西南航空 (LUV) 2012 Q3 法說會逐字稿

Welcome to the Southwest Airlines third-quarter 2012 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, and welcome to today's call.

Joining me on the call today is Gary Kelly, Southwest's Chairman, President and CEO; Tammy Romo, Senior Vice President Finance and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer, and President of AirTran Airways; and Mike Van De Ven, Executive Vice President and COO.

Today's call will begin with opening comments from Gary, followed by Tammy providing a review of our third-quarter results and current outlook.

We will move to the Q&A portion of the call following Tammy's remarks, and Gary, Tammy, Bob and Mike will be available to take your questions.

As a quick reminder, 2011 year-to-date consolidated results include AirTran beginning May 2, the date of the acquisition.

In order to provide what we believe to be a more meaningful year-over-year comparison on today's call, when referring to year-to-date 2012 results compared to 2011, we may provide commentary on a combined basis as defined in this morning's Press Release.

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.

As this call will include references to non-GAAP results, such as combined results and results excluding special items, please reference this morning's press release and 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.

Thank you, Marcy, and thanks, everyone, for joining us today for our third-quarter earnings call.

Third-quarter earnings were $97 million or $0.13 a share, which was slightly ahead of the First Call consensus.

We had a lot of activity in the quarter.

We made a lot of progress.

Clearly, I'm not satisfied with our earnings results at these levels, but always pleased to have a profit.

I do want to thank all of our Southwest people for their hard work and their results.

Again, we made very solid progress on our strategic initiatives that are underway.

We had excellent operations for the quarter, and outstanding customer service.

Just several notable events.

We completed the 717 lease and sublease deal with Delta.

We have converted nine of the AirTran 737s into Southwest at this point.

We opened or converted five airports at or to Southwest Airlines, and at the same time, AirTran shut down operations at six airports, and that brings to 16 since a year ago.

We're continuing our 737-700 retrofit of our interiors, and we now have 147 of the -700's with 143 seats that have been converted.

And in addition to that, of course, the AirTran nine aircraft that are converted are also in the 143-seat configuration.

So, that work is continuing, and we'll continue through the first half next year until we get all of the 700s done.

We made significant progress on a host of technology efforts, and several of those are scheduled for implementation next year, which I'm very excited about.

Our third-quarter revenues and earnings were, again, as I said, they were solid but below our plan and below our return target.

There were definite signs of demand weakness, and especially in September, that month was down on a unit basis about 2% to 3%, and of course, our results mirrored what was going on with the rest of the industry.

The good news that we reported this morning is that October so far is back on track.

Its unit revenues are up about 4%, and sustaining our revenue momentum, of course, is absolutely critical.

So, we have three or four key revenue initiatives that are planned for 2013 to sustain our revenue momentum.

First of all is the continued rollout of our seating reconfiguration of the 700s, known as Evolve.

A second is the connection of the Southwest and the AirTran networks, which is scheduled for early next year.

And really related to that is the ongoing optimization of the combined airlines' networks, and we're doing that with every single schedule that we publish.

And then fourthly is the introduction of a new, at least the first phase of a new revenue management system.

But I would say that in addition to those four planned activities, we're also evaluating opportunities for additional revenue drivers in 2013.

On the cost front, the investments that are reflected in our operating costs to modernize the fleet, I think will pay very handsome dividends, but those costs will begin to ease next year.

And ultimately with respect to our operating costs, at least excluding fuel, our goal is to reduce our unit cost from current levels.

I don't think that's necessarily likely for the full-year 2013, but that is our goal.

And for several reasons, we'll be pursuing aggressive cost-control efforts for all of 2013, with the goal of paring at least $100 million from our corporate overhead.

There's no real fat at Southwest, but clearly I think there's some opportunities for us to streamline and to focus.

I am very pleased with the performance of our all-new Rapid Rewards program, and of course, it is one of our five strategic initiatives, and the very first one to be delivered.

Partner sales alone generated another $50 million in revenues in the third quarter, and we're on pace to do $200 million or more for the year.

In addition, since last year, there's a build in our air traffic liability of over $400 million, and those are cash sales that are in effect locked up until the member takes a trip.

And that is, of course -- those monies have not flown through revenues yet, and that's in addition to the several hundred million dollars that we are counting on in revenues this year from our all-new Rapid Rewards program.

But all of those are contributing to very, very strong cash flow at Southwest Airlines.

Year-to-date operating cash flow was $1.8 billion.

That was well in excess of our capital spending.

That's allowed us to boost the dividend and return $325 million to shareholders in the form of share repurchases.

And on top of that, we've reduced our debt by $517 million this year, along with the effective reduction in our balance sheet leverage to about 40%.

So, we're going to continue this financial discipline, and we're going to do everything that we consider necessary to hit our 15% return on capital target, and certainly that's going to be our goal for next year.

We are falling short of our goals for this year, and again, we're evaluating revenue and cost ideas to augment what is already, I think, an excellent strategic plan.

We've got many exciting opportunities.

I'm delighted with our progress on our initiatives.

Until we hit our targets, we just can't be satisfied with the results.

So, I'd like to welcome Tammy Romo as our Chief Financial Officer and, of course, Tammy is known to many of you on the line, and a 21-year Southwest veteran, and been a Senior Vice President for a number of years in a number of roles, so Tammy, welcome.

Real proud of you, and we'll just turn the call over to you.

Well, thank you, Gary, and thank you, everyone, for joining us today.

As Gary mentioned, our third-quarter net income excluding special items was $97 million or $0.13 per diluted share, which exceeded consensus estimates of $0.12.

Record passenger revenues, high fuel prices, and non-fuel-cost pressures, which were driven largely by our investment spend on our fleet initiatives, were all significant catalysts to our third-quarter results.

Revenues were subject to challenging year-over-year comparisons due to holiday mismatch this year, and of course, last year's ticket tax benefit and the weak revenue yield environment.

Despite the difficult comparisons and slight decline in capacity, our passenger revenues in the quarter were a record performance.

Our load factor and unit revenues were also third-quarter records.

We've implemented five system-wide fare increases this year, which have been revenue-positive.

However, we've had to work hard to stimulate demand in this weak yield environment.

Despite continued economic weakness, we were able to maintain close-in bookings at about 20%, and our business mix at 35% to 40%, both flat year over year.

Yields, though, were down in both cases, as we lowered some walk-up fares in response to weaker demand and more aggressive fare competition.

On a unit basis, our passenger revenues grew 1% year over year, and total unit revenues grew about 0.5 percentage points.

