an AirTran code and we would exchange -- just a classic thing, we would exchange passengers, we would exchange bags, single itinerary, 1 fare, pretty straightforward stuff.

We don't have classic code share technology in our system.

Importantly, neither does AirTran and so that's why we are leading you that way, that we're constructing that technology to enable the exchange of passengers and bags and therefore, expect that to be in place by first half next year.

So maybe it will operate kind of -- from the point of view what the customer experiences, kind of like you used to have where you'd go from, in my case, Kansas City to Chicago to New York and then but the second leg was on ATA, that kind of an experience?

It is that exactly.

Okay.

And different, because AirTran is, they aren't ATA, the technology that we used with ATA is not necessarily useable again with AirTran.

But in any event, with our current reservations technology and their's, it has to be built and that construction is under way.

And that will be some time in the first half?

We're not giving you a definitive date because we're not confident enough to give you a pinpoint date yet.

That's fine.

We want it sooner than later and yes, sir, it should be first half.

Great.

Thanks.

Bob, the only thing I was going to add is, the advantage we have with AirTran versus ATA, is AirTran and Southwest are 1, so from a scheduling and their network and our network, we are going to be able to build better connections and pricing so I think it will even be superior to what we could do with ATA.

And I would assume at that point if you decided, I mean there's nothing that keeps you from deciding to hook a few more cities into Atlanta that maybe aren't into Atlanta or do some of those kinds of things as you move into the latter part of the first half as well?

Yes, that's somewhat unrelated to the question but it's at least indirectly related but absolutely.

So I think Bob may have pointed this out with his AirTran report, but AirTran does not currently serve Austin, Texas.

So one of the first cities that we're opening with Southwest Atlanta service is a non-stop to Atlanta, so we'll have 2 daily round-trips in that market on February 12.

And then so this new connect -- quote, connecting capability, would allow you to obviously to sell Austin to a number of cities that you can't get to now on Southwest?

Well, yes.

I think that's fair.

That's fair.

Okay, very good.

Thanks.

Gary Chase with Barclays Capital.

Good afternoon, everybody.

I was racking my brain to try to see if I could ask a question that would get Laura to say ticket tax lapse again.

(laughter)

That was pretty bad.

I just couldn't figure it out.

What I wanted to ask was just a couple of things about business travel.

Laura, you gave us that 17% full-fare mix.

I'm wondering if that was adjusted for AirTran, which I don't think there was any airline in the country that had a full-fare mix as high as yours, if you look back.

So is that adjusted for AirTran and if not, could you maybe give us a little flavor for what that might look like say Heritage Southwest to Southwest?

You know, it was Southwest only, Gary, and I don't know if I have, let me see if Marcy can help me, AirTran's full-fare mix for their network is very different than ours and it's about 3% in the quarter so I don't know that I can do the math in my head to tell you what the combined is but if you want to look at it on a relative basis that's where we were.

But you're right.

That was Southwest itself compared to Southwest itself, yes.

And what do you think is driving that?

Is it the change in the way that you're pricing that has caused some trade down out of that?

If you look way back you were in the 30s, offset at those levels for quite some time or is it more about the drive you've had to get loads up and do a better job of filling the lower fare buckets?

I think it's many things, Gary and Gary can join in too.

Too many Garys.

But certainly, if you go back in history, we used to have a load factor in the mid 60s we're in 80 and so you know the incremental traffic is being driven by the discretionary travelers so some of that is arithmetic.

Certainly, we've raised fares a lot and even in the old days when you raise fares we've always seen full fare go down so that's not surprising with the number of fare increases we've had.

And finally, booking -- we have a lot of evidence that shows a lot of business travelers book in advance today, so not everybody buys a full-fare, last minute ticket.

So I think there's a lot of pieces, but so what we like to do is check business travel from a lot of other perspectives, our corporate sales, just looking at the type of bookings and leave in the week, come back before Friday.

So all of those other indications show that business travel has been pretty stable but we're probably seeing a shift of more of it into non-walk-up tickets.

The only things, while Laura was talking, I was trying to think here, and the only things that I might add -- I don't think I can add much to what she's already nailed here.

But we used to be a short-haul network and the short-haul routes were business routes.

Now we have a lot of long-haul routes with low frequency and in some ways, one could argue that they're more leisure oriented.

We might debate that a bit but, in any event, we definitely see a different full fare mix on the longs compared to the shorts.

I think the most compelling point Laura has already made which is the absolute number of full-fare passengers is closer to what you've seen historically.

