AirTran Holdings, Inc. Q4 2008 Earnings Call Transcript

AirTran Holdings, Inc. (AAI)

Q4 2008 Earnings Call Transcript

January 28, 2009 9:30 am ET

Executives

Jason Bewley – Director of Corporate Finance

Bob Fornaro – Chairman, President & CEO

Arne Haak – SVP Finance, Treasurer, & CFO

Kevin Healy – SVP, Marketing & Planning

Analysts

John [ph] – Morgan Stanley

Jamie Baker – JPMorgan Chase

Ray Neidl – Calyon Securities Inc.

Mike Linenberg – Bank of America

Kevin Crissey – UBS

Dave Simpson – Barclays Capital

Duane Pfenningwerth – Raymond James

Jim [ph] – Raymond James

Helane Becker – Jesup & Lamont Securities Corp.

Bob Mcadoo – Avondale Partners

Presentation

Operator

Good morning, my name is Abigail and I will be your conference operator today. At this time I would like to welcome everyone to the AirTran Holdings fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator instructions). Thank you. Mr. Bewley, you may begin your conference.

Jason Bewley

Good morning, everyone. I would like to thank you for joining us to discuss our fourth quarter results and outlook for 2009. Joining me today is Bob Fornaro, Chairman, Chief Executive Officer and President, Arne Haak, Chief Financial Officer, Senior Vice President of Finance, and Treasurer Steve Rossum, Executive Vice President of Corporate Development and Kevin Healy, Senior Vice-President of Marketing and Planning.

I like to remind you this call would contain forward-looking statements. These comments are not historical facts and instead you should consider them as time sensitive forward-looking statements that are accurate only as of January 28th, 2009. If you would like additional information to concerning factors that could cause actual our actual results to vary from those in the forward-looking statements they can be found in Form 10-K under SEC filings of our company. We will also discuss the several non-GAAP financial measures that we believe are more consistent of our true operating performance to provide more meaningful period to period comparison excludes special items. A copy of today's press release, our SEC filings and a reconciliation of these non-GAAP financial measures is available in the investor relations section of the company's Web site AirTran.com. Today, we will be discussing our fourth quarter results and our outlook for 2009. At the end of the call there will be a brief question-and-answer session.

I would like to turn the call over to Bob.

Bob Fornaro

Thanks, Jason. And good morning, everyone. Thank you for joining us today to discuss our 2008 results and more importantly our outlook for 2009. I am sure I speak for many when I say I'm glad that 2008 is behind us. This past year presented many challenges for our company and the industry. Energy, prices clearly dominated the headlines but the tightening of the credit markets and the softening economy presented multiple issues for us as well. As we enter into 2009 the economy is front end center for all consumers.

Our early assessment of these problems is crucial and now our actions have dramatically changed our company and have better prepared us against uncertainty that lies ahead. As is the AirTran style we tackled the issue in the same manner that we have in the past, head on with resiliency and with a can-do attitude. Our operational team continue to deliver outstanding service levels the kind of service that has consistently earned us high ranking in the air quality ratings and made us number one in quality for 2008 among all major airlines. Our on-time performance for the year was 76.8 and completion factor was over 99.1 and our lost baggage ratio was the lowest of the major airlines of 2.84 per 1,000 passengers.

We began the year with $326 million in unrestricted cash and investments and ended the year with highest balance of unrestricted cash and investments in several years as well as – as a result of almost $375 million in financing and credit transactions. We completely restructured our growth profile for the sale or deferral of 46 aircraft. This has not only helped reduce our current debt load by over $200 million but also eliminated the need for nearly a billion dollars in capital in 2009 and 2010. We have made changes to our network, home cities and significant changes in how we allocate our capacity across our network.

Our fuel hedge contracts saved us over $60 million in the 12 months ending September 30th, but the rapid decline in fuel prices in the fourth quarter presented yet another challenge as we face margin calls to collateralize our mark-to-market exposure. We terminated our lease valuable fourth quarter hedges early in October and systematically closed out nearly 80% of our 2009 hedges that we felt would not mitigate our exposure to volatile fuel prices and only create more uncertainty for 2009. The continued decline in energy prices means that these decisions have saved us tens of millions of dollars.