While July and August had difficult year-over-year comparisons, September was particularly challenging due to the weak yield environment.

We continue to significantly improve AirTran's year-over-year revenue performance.

However, on a nominal unit basis, we still have significant synergy opportunities yet to be realized on AirTran's network, and look forward to combining our networks early next year.

We are encouraged about traffic and revenue trends thus far in October.

Passenger unit revenues, as Gary mentioned, month to date in October are up approximately 4% compared to the same period last year.

However, you should note that October last year was the softest month of the quarter, so at this point we do expect our PRASM comparisons to be more difficult as we progress through the quarter.

Before I move to our cost performance, I want to quickly cover the revenue contributions from some of our initiatives.

Business Select revenues were approximately $21 million.

We've recognized $50 million in incremental passenger revenues from our Rapid Rewards program and, as Gary mentioned, we're just very pleased with the Rapid Rewards program.

We continue to produce increased membership, increased partner point sales, and increased trips flown by members, and that's at a higher premium.

Our Wright amendment revenues increased 18% year over year to $75 million in third quarter, with year-to-date revenues totaling $210 million.

We are very pleased by the early results of our 800s and Evolve seating, and both fleet initiatives were meaningful contributors to our third-quarter revenue results.

Through the third quarter, we have 147 Evolve -700s in our fleet, and we expect to retrofit another 100 during the fourth quarter.

While our freight and other revenues declined year over year in third quarter, we currently expect fourth-quarter freight and other revenues to increase slightly year over year based on favorable trends in freight volumes, Early Bird revenues, and charters.

Early Bird revenues in third quarter were $41 million, and we also recognized $75 million in third quarter from other fees.

Turning to fuel, our third-quarter 2012 economic fuel price per gallon of $3.16, which was lower than our most recent guidance, that was due partially to easing jet differentials, and that was due to the less dramatic hurricane season than what we had expected, and more favorable inventory benefit from carrying lower-price fuel in a rising market.

Our hedging premiums, which are included below the line, and other expenses were $15 million, and that compares to $36 million last year.

Based on market prices as of Monday this week, our fourth-quarter 2012 economic fuel price is forecasted to be in the $3.45 per gallon range.

The significant increase in our fourth-quarter jet fuel forecast is primarily driven by lower than normal refined product inventories worldwide.

While Brent crude oil has risen to near $115 per barrel, refined product prices have climbed even higher.

In addition, we are not forecasting the same level of benefit in fourth quarter as we realized in third quarter from using lower-price inventory while prices were rising.

Our net premium costs for fourth-quarter 2012 will be approximately $3 million, down from $14 million in fourth quarter last year.

The increase in our third-quarter unit costs excluding fuel, profit-sharing, and special items was right in line with our guidance.

As expected, investment and our fleet initiatives was a good portion of our third-quarter cost inflation relative to the modest increase experienced in first half of this year.

Other operating expense also included some inflation associated with unique timing, such as advertising spend that was deferred from the first half of the year to the back half.

All told, these items contributed 1 to 2 points of the third-quarter non-fuel unit-cost increase.

The remainder of the cost inflation related to rate increases in both our labor and airport costs.

We expect similar year-over-year cost trends in fourth quarter, with a 2 to 3 point unit cost impact estimated from our fleet initiatives and shift in advertise spend.

As a result, we currently expect fourth-quarter non-fuel unit costs, excluding special items and profit sharing, to increase year over year, similar to the 6% increase experienced in third quarter.

While the increases in the back half of this year are the result of a combination of investments and unique timing, we are not satisfied with our current level of cost inflation, and we intend to be aggressive in addressing these trends.

While I'm not ready quite yet to provide 2013 cost guidance, we expect year-over-year cost pressures excluding fuel, profit-sharing, and special items to ease dramatically in 2013, trending towards flat year over year in the back half.

On the non-operating-cost side, our net interest expense declined year over year from lower interest rates.

We expect a similar year-over-year decrease in fourth quarter.

As noted in our fuel discussion, our 2012 fuel hedging premium expense recorded in other gains/losses is expected to be down approximately $11 million as compared to fourth-quarter 2011.

Gary touched on most of the balance sheet, so I'll go through this very quickly.

Cash and short-term investments at September 30 was $3.2 billion, and cash flow from operations was a very strong $1.8 billion for the first nine months of this year, and our CapEx was $949 million, and that generated free cash flow of nearly $900 million.

For full-year 2012, we anticipate cap spending of approximately $1.3 billion, and for 2013, we currently expect $1.1 billion to $1.2 billion in capital spend.

We repurchased $325 million of stock this year, which totals $550 million or 65 million shares under our $1 billion total stock repurchase authorization, and we've distributed $22 million of dividends to our shareholders.

And as Gary mentioned, our leverage is currently in the low-40% range.

We have about $40 million of debt payments for the remainder of this year, and for 2013, our scheduled debt maturities are less than $200 million.

Overall, we remain investment-grade with strong liquidity, modest debt, and a focus on preserving our financial strength and enhancing shareholder value.

On the fleet and capacity side, we, just to give you a quick update here, we have had 8 of our 34 planned -800 deliveries remaining this year.

Net of classic retirements, we are still planning to end the year down a few units versus last year.

Fourth-quarter and full-year 2012 available seat miles are expected to be flat year over year.

For 2013, we are planning for a modest year-over-year ASM growth with relatively flat fleet.

As we manage the multiple moving parts of our fleet, including integrating AirTran's fleet, we have various ways we can replace the lift we need to support our schedules, without wavering from our commitment to keep our flat relatively constant until we are meeting our financial targets.

First-quarter 2013 ASMs are relatively flat to slightly down year over year.

Our flight schedules currently run through April 12.

We will be publishing the April extension of our flight schedules on Monday.

That schedule will be a continuation of our efforts to manage the Southwest and AirTran networks in preparation for connecting the networks early next year.

We will be publishing the connecting itineraries once the capabilities are ready to be implemented.

Our AirTran synergies are expected to significantly benefit from a more optimal network, once connected.

Thus far this year, we've realized $110 million in net synergies, largely from cost synergies, but revenue contributions should significantly increase as we connect the networks early next year, which supports our plan to achieve $400 million in net pre-tax synergies.

Overall, I am pleased with third-quarter revenue results, and encouraged about October revenue trends thus far With ever-rising fuel costs, we must and will continue to work diligently to control our costs, normalized for near-term fleet investments.

As Gary mentioned, we have significant revenue opportunities on the horizon for 2013, which align very well with our strategic discipline to produce the 15% return on invested capital.