It's just that we've got significantly higher load factors today and certainly over the last 5 years, those have been driven more by connecting passengers, being added on.

The other thing that's happened is we have added more precision, you might say, in our revenue management and more fare points, so there are relatively non-discounted discount fares, if you know what I mean.

So they may be less than a full fare but they are higher than what you might have in your mind as a 3-week advanced fare.

So that's different today versus years ago too.

In fact, we sort of chuckled about this -- we're probably the only airline that talks about full-fare mix and we sort of question the importance of it.

We pay attention to it but we look at our business in a lot different ways other than just fretting over the full-fare mix.

And just to go from 12 to 13 RASM growth in September to mid-singles in October, is there just something that we don't understand and -- when you said things were -- the strength continues, is there something we don't understand about normal seasonality or was September just uniquely solid?

Well, I think it may take us a while to funnel our knowledge to get to a more precise conclusion too, but one thing -- we've introduced some new techniques along the way as you well know.

You can see the result, if nothing else, in our load factor over the last 4 years.

We have techniques that had been added on in the last 12 months that seem to be driving more business in available periods.

So one way of saying that is if you're already full in July, this new technique that we're using to fill up airplanes may not add much.

But in a softer month like September, we were pleasantly surprised at how good -- and that's why Laura specifically singled out revenue management because over time, we can see the very significant benefits that some of the new techniques that they're using are bringing.

October is just -- it has less opportunity we think, to fill in some of those gaps but it's all part of our argument to you that we're winning more share.

Bags Fly Free is a fundamental component of that.

We are smoothing out what we think is some of the seasonality in our business and those are the primary drivers that we're finding.

So we think that now that we understand this better we'll be able to set some better expectations internally as well as with you all but we've given you a very fair outlook for October.

Obviously we're 20 days into it and know pretty much where we're going to be and feel like that is an explanation.

Yes, and October is our toughest comp of the quarter as well, so -- but Gary's right.

September was extremely strong.

We're a bit off sequentially but not terribly, so we think October is really a continuation of what we've seen in September.

I'll just give a little commercial here for our Southwest revenue team overall.

We've made dramatic progress in 4 to 5 years time, but we know that we are lacking some tools that will bring more value and we're very excited about constructing those, implementing those and just have a lot of confidence that they are going to bring very significant value over the next several years as we bring them online.

Okay, thanks, everyone.

Kevin Crissey with UBS.

Thanks, actually decent timing to go back over the end of that.

You were talking about the tougher comp, Laura.

I don't know if you've provided or maybe you have and I've missed it, the monthly kind of RASM numbers.

I just want to understand what capacity looks like by month as we go forward here and maybe how you helped those comps progress?

Yes, so for 4Q, October I think ASMs are up about 4% on a combined basis.

We have that October last year PRASM was up 12.5% and then November and December, ASMs are going to be flat versus last year on a combined basis.

Last November, PRASM was up 7% and December we were up 5%.

And those were all combined numbers?

I believe they were, yes.

Absolutely.

So importantly to your comps?

Yes.

Okay, terrific.

I thought that might be the case but wasn't sure.

Maybe what you're talking about, the impact of -- if you could talk about if there's any impact overall as maybe tighter credit conditions, how that might favor you or disadvantage you to the extent that the banking lending is more difficult over time?

From a competitive standpoint, Kevin, or --?

Just in general what it means that you see German, French banks maybe doing less lending or what it maybe means structurally, if anything.

Maybe it has no impact on you guys.

Well, certainly we have a lot of good European bank partners, but we've had so many, so much access to capital -- typically used the US public debt market has been the vast majority of the financing that we've done.

So at this point, based on what we know, I'd say it's negligible.

And your financing requirements for next year--

Are modest if any at all.

Okay, terrific.

Thank you very much.

Thanks.

Bill Greene with Morgan Stanley.

Hi, good afternoon.

Gary, there were some press reports recently about you suggesting there was a lot more revenue opportunity in Atlanta, I think, than you first perceived.

I don't believe you changed the full synergy numbers, correct me if that's wrong.

But the other question is how do you ensure that revenue opportunity that you're addressing and you're seeing doesn't actually end up getting competed away because I think we see that time and time again.

So how are you thinking about how you'll preserve that value for Southwest?

So Bill, I'm glad you mentioned that.

Yes, I'd object to the characterization in that article.

So our best estimate, interestingly enough, has not changed and so we think that we're pretty neutral on the cost side.

We're seeing some successes as Laura reported on the cost side earlier.