Despite all of these efforts it is an understatement to say our financial results last year were a disappointment. As you see in our press release we reported full year loss of $274 million and $118 million loss in the fourth quarter. I am encouraged by our unit revenue performance in the fourth quarter which was clearly assisted by our capacity reductions.

Finally I believe our fourth quarter underlying traffic of $55 million is a good indicator of the potential that we have in 2009. Although there was a lot of uncertainty in front of us, I am optimistic about our outlook for the coming year.

Now I would like to turn the call over to Arne Haak.

Arne Haak

Thanks, Bob, and good morning everyone. As Bob just mentioned we reported a net loss for the fourth quarter of $118 million or a loss of $1 per share. Included in these results are losses on fuel derivative contract of $147.7 million and a gain of $5.5 million on the sale of three aircraft and other assets. Excluding the gain on sales of assets and derivative losses related to fuel contracts beyond 2008 we would have reported a loss of $0.14 per share.

For the full year we reported a net loss of $273.8 million or a loss of $2.51 per share. These results include losses on derivatives of $150.8 million, a gain of $23.2 million on the sale of assets, and an $8.4 million charge impairment charge for goodwill. Excluding the gain on sales of assets of goodwill impairment charge and the derivative losses related to fuel contracts beyond 2008, our full-year net loss was $154.8 million or $1.42 per share.

While these losses are disappointing the underlying business has improved tremendously. In the fourth quarter we have an operating profit of $54.9 million. Absent fuel hedging our net income would have been over $25 million at a time when jet fuel prices average $79 a barrel. Today jet fuel prices are nearly $20 per barrel lower.

I'd now like to spend just a minute to describe the derivative losses we incurred in 2008. Fuel prices (inaudible) all airlines of this year the price rose from less than $100 a barrel to nearly $150 a barrel and then retreated to less than $40 a barrel in the past several weeks all within the span of one year. To help manage this volatility we have consistently used physical derivative fuel contracts.

During the last five years the company saved nearly $140 million from these type of fuel contracts including over $60 million in the 12 months ended December 30th, 2008. As fuel prices plummeted during the fourth quarter the potential for our existing fuel contracts to provide benefits to the company became significantly diminished.

In addition, these out of the money fuel provisions have the potential to require large amounts of capital to satisfy counterparty margin requirements. In the fourth quarter of 2008 the company systematically reduced its fuel contract portfolio by closing positions in order to minimize future losses and margin requirements that would result from further declines in the price of crude oil.

We eliminated fuel contract positions that we felt had only a remote potential for providing price risk management. The benefits of eliminating fuel contracts are cost savings of future fuel prices decline and the elimination of the need for additional class collateral to satisfy margin calls.

Contracts covering over 80,000 barrels or roughly half of our fourth quarter 2008 contracted fuel volume were closed out during October when crude oil was trading at $77 a barrel. Contracts covering approximately 3 million barrel or nearly 80% of our 2009 contracted fuel volume were closed out during the fourth quarter when crude oil was trading about $52 a barrel. The decision to close out these positions in advance has saved the company over $14 million on our fourth quarter fuel contracts and at recent spot prices the decision to close out our 2009 fuel contracts will save the company between $10 million and $30 million going forward.

During the fourth quarter we had $589 million in revenue with our CASM in revenues were up 6.8% and our total RASM was up 7.9%. Those factors for the quarter was very strong. Up 3.4 points from last year. And yields were also up 2.1%, our strongest yield performance in the past two years.

I'm particularly pleased with the improvement in our other revenue which were up over 22% and reflects our efforts to unbundle our pricing structure and increased our ancillary revenues. For the full year, our total RASM was up 5.3% and our other revenues increased 29%. We experienced positive increases in total unit revenues in all three months of the quarter with the strongest increases in both October and December.

On the cost side of the equation our total operating costs declined by 6% as a result of our capacity reductions and the decline in fuel prices during the quarter. As we anticipated our non-fuel unit costs were up 6.3% which was roughly in line with our estimates provided at the end of last quarter.

Our interest income for the quarter was $1.3 million, however, we reported a $3 million loss on investments as a result of a decline in net asset value on our investment in the Columbia Management Strategic Cash Fund.