With exciting opportunities ahead, our Southwest warriors continue to make great progress on our initiatives, and I want to thank them for their outstanding efforts.

And with that, Tom, we are ready to take questions.

(Operator Instructions)

We will now begin with our first question from Jamie Baker with JPMorgan.

This is actually Scott Tan on behalf of Jamie.

Last week, you filed what looked to us to be your deepest winter sale on perhaps three or four years, but you also pushed through an across-the-board fare increase.

I know you provided October demand commentary, but we're still having trouble reconciling what seems to be contradictory pricing actions.

Does this speak to friction perhaps between the finance department and the marketing department, perhaps the former is pushing for higher fares and the latter for lower?

Or do you think these decisions come from the same place, any color would be appreciated.

Well, no, there's no friction, although I would welcome that.

They're very friendly with each other, actually.

No, these are decisions that are owned by our commercial group, and in particular, our marketing and revenue management organization, so let me be clear on that.

We have sales that are seasonal and they're annual, so I don't think you should read anything into that other than sometimes the sales are more or less aggressive, and that is a function of where we see demand in our business, so there's nothing at all unusual about a sale this time of year.

Fare increases of course are always held close to the vest.

We don't telegraph those, we don't tell you what's coming next.

We look for fare increases on the whole fare structure in particular, when costs are rising, and that's exactly what we reported to you, which I'm sure you already know.

Jet fuel prices are up sharply over the last 30 to 60 days and as I said in the press release, I'm disappointed with that.

But no, we are evaluating opportunities to raise fares, and on top of that, we are managing our seasonality and our business with fare sales so if you're sensing that the sale is a little deeper this year, I don't know if I have a comment on that, other than to admit to you all the very obvious, which is we did see weakness, especially in September, and as we reported, we continue to be very concerned about the economy.

The good news is that we seem to be back on track in October, but I'm not willing to make any predictions about December or January quite yet.

Great, great, thanks, Gary.

Was just curious because we saw the Southwest's big deal 40% off sale, that was in relation to the question but as a follow-up, Gary and this is more for Tammy, you mentioned that costs will ease in 2013.

Did you say flat CASM ex-fuel for 2013 or just the back half of 2013?

No, not for the full-year 2013.

I would, again, we haven't given guidance.

I would expect we would likely be up still for 2013 because again, if you include the investments that we're making in our fleet initiatives.

But yes I did what I did say was that we do expect the cost pressures to ease dramatically, and we would be trending to flat by the second half of the year.

Okay, got it.

Very good.

Scott, I'm glad that you noticed it was 40% off and I hope you got out there and bought a whole bunch of Southwest tickets.

I tried to.

Thanks.

We'll take our next question from Glenn Engel with Bank of America -- Merrill Lynch.

Couple questions.

One, depreciation jumped up a lot from the June to September quarter.

Does that have to do with buying planes or just older planes having higher depreciation levels?

Yes, Glenn, our depreciation, we've been of course adjusting our fleet plans, but the quarter did include expense for the revised salvage value associated with the accelerated retirement of our classic fleet.

So that's the base level to start from fourth quarter as well?

Yes, that's correct.

You talked about your other revenue being down despite the fact your Rapid Rewards revenues are up.

So what is driving down another non-passenger revenues?

We had lower fees versus a year ago level.

We had a reduction, and of course some of the AirTran ancillary revenues as we're moving those airplanes over to Southwest, and that's probably the majority of it.

All of the increase in the Rapid Rewards is in passenger revenues.

And the $110 million of pre-tax synergies, you said it was on the cost side, yet your unit costs were up 6%.

How come we just don't seem to see that number anywhere?

I think those are just being again offset by inflation, because you just mentioned we have some in our depreciation expense, our airport costs are up, so we are seeing some inflationary pressures throughout all of our cost items, but when you track where AirTran was, versus where we are today, we are seeing lower costs.

I think we're seeing also some pressure in our maintenance area, which we're seeing, we have increased rates on our 700 engines, so it varies throughout our cost structure but back to what we said earlier, we're not happy with the inflation that we are seeing in our cost trends, which is going to be a significant focus for us in 2013.

And finally, I was a little confused, the full fare mix, last year it was 17% in the third quarter and I think it was 17% in the second quarter or the quarter that just ended, what number did you say it was in the third quarter of this year?

Glenn I'm going to point you back to, I think what I mentioned earlier was the 20% close-in passengers, I mentioned during my remarks, with more walk up discounting needed to stimulate traffic in this tough yield environment, the full fare percentages we provided historically really just aren't that meaningful, so I'll point you more to just our kind of walk-up mix which is 20% and that is right in line with last year.

And with that walk-up mix though so much lower than it was 10 years ago and generally trending down, is that a sign that the full fare hikes that you've been doing have gone too far?

While our fare increases, we have pushed fares, as you know, we had five increases this year and actually last year we had about eight, but while this year's fare increases, they have been revenue positive so that's number one.

But definitely I would acknowledge that the impact to our revenues has been less dramatic relative to historical results, which is why we have our fare sale that we offered today so we are having to offer more discounts to our close-in passengers as well.

But I think you have to look at the overall revenue number, and it is definitely a component, obviously driving our revenues, but our revenues even with a higher mix of quote, full fares, years ago, our unit revenues are up in huge numbers.

In five years' time we're up 40%.

So the other thing that is very different Glenn is that from the days that you and I worked together in the 1990s, we were all short haul and the mix in short haul markets today as compared to them compares better, but the full fares have never reached that kind of historic level in long haul markets so there's a number of reasons for the change but I think our net argument is we have to manage our total revenues period, from whatever array of techniques we use and it's just a different airline today than it was 10 or 20 years ago.

Thank you very much.

We'll take our next question from Michael Linenberg with Deutsche Bank.

Just two questions here.

I want to go back to I think you'd mentioned, Tammy or Gary, on the other revenue maybe being down a little bit as some of the ancillary shifts away, when you convert an AirTran airplane to a Southwest plane, or a station from AirTran to Southwest, I'm sure there's some puts and takes there.

One is that the airplane goes online into the Southwest network, but then you lose the baggage revenue, the first-class revenue.

What are you seeing with the pluses and minuses, what are some of the things that you have seen as you've gone through that conversion?

Tammy, you want me to take a swing at that?

Sure.

Mike, I think first of all, when we bought AirTran, Southwest outperformed AirTran on a unit revenue basis.

Since we've owned AirTran, at least through the latter half of last year we made significant improvements in their RASM, and that was mostly with revenue management, so we just took a little bit different approach with their fare structure.