Our view of the revenue synergies is still a future, so we still have to realize those.

But we're constantly updating our projections there and feel pretty comfortable that the net of it is a $400 million improvement to the combined -- you have to combine AirTran into Southwest to realize that improvement but it would be coming from the AirTran component of the route structure.

So we're very comfortable with that.

Just doing math it would suggest that maybe the potential is higher than that and that was the point I was trying to make about the reasonableness that we could achieve $400 million.

The $400 million is ambitious and it's something that we think is doable so with respect with your second question, is it really talking about the risk in integration that we execute?

I guess we just see time and time again airlines that end up competing away an awful lot of the revenue synergies or the total synergies that they sort of perceive so it gets hard to tell where they are.

It's look, it's a competitive industry so we all sort of understand that and I was just trying to figure out how you think about, well this is how we're going to preserve it and not end up just competing it away or maybe that's the answer to win share, I don't know.

Well, I think -- how can I answer your question, here?

I think that's it really --so if you'll forgive me for perhaps stating the obvious.

Our earnings are not where they need to be; the rest of the industry earnings have not been where they need to be forever.

So as we look out onto the fourth quarter, as an example, domestic capacity is coming down year-over-year, capacity in our markets is coming down so if anything, I would argue to you that the competitive environment actually supports us pursuing our strategic goals here over the next several years.

So we've committed to you all that we're determined to hit our strategic goals.

We all understand that other things happen, whether it's higher fuel prices, more or less competition, but it seems to me that I could argue to you that the competitive environment is pretty good.

We have a very strong route network on a combined basis.

We have a number of opportunities to optimize the flight schedule which gives us just a ton of flexibility.

We're trying to build the airline such that we can grow it but will only grow it if the profits and returns are there.

So that's --

No, that makes sense.

I feel very confident about the synergies as long as we execute.

So I don't think the macro environment will work against us in this scenario.

That makes sense.

Gary, you were vocal on one other thing in some of the media and that is just about all these proposals that keep coming back to tax airline tickets more and I don't know if -- look, it's not gone through yet.

But I look at this and say this is potentially, could transform your business model in a more significant way because if you put on ticket taxes of that magnitude, I don't know how the stimulation effect works anymore.

So is that too aggressive of an interpretation of what's being proposed here or how do you think about these taxes?

Well first of all, we at Southwest are very supportive of the trade association, the ATA's lead on this.

We are already overtaxed.

We are already overregulated which comes at an enormous cost.

Every year we get more regulations and of course we've had to redirect technology resources this year to comply with yet another DOT regulation which is the so-called full-fare advertising rule.

That's just one example.

Then you layer on top of that taxes which have nothing to do with aviation.

Much of the proceeds of the taxes were proposed to go to the general fund and reduce the deficit.

So if we weren't paying our fair share I guess I might be more patriotic about that thought.

The idea is to make America more competitive so that America can grow its economy so that America can generate more jobs.

The way we do that in the airline business is we keep costs low so we make more fares affordable for people so more people can afford to fly which clearly is what you are asking about.

Absolutely, Bill, if our costs go up, fares will be higher, more people will not fly, will not travel.

There are 14 million jobs in travel and tourism.

There is an enormous opportunity to grow it and I guess the final argument I would make is that air travel in the United States is down compared to where it was a decade ago.

Think of how many jobs there would be if it was growing like it should have over the past decade.

So my focus is on creating jobs and certainly jobs at Southwest Airlines.

Are you a little overly dramatic?

I think in relative terms, the departure tax, Laura, I think is about $140 million a year impact to Southwest Airlines in terms of a cost increase.

The tripling of the TSA fee would obviously be a lot more than that even, but in fairness, we're struggling with high fuel cost.

I think Laura, our fuel bill is probably up, if it was up $400 million in the third quarter, just say it's up times four, it's up $1.6 billion, so is $140 million not important, therefore?

I think it actually makes it more important because we're already struggling with such high fuel costs that could go even higher.

And so, yes, we have an impassioned argument to, not only not add more taxes, but we need to relieve some of the burden on the industry so that we can have more people affording to fly.

That's great.

Thank you very much for the time.

Thanks for that question, Bill.

No problem.

Duane Pfennigwerth with Evercore Partners.

Hi, thanks.

Most of my questions have been asked.

Just wondering if you could put numbers to the competitive environment, specifically as you look at the world.

How do you see capacity down in the fourth quarter in your markets and relative to the third quarter?

Duane, give me just a minute and I'll get you that answer.