On December 31st, our unrestricted cash and investments fell with $340.5 million. As of today we have approximately $34 million on deposit as collateral for outstanding derivative contract. Our non-aircraft CapEx for the year was just over $10 million versus our guidance of $12 million to $15 million.

2008 presented financial challenges for us on many fronts as we have in the past we acted promptly and decisively to remedy these challenges. In April we outlined a course of action that represented a dramatic change in how we manage our business, our plan to enhance the airlines liquidity, aggressively reduce capacity through the disposition of aircraft in the deferral of 737 deliveries, reduce our aircraft and other capital commitments, increase our unit revenues and also maintain our low cost structure. We have executed this plan and raised over $375 million in additional capital and credit facilities which resulted in the highest year ending cash balance year ending balance of unrestricted cash and investments in several years.

We have successfully reduced our fleet plan for 2009 and 2010 by 35 aircraft We have sold lease returns and delivery deferrals. We've seen the best improvement in yield in several years. And most importantly we have maintained the lowest non-fuel unit costs of any major airlines in our (inaudible).

Even with all of these positive attributes, we’ve recognized that we enter the 2009 with a tremendous amount of uncertainty about the strength of the domestic US economy as well as the future of oil and jet fuel prices. It is clear to us that we cannot continue to rely upon growth in passenger travel or material improvements in passenger yields to manage through this uncertainty.

Our plan for 2009 is to further shrink our capacity by an additional 4%. To accomplish this we plan to reduce our fleet size from 136 aircraft at the end of 2008 to 134 by the end of 2009 through additional aircraft sales. We have four 737 aircrafts on the order this year from Boeing. Two of which were delayed from December of 2008 as a result of the Boeing strike. We currently have an agreement to sell through aircraft this year and are in advanced discussions with several other parties on additional aircraft sales.

We have committed financing for remaining two aircraft that is to be delivered this year and we have no new aircraft deliveries scheduled until the second quarter of 2011. Our capacity outlook by quarter is down 7% in the first quarter, down 5% to 7% in the second quarter, down 2% to 4% in the third quarter and flat to up 2% in the fourth quarter.

As we entered 2009 the industry revenue outlook is certainly uncertain. We have seen nice improvements in unit revenues in January driven by higher load factors although not nearly as strong as the growth in unit revenue that we saw in the fourth quarter 2008.

February and March advance book revenues are both behind last year's booking phase, but so far this has been in line with our capacity reductions which will range to be down 9% to 10% in those months. March is also being impacted by the shift of the Easter holiday back in to April. When we combine both March and April to neutralize this effect our advanced book revenues are ahead of the reduction in capacity.

While we are encouraged by these trends recent booking patterns suggested a decline in demand may be a bit more severe than what we have seen so far. If we had to make an estimate on passenger unit revenues for the quarter, it would be in a range of down 2.5% to down 5.5%. And total unit revenues in the range of up 1% to down 2%. I realize that this is a fairly broad range but there's clearly a higher level of uncertainty in the current demand environment.

Our non-fuel unit costs will be pressured in the first half of this year as a result of the reduction in our fleet size and the elimination of our growth. We saw the beginning of this trend in the fourth quarter and the year-over-year growth in unit costs will likely be in the range of up 8% to 9.5% in the first quarter and second quarter and up 6% to 7% for the year.

One of the primary areas of unit costs growth will be in the area of maintenance where we will see the number of fee checks go up nearly 80% year-over-year due to timing. And in the fourth quarter of 2009 our last contractual step increase outside of normal escalation on our 717 engine will go into effect.

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

As of December 31st, 2008, the company had fuel hedge contracts primarily in the form of collars for over 750,000 barrels of oil or roughly 9% of anticipated 2009 volumes. The average floor price for the company's hedge position as of year end was $72 per barrel of oil and the average call price for the company's hedge position as of year-end was $85 per barrel.

In January the company has entered into new derivative contract for an additional 22% of the company's anticipated consumption in 2009. The new contracts are in the form of call options as well as some collars. The average call price is just over $61 a barrel and the average put price is just over $33 a barrel for our collar contract.

The total amount of fuel under derivative contracts in 2009 is now 31%. By quarter the percentage of fuel under contract is 18% in the first quarter, 28% in the second quarter, 37% in the third quarter, and 41% in the fifth quarter.