In other words, that worked fine late last year, seasonally it probably wasn't as effective, that Southwest technique if you will, in the first quarter of this year and we made some adjustments with pricing primarily since the first of the year.

With their product and their away of fares and fees, as it stands today, they are no better than Southwest Airlines without fees.

In fact Southwest Airlines performs better.

What is happening though as AirTran continues to make what are really dramatic changes, and I think Tammy reported this, their capacity was down over 15% year-over-year in the third quarter, and I mentioned this too, they closed six airports, they've closed 16 over the past four quarters, and their feed into and out of Atlanta is not as productive as it was before we started tinkering.

On the other hand, their mix of non-stop traffic is up significantly.

Within AirTran, we're kind of going through quite a bit of churn and we'll have a much better AirTran network next year as we continue to tune it.

I think the bottom line answer to your question is we're seeing what we expected, which is we have a better opportunity to produce unit revenues on the Southwest brand than what we have on the AirTran brand.

But in fairness to AirTran, we're making a lot of changes that are sub-optimizing it here in this interim period, so but yes, certainly we want to get it over to Southwest just as fast as we can.

Good.

My second question when I look at your hedge book, if I look back a quarter or two, it seemed like you were over 50% of 2013, you had a hedge position on, and I think now its pulled back a bit, like it's below 15% and you've backed away in the fourth quarter.

I'm curious over the last quarter or so, was there maybe a shift in sort of your thinking where energy was moving or when we saw that sizeable fall-off in fuel, you may have backed away from some of your positions, so you wouldn't have such a large draw in your cash position.

What drove that retinkering of the hedge book?

Well Tammy is just getting involved in this, so I'm probably the common denominator of where we are, so I'll go ahead and answer this one too, and Tammy can chime in.

But we have a hedge built in 2008 that affects 2012 and 2013, and those hedge prices were relatively high, so we have worked that hedge down.

Mike, I would think about it like a put, so we have higher put exposure with the hedge position three or six months ago than we would like, because we are concerned prices will come off and create hedging losses so we've worked very aggressively to manage that hedge to a lower position.

The coverage that we have in place now for 2013 I believe is 15%.

That's right.

And that is a view that prices aren't going to go up significantly in that time period from where we are today.

If they do, we've got very good heaver coverage in place for -- it's a portfolio management if you will, so we've got good coverage in 2014, good coverage in 2015 and minimal downside exposure now for 2013 I think is the way to best explain that.

If we have opportunities to boost our hedge in 2013, well then we're primed to do that, mindful that we don't want to spend a whole lot of money on hedging premium, so actually, I think, we're in the best shape we've been in a while with our hedging.

Especially if you look in the rear-view mirror, and see what prices have done, its just been a horrendous time to try and do any meaningful fuel hedging, so I think our folks have done a great job there.

Okay, very good.

Thanks, Gary.

We'll take our next question from John Godyn with Morgan Stanley.

Gary, as somebody that's seen a number of cycles, can you just talk about your thoughts on the demand trends the industry is facing today, compared to what you remember it feeling like in other sluggish GDP environments?

How do we know whether the weakness we saw in September was a blip within a solid trend or whether the strength you're seeing in October is a blip, and demand trends overall are turning worse?

I think really this period since 2008 is unlike anything we've ever seen, and the oil markets, it's really the same story, for the economy, for travel demand and for the oil markets, they're extremely volatile and I think the bottom line answer to your question is, I don't think we can be sure that September is just a blip.

September's performance is inconsistent with what we saw in June.

On the other hand, we did have some interesting comps in July and August but we were also off our plan in those two months a little bit as well.

But I look back at our earnings plan for the year again this morning.

We were ahead of plan as of June, and now all of a sudden, three months later, we find ourselves pretty significantly behind plan for the year, so that's how fast things have turned on us, and why it makes it really tough to predict from here.

But we all know the political uncertainty, we all know the fiscal issues that the country faces and the debt, and the elections are upon us, and I don't think any of us can predict exactly where the economy will go from here.

I think all of the economic signals, as we see them, are very mixed.

And as I look at our trends compared to everybody else, I don't see any difference in trends so it's nothing unique to Southwest.

Okay and you mentioned the election.

Are you a believer in this idea that its weighing on closed in demand right now and there could be a pop post-election if we get more certainty, do you believe that?

Well, here is what I do believe.

I think empirically, capital goods orders, business investment, those kinds of broad economic metrics are definitely in decline in 2012, and as we know out of 2008, those were really the drivers in the recovery.

Consumer spending, as we look at that separately, as long as our marketing folks have the right price point and the right sale effort, we get all you can eat when it comes to consumers there, so we have record load factors, very strong demand on that front, but it's the business travel that seems to be the softer piece, and I think by extension, yes, one could speculate or hypothesize that's what's causing it.

And in the end, we don't know, but it is somewhat of a mystery here to see September be as weak as it was and October to look pretty normal.

Tammy did make the point, and I'm mindful of that, that our October a year ago wasn't so strong, but at least sequentially, relative to I think prior month this year, October looks pretty darn good, so we're not trying to qualify October too much.

I think it's just an admission that we can't predict from here where things are going to go.

Just a quick note on the 4% October number.

Is that the right expectation we should have for the end of the month if demand trends don't really change, or is there something in the comps that's naturally going to bias that number?

You mentioned that comps get tougher throughout the quarter, but would that bias the month number?

There's nothing in particular for October, assuming the stable revenue environment, so no, it was really more directed to as we progress through the month.

And particularly, if you just note December, there is a mismatch in how the holidays fall this year versus last, so I do think it will make the comps more difficult in December.

Okay, thanks a lot.

We'll go next to Thomas Kim with Goldman Sachs.

Could I ask you to elaborate on the new revenue drivers being explored and if it's too early or premature to go into that now, could you give us color as when we might expect further news on that front?

I knew if I teased you.

No I don't feel comfortable sharing our thinking because they are not committed initiatives yet, but I did want to admit what I think is the obvious, which is we're off plan.

We do have some concerns about the economy and higher fuel prices, and I don't think we want to just continue on with business as usual.

So we will be looking for ways to augment our current strategies which I'm very enthused about already, but we're looking for ways to augment those, and have not made any decisions yet admittedly, but with a thought towards something that could impact 2013, that's on the revenue front.

I think I can be a little bit more committed with you on costs, and our corporate overhead in particular.

We are working on cutting our overhead budgets, and again as I mentioned, we'll be looking for at least $100 million from that perspective.