Do you have another question?

Yes, was going to take a stab on if you have early thoughts on 2012 ex-fuel costs -- I mean we've got potential cost synergies, potential cost dissynergies.

I assume we should still be assuming dissynergies in 2012 from a cost perspective, so given flat capacity, where do you see cost inflation next year?

Well it's a little early so we'll probably need to finish all our planning for next year and making adjustments as we see that we need to.

I think there will be some cost inflation next year, but we're determined to keep it modest.

Yes, okay, and I agree with Gary.

Preliminary 2012, but cost inflation in most categories.

On the capacity front, Duane, in the fourth quarter, total seats in our direct markets are expected to be down a little over 2% in the fourth quarter, and if you include the indirect markets down 1.6%.

For the whole domestic market seats are down 2%.

Compared to third quarter, seats were up almost 2% in our direct market in the 3Q.

So there, it's a favorable comparison from 3Q to 4Q.

Okay, thanks very much.

Glenn Engel with BofA Merrill Lynch.

Good afternoon.

2 questions please.

1, CapEx can you go over it again for 2011 and '12?

And, 2, I'm pretty sure the debt that's coming due in the next couple quarters is pretty high cost so how much will it end up reducing your interest expense when you pay those bills off?

I'll answer the second question first.

So the $400 million that comes due at the end of December was 10.5% so that's $42 million, Glenn.

And we get a full year of that next year.

The $385 million that comes due on March 1, was it 6% rate?

I'm trying to do that off of memory, so roughly say $24 million-ish on a full year basis, but you've got 10 months of it, so we've got some significant benefit coming next year in our below-the-line expenses, reductions there.

And your first question, I've already forgot.

CapEx.

Oh, yes.

'11 to '12.

Yes, so again we're still preliminary on our 2012 plan.

I think what I shared this morning was $1.3 billion to $1.4 billion is what we're currently expecting.

That does include some capital costs associated with aircraft conversions on the AirTran fleet but it's primarily the 28 new Boeing 737-800 deliveries, as well as progress payments on our 2013 and beyond payment.

And this year is about $900 million?

This year is in the $800 million to $900 million range.

Thank you very much.

Thank you.

At this time I'd like to turn the call back over to Marcy Brand for any additional or closing remarks.

Thank you, Tom.

As always, Ryan and I are available after the call, if you have any additional questions.

Thank you again for joining us and have a great day.

Ladies and Gentlemen, we'll now begin our media portion of today's call.

I'd like to first introduce Miss Ginger Hardage, Senior Vice President, Culture and Communications.

Great.

Thanks, Tom and thanks for everybody who has been on the call.

We've had lots of questions, so let's move right on to the media portion and if you would remind everyone of the technique to line up for questions.

Thank you.

Yes, ma'am.

(Operator Instructions)

Terry Maxon with the Dallas Morning News.

Good morning -- no, good afternoon, by now.

Let me follow-up on the question about code sharing or about being able to interconnect.

Will this include the ability for Southwest passengers to connect onto international flights of AirTran?

Yes, absolutely.

So certainly not from Dallas Love Field because I think there's a restriction on international service connecting or otherwise out of Love Field, but any other Southwest city, if you're connecting to AirTran to an international flight you can do that whenever you get this worked out?

Terry, you can do Love Field as well.

We just can't fly non-stop when the ride amendment is repealed or relaxed in 2014 but we can still have international itineraries at Love.

Okay, very good.

Thank you.

Yes, sir.

Lori Ranson with Airline Business.

Hi, yes.

I was just wondering if you could elaborate a little bit on your evaluation of the Sky Interior.

It sounds like you might consider retrofitting your fleet with a new interior?

Yes, ma'am.

That is exactly correct.

We are very enthused about the Sky Interior.

It is -- we have a separate fleet type now in the 800s, so we do have a unique interior that we have purchased for it, but it does allow us the opportunity to think about what elements of the Sky Interior we might want to consider for either prospective deliveries on the rest of our fleet, like with the 700s or even retrofittings.

So we have made some decisions there and are just not ready to share those yet but absolutely I would concede that that has been a consideration.

Thank you.

Andy Compart with Aviation Week.

Good afternoon.

I just want to clear up some, seem to be mixed signals regarding the 717 in early September.

You were at the Boyd Group conference and you seemed to suggest you might be able to get rid of some of them earlier than the leases expire by the discussions you're having with Boeing but heard Laura speak of the Dahlman Rose conference and it seemed to suggest that wasn't in the cards.