Our outlook on fuel costs is very positive. Year-over-year our current projections for fuel expense are more than $400 million lower than what we spent last year. Based on an average spot price of $47 for crude oil, and $18 for jet fuel refinery spread in the first quarter, we expect our fuel costs per gallon to be between $1.80 and $1.85, all inclusive of taxes, transportation, and (inaudible) fees.

One final cost item is in regard to our interest expense as we have highlighted in our most recent 10-Q filings we will be implementing FASB StaffPosition APB14-1 in 2009 which will result in a change for how we account for interest expense on our 2003 convertible notes. Because of this change our interest expense will increase by approximately $8.6 million in 2009. But there will be no impact to our cash interest expense.

We expect to accrue only minimal amount of taxes in 2009 unless our pretax earnings approach the significant losses we experience in 2008. We expect to be ANT taxpayer this year and at this time we expect to accrue at a tax rate of 1% to 2%.

Our NOLs as of December 31st were in excess of $400 million. In regards to capital expenditures we're planning for the purchase of two aircraft and approximately $10 million in rotable parts inventory. Our non-aircraft CapEx is currently planned to be between $10 million to $15 million.

In closing, 2008 has been an extremely difficult year for AirTran and for all airlines. The challenges have changed dramatically in the last six months and we have moved decisively to prepare and adapt. The current set of challenges is well suited to our strength of extremely low cost and high quality service. This allows us to provide value to our customers at a time when people are carefully managing their own personal budgets. We believe that we have prepared the company for new challenges and change in our assumptions that we've laid out today we expect to return to profitability this year. Our focus this year includes return to profitability and to begin restoring the health of our balance sheet. Increase profitability and reduce investment in growth.

We are committed to maintaining our low-cost competitive advantage to maintaining a high level of quality, and continuing the diversification of our networks. We are an experienced and stable management team that has demonstrated discipline to overcome these challenges and emerge as a stronger more viable airline.

With that, Abigail, I would like to turn the call over for questions.

Question-and-Answer Session

Operator

(Operator instructions). Your first question comes from William Green with Morgan Stanley. Your line is open.

John – Morgan Stanley

Hi, guys, this is actually John [ph] filling in for Bill. Just a couple of questions here. First, I guess considering the – considering the fact that you're guiding to negative RASM in the first quarter, I guess I was a little surprised to see capacity down 4% which I guess is towards the upper end of your previous guidance range of down 3 to down 7 in 2009. Can you just kind of discuss what type of flexibility you have through reduced capacity further and how you're thinking about that decision with respect to the current RASM trend?

Arne Haak

Sure, good question. I think probably the key areas, key ability to flex has to do with aircraft sales. We expect to sell two airplanes although I would tell you that the market today is not as strong as it was six months to eight months ago. But we have the ability to adjust our utilization if we feel it's necessary. But I think at the same time I think the best indicator for us of what we're seeing in the future is if you look at where our operating income is for the fourth quarter, and you take our normal run rate of interest expense about $20 million, we expect to produce a pretty nice numbers in the first quarter. And at the same time our total RASM number is going to add significantly to the revenue as well.

So we have some opportunity to reduce capacity if we feel necessary with a combination of oil prices today and a weak environment, it is not a bad environment for AirTran. I go back it would probably be impacted more last year than any carrier of the business, and we should probably have the most benefit as oil prices come down again. Oil made up the largest amount of our expense versus any other of the major airlines (inaudible) biggest beneficiary.

John – Morgan Stanley

Just so I – just so I understand you clearly, is it fair to say that you're willing to run negative RASM rates going forward as long as you maintain profitability?

Arne Haak

We're willing to run – absolutely because there is also a relationship between the capacity and unit costs and you got to find the balance between the two. And so, again, I would say, again, previously we had a range of 3 to 7 and I think we'll probably finish the year in the 4% to 5% range as Arne mentioned, and we think we can have, again, substantial P&L improvement if the RASM was negative, but I think also you have to look at the total RASM because again our ancillary revenues are growing significantly. I think you could see that in the quarter. They were up more than 20% and capacity down approximately 8%. So we're going to get a nice boost on the – from the ancillary of several points. You got to put that into the equation as well.