And the balance here is that the Company is working very hard.

Our people are very dedicated, helping Southwest Airlines manage through a very challenging transition, transformation, and it would be unwise to starve the Company from necessary resources to make those investments pay off.

So it's going to take us two years worth of work, as an example, to bring in international service from a technology perspective.

We've got to have the resources to make that happen.

I just want to make sure that we're focused and that we're not committed to do things that don't add value and I feel very confident that we can trim our cost there.

Tammy already mentioned that some of the investments of course will play out here naturally, like the Evolve seating, we'll be done in the first half of next year so that will provide cost relief, and we do have a bit of a bubble this year with transitioning our AirTran 700s onto our engine maintenance contract, so those costs will also ease in future years.

I think we're very well set up to manage our cost overall much more efficiently, 2013 and beyond.

Great.

Can I just ask one more follow-up question with regard to the landing fees?

I noticed they had risen about 8% year-on-year, and when I compare that to the trips flown which declined, I wanted a better understanding as to what might have driven that increase, if it was inflationary pressure or something else going on there?

That category of course includes airport rentals for space, in addition to the activity driven landing fees so it's the rentals piece of that's gone up.

Significant to construction projects that went into effect in Las Vegas, in Sacramento, very expensive, and believe it or not, going to move the needle almost all of the degree that you see there so it's not landing fees is the point.

We'll go next to Jeff Kauffman with Sterne, Agee.

Congratulations Tammy.

Thank you.

So I thought I'd ask you a question to celebrate.

Just looking at the current analyst guidance and for 2013 the guidance you've given on the cost side and the CapEx side and what you've given us an idea on debt maturities, it looks like you have about $600 million or $700 million of potential cash flow that's not really relegated to debt pay down or CapEx or operating working capital.

What are your thoughts to the extent there is excess cash?

I know you've used a lot of it to retire debt this year.

Is the thinking to build back up the cash stockpile, or are there other places that potentially, if you had $600 million $700 million of uncollared cash, that you might dedicate it?

Well absolutely.

We went through our stock repurchase, the increase in our recent increase in our dividend, we are very focused on enhancing shareholder value.

As I mentioned earlier, we do have $1 billion stock repurchase authorization, of which we to date, we've used $550 million of that.

Now I wouldn't comment on what our plans are going forward, but certainly we do have authorization if indeed we determine that's appropriate.

At the end of the day just to answer your question, we're, I guess the choices are to invest back in the business, and we've already told you that we are committed to a flat fleet until we achieve our target, and then to the extent there's excess cash, then we'll obviously explore ways to enhance shareholder value.

Is there a minimum cash threshold that you want to keep on the balance sheet or just because the investment account is so large, no need to worry about that?

Sure.

I think we've been fluctuating around that $3 billion mark, and that feel pretty comfortable with those type of levels, so really no big deviation from where we are today.

Okay, thanks a lot.

Gary, congratulations.

We'll take our next question from Helane Becker with Dahlman Rose.

So I think earlier this week, Gary, there was the 717 that was hit by a catering truck.

Can you just talk about the disposition of that aircraft, and how if it can't be fixed, you make amends with Delta?

Helane, I'm going to ask Mike Van De Ven to answer that question.

Helane, this is Mike.

So there was some fuselage damage to the airplane, and we will send it into a maintenance provider and we'll fix the airplane.

It was not any significant structural damage to the airplane.

Okay, great, thank you.

And then my other question, Gary, can you prioritize the initiatives you have going at this point in terms of international reservations, international res capability, the ability to do over-water flying for Southwest, how we should think about the next couple of years in terms of getting from here to where you'll be able to fly to Hawaii and Mexico and so on?

Well, Helane, I'll just very quickly recap the initiatives and hopefully explain how they all tie together.

The first one that's already up and running is the frequent flier program.

AirTran of course is an integration initiative at this point, so that's the second.

We've got the 737-800s, and of course we're well on our way in the implementation stage of that initiative.

We've got Tammy, I believe, 24 800s on the property at this point, and we're firmly committed to 78 over the next -- cumulative, over the next several years, so that's the third initiative.

The fleet modernization is probably the biggest work effort, but also the biggest potential value driver that we have, and I think you're familiar with that.

And then finally is I'd sort of put it in a grouping of replacing our reservations technology and also enhancing our revenue management technology.

They're somewhat different but they are very intimately tied together also.

Every one of those five initiatives by the way is worth somewhere in the neighborhood of 500 million or more, except for the 800s.

It's the only one that falls below that, and it's probably worth $150 million.

What we don't know until we get it all built and implemented is whether there's some double counting, but there is a big portfolio of value that we have under construction that we're pursuing.

The international probably falls into several categories.

I think that international routes look very attractive from a profitability perspective.

Of course, we need technology to enable that, but it is also a straight line to integrating AirTran, meaning that AirTran has international service.

We must bring up international capabilities within Southwest Airlines to finish the integration of AirTran, so it's a very high priority.

We're working with Amadeus.

That project was launched many months ago and was right on track and is scheduled for completion in 2014.

The other value that effort brings us is it is a first meaningful step towards the ultimate complete replacement of our reservations technology, which we very much need to do, and obviously want to get that first step completed for that reason also.

Separate from that, we have a revenue management system that is going in next year and I'm calling that Phase I, when we have a new reservation system that will also bring added revenue management capabilities and then revenue management has other phases of their project they will be pursuing over time So collectively that whole replacement of reservations and revenue management is a very, very significant effort for us.

And again as I said it brings the international capabilities with it and the international routes look like they will be handsome profit opportunities for us.

With respect to Hawaii and things like that, other than having Southwest Airlines capabilities in place, I don't want to give our competitors a sense of our priorities for opportunities like that.

On the operations side, Mike Van de Ven and his operations team separately are doing everything they need to do to have us properly certified for the various phases of international flying that we can do.

Right now, he's working on approving flights for San Juan as an example which is not international technically, of course that's a US territory, but all that work is under way, and it is hard work, but the harder work of course is replacing our reservation system technology.

Great, fair enough, thank you.

Just for Tammy, what's the share count we should use now after all your stock repurchases?

Sure, Helane.

We are, well obviously it depends on where our stock price is, right?

But based on where the stock price is roughly today, on a diluted share basis, it's in the 745 million range, 745 million to 746 million range.

Okay.

And it's of course 740 for the third quarter on the press release.

Okay, thank you very much.

We'll take our next question from Savanthi Syth with Raymond James.

What was the Business Select as well as the pets and other fees this quarter?