So trying to figure out what is the status with the 717 and is there any possibility of working out some deal to get rid of them before the leases start expiring?

I'll try to clear that up and Laura is sitting right beside me and if she disagrees she can clear it up further.

But I think it's very straightforward.

We don't see a need to have a different airplane in our fleet like the 717 as compared to the 737.

Said a different way the 717 doesn't bring any unique capabilities for us that would justify having the ongoing complexity by having a second fleet type.

So that's just a fact.

Then, the question becomes, well what are we going to do about that?

So I think that if we had an opportunity that was affordable for us to accelerate the retirement, if you will, of the 717s and replace them with 737s, that would be fantastic.

And I think the point that Laura made was very pragmatic which is, well that's all true but right now, we don't have an alternative and they are under lease for quite some time.

So the odds are, you are going to see those airplanes operated by Southwest for quite some time.

I don't see there's any confusion there at all but if in fact, if she and I do find an opportunity to retire them early, we'll give it a very good look because we would rather have the 737 just for the fleet commonality.

I think there's 88 of them so from a practical standpoint, it's just, it would take a while to do that.

Right.

The leases are 2018-2024, right?

That's correct.

But are you talking to Boeing right now or is there any indication you might have an option to get rid of them before?

Absolutely we're tacking to Boeing about a whole variety of things and that would be one, but there's nothing for us to report to you that says we have any different plans right now other than what you know that we've inherited from AirTran.

It's a good airplane, so there's nothing wrong with the airplane.

It's just, as I said, it doesn't bring anything beyond what a 737 could do for us, and especially in a higher fuel cost environment.

A lot has changed this year compared to where we hoped to be in 2010 with fuel prices and that certainly has some bearing in the way we're thinking about utilizing the 717.

Okay, thanks.

David Koenig with the Associated Press.

Hi, good afternoon.

I have a question about demand and, I guess, fares, and Laura touched on this a little bit in the analyst section of the call.

But you've got this confusing situation now where you've both raised prices and have been running a big fare sale this week and how should we think about that?

Does that mean that you're seeing enough demand to raise prices for the peak weeks but you're worried about demand for the rest of the fall and winter or what?

I don't think it's confusing.

Every year we raise fares and we try to do that at an infrequent pace and at a modest rate and every year we also have sales.

So, in other words, there's nothing consistent with that.

We have an array of fares and our fare structure; we have some customers who are extremely price sensitive and will only fly at a certain fare level and we want to get at least some of those folks on board our airplanes; and we use fare sales as a technique.

What is a little different, in fairness to your question, right now is that we are, it's probably a little out of our historic character to be launching a fare sale right now seasonally and that is simply and I think Laura tried to speak to this earlier -- the bookings we have in place are strong but we've admitted that we're very cautious and we just don't want to take any chances in this macroeconomic environment and would rather err on the side of getting more bookings than less.

So it is a reflection of that nervousness, if you will, about the overall economy.

Again you look at our results, we had very strong revenue results in the third quarter, we're seeing a continuation of that thus far in October, bookings look strong, so there is no sense that the economy is weakening by our business.

We're just not taking any chances.

Okay, thanks.

We have time for one more question and it is a follow-up question.

We'll take the last question from Terry Maxon with the Dallas Morning News.

What is your comments or discussions with Boeing on the 737 MAX?

Do you have any in your order book yet?

If you did, we would know it, pal.

But we are, no.

So the straight answer is, no, we don't have any orders yet and we are very desirous of the next generation engine technology and therefore, airplane technology.

We're absolutely talking to Boeing about that and we have been talking to Boeing as you know, Terry, for the past 6 years.

So we're right in the midst of -- because Boeing, of course, just made a decision late summer to go forward with the 737 MAX and so we are just now being briefed on what it does, what it doesn't do, and it's just too early to give you an answer on either our evaluation of that or what we might do.

Are you concerned that you will be too far back in line to get the 737 MAX behind other customers?

No.

Absolutely not.

We expect that -- again, this is a long, many years discussion that we have had with the Boeing Company and I'm sure that they will meet our needs with respect to delivery positions.

Okay, thank you.

Sure.

At this time I'd like to turn the call back over for any additional or closing remarks.

Well, great.

Thank you, guys, for being on the call today.

You know that if you need any additional follow-up, to call 214-792-4847 and we will get back to you.

Thanks so much for being on the call today.

Thank you, Tom, and that concludes the call.

And this does conclude today's conference call.

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You may now disconnect.