Our Business Select, our revenue was $21 million and our fee, our pets, unaccompanied minors, and excess bags were roughly $19 million to $20 million and our Early Bird revenues were $41 million.

Great, so just wondering, with AirTran's fleet moving over to Southwest, should we expect the other revenues to be down year-over-year for a while now since we are losing some of the revenue from those?

Yes.

That would be going the other way, you're correct.

Okay, and then just one last question.

On the fleet transition, how much of the targeted savings have you realized so far?

Are you still on target for that $70 million for this year?

Yes, we are.

We are on target on all of our fleet initiatives, the numbers that we provided to you previously, which by 2015 are well in excess of $0.5 billion.

I think we gave you over $700 million.

We're on track.

Okay, great, thank you.

We'll go next to Ray Neidl with Maxim Group.

I just wanted to have one specific question and a general question.

To go back to the maintenance materials from your peers, which has been increasing in low double digits, what happened there, and what should we look for going into next year?

I think there's, and Tammy you may want to pick up on this, and Mike is here too, so whatever you all would like to pitch in here.

There are two major drivers there, Ray.

One is we renegotiated our engine maintenance contracts with GE, and part of that was to incorporate AirTran into the especially the Dash-700 maintenance program.

That resulted in an increase in our maintenance engine expense in 2012.

The second driver in 2012 is this 737-700 seating retrofit that we're doing, so all of that for accounting purposes is being expensed, so that's also an increase in the maintenance materials and repairs line.

And Tammy, you may pick up a couple more things here, but the main point that I wanted to leave you with is that you're seeing a bubble here in the maintenance materials and repairs line item.

The retrofit will complete next year, and so that spending will go away and the costs will begin to come down.

Over time, the engine cost component will also begin to come down, so we have a bit of a bulge here in 2012 but our long term outlook for maintenance, materials and repairs spending is a trend down and it looks very, very good.

Part of this is the fleet modernization.

Part of it is in other words, retiring 717s which are very maintenance-intensive and also part of it of course is retiring our classic fleets, which are also pretty maintenance-intensive.

Gary the only thing I would add to that is if you, without the Evolve charge here in the third quarter, the maintenance CASM increase was approximately 5%, so it would have been significantly less.

About 5 points less.

Okay, great.

That's kind of what I thought and the general question is your system, I know you're being very conservative with the economy and so forth, but with the AMR restructuring, what you're seeing in Dallas, what you're seeing in Houston with Hobby with United, and the actions they're taking and most importantly Denver, Frontier seems to be making a real comeback at the major hub there.

How is that affecting your growing operations there?

Well, I guess, I think you put that one in the category of the general question so I'll answer you generally.

I think competitively we're matching it very well, and seeing nice opportunities to pick up some business here at Southwest Airlines so I think most of our challenges right now are internal, in other words managing our own transformation, maintaining our own operations, our own customer service, but when it comes to opportunities for us to grow, I think the opportunities are going to be there.

I think they're going to be there domestically.

I think they're going to be there internationally and to include Hawaii and Alaska.

Obviously, we'll be disciplined about our growth until we can justify making the investments to grow, but the opportunities are there, and I will certainly include the areas that you mentioned as opportunities for Southwest.

Thanks, Gary and congratulations.

We'll go next to Kevin Crissey with UBS.

Can you just go through the capacity by month and capacity year-over-year by month so October RASM is up 4 on what?

We can do that.

Our October ASMs were pretty much throughout the quarter, roughly flat, there was no -- pretty much flat each month year-over-year.

Terrific, thanks.

Gary going back to one of your points and I may have discussed this on other calls and maybe it's the element that I harp on, but you mentioned about fare increases, particularly when there's higher costs, conceptually I'm not sure I understand why that happens.

I understand if you're having trouble making a profit you set a new schedule, but I would think the pricing would be determined on the supply and demand on a market-by-market, day-by-day, flight-by-flight basis and really fuel prices going up or landing fees or any other factor shouldn't affect your pricing departments behavior, they should be maximizing the price from point A to point B. Why is that not the case?

It is.

Kevin, you can't piece all of that apart.

The market will react to changes in raw material costs, so it's certainly going to be easier to pass through price increases when demand is strong, and bear pressure to the industry to increase prices, that's all.

But it's a market driven exercise, no question.

Thank you.

Ladies and Gentlemen we have time for one more question during our Analyst portion.

We'll take our final question from David Fintzen with Barclays.

Actually just to segue off of Kevin's question, just for Gary, I'm curious, just given some of the economic caution that you're expressing and just going back to the 2013 capacity outlook, how should we think about how willing and able you are to start making adjustments there?

Is that something where there's so much going on internally it's going to be harder to make capacity adjustments as you need to?

Don't let me read something into your question that you don't intend.

You mean to make downward adjustments to our capacity?

Well if you're starting to get more cautious because you've come under plan and you need to start to react to that in terms of the economy, you lose flexibility when you've got a lot of initiatives going on internally.

No, I'm not challenging the validity of your question.

I think it's a very good question.

No, I think we have plenty of flexibility to manage our capacity.

Now we're published, so we're published out through April, and I think we just reported that we're about to publish our next schedule, which will take us out through June, something like that.

So it is, once we publish the schedule, we would prefer not to go in and make material changes to that published schedule, but every schedule we publish we're thinking about what kind of capacity we want to produce.

And I don't think we're telling you that our outlook for 2013 is pessimistic.

That's not the message today.

I think the message is actually we feel like we have a very good plan for 2013.

What's built into the plan is already revenue improvements.

We're talking about trying to augment what is already planned and committed for 2013.

We're going to try to create a little insurance for ourselves here with some cost control efforts, and fuel is always a wild card, but we tend to be pretty good at hedging so we'll be looking for opportunities there, at least on price.

You will notice that in the third quarter that we had a nice improvement in our fuel consumption by our operating department, so I fully expect that's going to continue next year, so our goal is to hit our return target in 2013.

So given that, we're not sitting here thinking that we need to make some significant adjustments downward to our capacity, but in the end, I want to admit that we're prepared to do whatever we need to do to keep the Company healthy, to maintain our discipline, to hit our target, but that's how we would think about capacity changes, and I think the main point that I think is responsive to your question is absolutely.

We have flexibility to adjust our capacity.

Okay, great.

That's very helpful, thanks.

And just maybe a quick one for Tammy.

I don't know if I heard you quite right.

I saw in sort of the progression of CASM ex-fuel, ex-profit share next year, did you say it sort of tapers off towards flat towards the end of the year, or is there a step down at some point where we start to overlap the Evolve and some of the other things that hit particularly towards the second half of the year.

I'm just curious how profile generically looks.

Again we're still working on our plan for next year so we'll provide more specific guidance later but it does, there's probably more a step between the first half I would expect and the second half just given the timing of the Evolve.

Okay, that makes sense.

Wanted to make sure I understood.

Thanks, appreciate the color guys.

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

Thank you, Tom.

Thanks everyone for joining us today.

If you have any follow-up questions, of course we will be available this afternoon.

Thanks again.

Have a great day.

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

I'd like to first introduce Ms. Linda Rutherford, Vice President, Communications and Strategic Outreach.

Good afternoon, everyone.

Thank you for participating.

We're going to go ahead and start with the media participants so Tom if could you give them instructions for how to dial up?

(Operator Instructions)

We'll now begin with our first question from Sheryl Jean with the Dallas Morning News.

I have a clarification question first and then a follow-up.

Did you say that your plans to reduce unit costs and pursue cost controls will start next year or in 2014?

This is Gary.

Yes, it's for next year.

Next year, okay.

For 2013.

I think what Tammy was describing was that, given the strategic initiatives and the construction projects, as we refer to them, those investments, given those things that are in play, that investment will naturally begin to taper off in 2013 so that by the time you get to 2014, you'll have some nice cost reductions, so that was her point.

What I'm saying is that in addition to that, we're going to be looking for some spending cuts that we can make, that would be effective in 2013 from our budgets, in excess of $100 million.

That's what I said.

Okay, and so do those options for cutting costs include layoffs, possible layoffs?

Well that's always an option for a Company, but to be clear, no.

That's not what I'm contemplating at this point, not at all.

Now, we may sharply curtail our hiring, and our total employment in corporate functions, if you will, may begin to fall as people, as we have voluntary turnover within the Company, so that may be one of our ideas, but at this point, I'm not suggesting that we're going to have layoffs or furloughs, no.

Oh, well there is a report out there that supposedly a letter went out from you to employees saying that there will be workforce shrinkage next year.

Is that not true, then?

Sounds false.

Okay.

And can you, I also wanted to see if you could give more detail on other cost-cutting opportunities that you might be pursuing in terms of, if you could be specific.

I'm not ready to be specific.

I think the array of things that we'll be considering would be getting supplier costs down, getting, creating more efficiencies in our supply chain, looking for opportunities to stop doing things.

There may be some projects that we have under way that we just don't feel add enough value, and we can simply stop doing that.

We can, through that mechanism, reduce the support that we need from outside contractors, outside consultants.

There's a whole variety of techniques that we can use to reduce our costs, and again, to be clear on your memo question, it is our desire to control our hiring in such a way that we don't increase our total headcount.

What that would lead to is a reduction in total headcount.

I see.

So that may be what you, I don't know what you have your hands on, but in terms of actually asking people to leave, or layoffs or furloughs, no we are not contemplating that, but we have other techniques to manage our total employment by simply not hiring to replace people as they leave the Company.

Do you have a specific target of what you want the headcount to be at the end of next year versus what it is now?

I do, but I don't know that I'm ready to share that, just because we haven't committed to it, but yes, we would like to, as a percentage of the total Company it's not going to be large but as a percentage of our corporate overhead, it would be pretty meaningful number.

But we haven't committed to it yet so I'd rather not share it.

Okay, well I'll let somebody else ask a question but I might be back.

Thank you.

We'll go next to Andrea Ahles with the Fort Worth Star-Telegram.

So you talked about looking at other revenue strategies or revenue possibilities for 2013, so I'm wondering if you are reconsidering bags fly free.

Well, for now, of course not.

I don't think we would ever say no to anything whether it's assigned seats or charging per bags, but we'll be looking for any and all good ideas, to see what we can do to augment our current strategies.

Can you give any more clarity on what revenue initiatives you are talking about?

Are these charges that revenue initiatives where customers would be impacted, where they would be seeing more fees, or are these more like partnership types of things like you've done with your Rapid Rewards and generating more revenue from the Frequent Flier program?

I think at this point, we're simply on a mission to see if we can come up with some ideas that we like, that we think will be effective that will enhance the brand, and it's just premature to share anymore than that.

Okay, thank you, Gary.

We'll go next to Josh Freed with the Associated Press.

You all have a competitor over in Fort Worth that had some trouble last month.

Did you see any booking away from them to you?

It seems like maybe there would have been some benefit for Southwest through all of that.

Was there, and how much?

The honest answer is no, I don't know that I would detect that, and now I'm having trouble remembering what occurred in September versus October, but our September results, as you know, weren't so great so there's no meaningful evidence that we saw a benefit, but common sense would tell you and me that we absolutely had to have some benefit.

There had to be some people that were booking away and there were a lot of cancelled flights.

I know for a fact that we picked up a lot of customers on that basis, but in any event, I'd assume whatever it was it's temporary and American is a good Company and they will get their act together, and I'm sure they will continue to be a very formidable competitor for us.

The most recent fare increase we saw go through, that October 9 one, it seems like it started by United and then it kind of started to go away and you came back and revived it.

Why the delay?

Was there something special about this one that caused you to think about it a little longer?

I don't feel comfortable really talking about our pricing decisions except to say that we aspire to be the low fare carrier in the United States.

We're very careful about considering any increases in our fares, very thoughtful and I don't think that's really different from the last 41 years.

We're in an environment where costs for the industry are going up, and fuel prices in particular over the last 30 to 60 days are up very sharply, and right now we're staring at record fuel prices for the fourth quarter, so that's our thinking, but beyond that, I'm not comfortable in sharing anything.

Okay, last really quick question.

Delta bought a refinery.

Do you have any interest in either that or anything that is sort of similarly outside the box on the fuel supply side?

I think again over four decades, we have looked at and thought about a lot of things.

Fuel is such a major dependency for a transportation company.

It's a lot of risk, it's not in our wheelhouse and it doesn't obviate the need for hedging, so our approach will continue to be just do the hedging as the mechanism to best protect ourselves on price.

If we had a supply concern, I think that would be different, and that's a lot of what's going on there is, a lot of refineries are being shut down on the East Coast.

It actually is beneficial for Southwest Airlines, selfishly for Delta to be bringing that supply to the East Coast.

That just takes them, yes they will be supplying themselves, but that means we don't have to compete with Delta for supplies from the rest of the industry.

So if that's what they want to do, we'll cheer them on, and I think looking at other alternatives to crude oil will continue to be something we'll want to monitor.

But at this stage I just don't see anything in the near term that's commercially viable there, but we're always looking for good ideas.

Okay, thanks a lot.

We'll go next to Karen Jacobs with Reuters.

Thanks for clarifying the word on the headcount plan.

I had questions about that myself.

I'll direct my question, it is kind of a question tied to labor as well.

You might recall that the TWU, which represents groups including ramp and freight agents at Southwest, filed for federal mediation, I guess it was a joint action with the Company, but in their statement, they seemed to suggest that the Company was taking a new approach to labor in some of the proposals that it had made in the collective bargaining process, basically calling some of the changes that the Company was proposing concessionary and unacceptable, including outsourcing jobs.

So my question to you is are you taking a new approach to labor?

Mike Van de Ven is our Chief Operating Officer and leads our efforts in these areas, and I'm going to let Mike tell you what he thinks.

Well Karen, it's not unusual for Southwest Airlines to go to mediation in our labor contracts, and we've done that several times in the past, and it's really just a way for us to work through very complex and difficult issues.

We have exceptional ramp and ops employees.

TWU covers a lot of our workforce, and generally have a really good relationship with them.

We have our competitive position, with respect to our labor costs have changed for Southwest Airlines, as a result of bankruptcies through all of the other carriers.

What we're trying to do is make sure that we can protect our people's pay and our benefits and our job security, and try to look for ways in the contract where we can get the right staffing of people at the right place at the right time, so we can provide good service and grow our companies through those mechanisms.

So those discussions are difficult.

They are complex, they are new approaches to our labor contracts that we've had in the past and so I think that's what's causing a little bit of a frustration.

We are not trying to outsource jobs.

Actually we would like to have more part time flexibility to bring part time workers into Southwest Airlines and put them in places where we need them, in terms of the demand, so I think it's just a natural progress that we're going to work through, and I wouldn't say that we have any other different approach that we've ever had.

We want to make sure that we protect our people's jobs, we pay them appropriately and that we have the most productive and efficient workforce in the industry.

If I could have a follow-up, I couldn't help but notice the other day that you brought on Mr. Babbitt as Chief of Labor Relations.

Is this a sign that you expect labor talks to become more contentious?

I don't think they're more contentious at all.

I think the fact of the matter is, we have complex and difficult issues to deal with and to have somebody like Randy be available with his background, and his experience and his approach to labor, where it's very complementary, we wants to work in a partnership with labor unions to go find answers to difficult solutions, to me, he is the right person at the right place at the right time, and we are so happy to have him join Southwest Airlines.

Thank you very much.

We'll take our next question from Kelly Yamanouchi with the Atlanta Journal-Constitution.

I'm interested in asking, when you connect the AirTran into Southwest networks together next year, how large of an operation do you expect each of the carriers to have, and when exactly do you expect that to happen?

Kelly, those schedules are already published, so in other words, our intent is to launch the network connections early next year, and the schedules are already published out through April, so that is the size of the operations.

Now so what it means by connecting the schedules, and I think, particularly in Atlanta, is that you'll on top of the current customer schedules that are published, we'll have hundreds of new origin-destination itineraries that will appear that can be booked, so it won't change the flight activity, but it will change the itineraries that customers can buy, and obviously, we're very excited about that.

But Bob Jordan our AirTran President is here, so Bob, is there anything you'd like to add?

Yes, Kelly, I'd just say the same thing.

We've got a lot of opportunity in Atlanta, Baltimore, Milwaukee, Orlando, a lot of places where we share a lot of service with AirTran and so the customers there are going to see access to a much broader network, particularly on the AirTran side, where they are able to access a very broad Southwest network.

So you'll see the same, as Gary mentioned, you'll see the same flight activity on each carrier that's currently published, but you'll see a lot more itineraries on the shelf so if you go to Southwest.com or AirTran.com, you'll see a lot of things that you can buy that connect the carriers that are not there today, as published in the April schedule, so we're just really excited about that.

Would be a significant shift?

Not a shift in the schedules so the schedule AirTran has and the schedule Southwest has they won't shift in terms of what you see published already.

What will shift is you'll see connecting opportunities that are not published today, so you'll have an AirTran flight for example, that today cannot connect in Atlanta as an example, or Baltimore that can not connect to Southwest, and once we turn it on, so you'll see a number of market opportunities and connecting opportunities that will of course produce a lot of new travel itineraries for our customers and revenue opportunities for Southwest Airlines.

Okay, great, thank you.

We have time for one more question.

We'll take our last question from Ghim Yeo with Flight Global.

I just wanted to ask about the retirement of the 737s.

I think it was earlier on that you mentioned that will likely contribute to helping you to bring our costs down.

Are you able to elaborate more on that?

We have I think at our peak we had just over 200 so-called classic 737s, and the model types that we had are the 737-300 and the 737-500.

We've begun retiring those several years ago.

I think at this point, I'm just checking my numbers here.

We've got 156 of the classic fleet on hand.

By the end of this decade, all 156 will be retired from the Southwest fleet.

That is sooner than what we had previously planned by several years, and in fact our desire is to retire them on an accelerated rate, and we may get them retired earlier than 2020 for that matter.

Those aircraft they're good and safe airplanes.

They aren't as fuel efficient as the current generation, and they're more maintenance intensive than the current generation.

We just feel like by retiring those and replacing them we'll have a more efficient more reliable, more cost-effective aircraft going forward.

Okay, great.

Thanks and just to follow-up to that you would still be rolling out the Evolve project on about 100 still going forward, right?

I'll let Tammy answer that.

So there are 342 Southwest 700s and those are the numbers that we've primarily been sharing with you, in addition to that, there are 52 AirTran 700s that will be reconfigured with the Evolve seating, and Tammy, I'll let you speak to the class ins.

Yes, so on the classics, we are actually still evaluating those.

We do think it will make sense to do a good portion of those.

I don't know that it will be 100.

It could be something short of 100 but I do think that we will be putting the Evolve, retrofitting the cabin on a fairly good portion of the Evolve.

Okay, great.

Thanks a lot.

I said 342, it's 372, I stand corrected.

Sure, thank you.

At this time, I'd like to turn the call back over to Ms. Rutherford for any closing remarks.

Thanks, Tom.

Appreciate it.

Thank you all for being with us today.

As always if you have any follow-up questions you can call the communications folks at 214-792-4847 or visit the website, www.SWAMedia.com.

Thanks very much.

This does conclude today's conference call.

Thank you for joining.

You may now disconnect.