John – Morgan Stanley

Okay. And just a quick question on fuel hedges. It looks like your fuel hedges are increasing or increasing percent per quarter going forward. Usually – usually we see the opposite among carriers. Is this the beginning of a – of a shift in your fuel hedging strategy? I mean, it almost looks like you're taking a view on oil in the sense that you expect oil to go up in the future. Is that correct? Or is this just timing aspect with respect to the fact that you close out of hedges?

Arne Haak

The decision – the view on hedging has changed and I think what we have seen is that there is still tremendous volatility in our largest cost input. And we can't ignore just because you like where prices are today. The way our hedging has changed is that our portfolio now is better prepared to withstand larger increases, so we have no limits on our outside protection on the new hedges we put in, and our downside participation is very large to the point if oil does average below $33 a barrel in this time period, we can withstand a tremendous decline in the unit revenues.

That being said, what I think we have to worry about when we focus on executing our plan and we are very focused on executing this plan and return to profitability this year, but if there is a decoupling of fuel and the revenue environment, that that could impair our ability to execute here, and we feel that that risk is more likely in the back half of the year than it is in the near-term and that is why we have a higher hedge percentage. We have also typically hedged more during the hurricane season when there is more price volatility than you go into the winter heating oil season. If you go into next year, we're about 10% hedged in the first quarter and about 3% for 2010.

John – Morgan Stanley

Great. Thanks. Thanks for the interest. Really appreciate your time.

Operator

Your next question comes from Jamie Baker with JP Morgan. Your line is open.

Jamie Baker – JP Morgan Chase

Hey, good morning, everybody. You disclosed the losses associated with the 2009 contracts, but I'm wondering if that captures the full expense, the full costs of unwinding that, for example, was any collateral pledged as part of that transaction. Just wondering if there was any cost above and beyond what was disclosed in the release this morning?

Arne Haak

No, Jamie, there was no – there are no other costs other than what we disclosed in unwinding those hedges for 2009.

Jamie Baker – JP Morgan Chase

Okay, excellent. That's it. Thanks a lot.

Arne Haak

Okay.

Operator

Your next question comes from Ray Neidl with Calyon Securities. Your line is open.

Ray Neidl – Calyon Securities

Yes, Arne, just to clarify some positions that you're in with the employees. I think you stated that there never has been and there is not currently any defined benefit plans, it's all 401Ks and profit sharing. I'm just wondering what potential risk if any is involved there on a variable contribution basis. Profit sharing of course has been on profits. But is there on the rest of the plan is there a way you could reduce your costs or is that pretty well fixed?

Arne Haak

It's a fixed cost rate. All of our benefit programs are defined contribution.

Ray Neidl – Calyon Securities

Okay. And the second thing just to clarify is the fuel hedges. I think you booked them a little bit differently than other airlines. You booked them below the operating expense line. And is that your choice or is that – is it the way the hedges are structured and the accountants make you do that?

Arne Haak

It really is driven by the accounting on it, Ray, and I would agree with you that it is confusing. In 2008 any hedge contracts that involved jet fuel were mark-to-market on the balance sheet and ran to the operating line. And the other derivative instruments were below the line. Going forward, obviously, we have a few jet fuel contracts going into 2009, but going forward we're going to be pulling all of these adjustments below the line and we'll be breaking out for you guys both the realized and unrealized gains and losses so you can have better transparency on what's happening there.

Ray Neidl – Calyon Securities

Okay. Good. And then finally we don't know what's going to happen this year as far as cash needs go with the economy. What flexibility – additional flexibility do you have to do capital raises if it became necessary. I know you said the aircraft market is very tight as far as maybe selling a surplus aircraft, but what else do you think might come up and in the timing?

Arne Haak

There are – I think first of all we have the $215 million credit facility in place today. We are currently using 125. We have I guess currently allocated today we have 125 allocated towards letters of credit. We are not using that full 125 million we have. The $90 million line as well that we can potentially use. We have financing on our two deliveries so we don't believe we face any risks there for deliveries.

And in terms of assets the 737s are probably the best assets that we have in terms of I think there are opportunities to be secured financing, things in that gain as well to raise additional money should it be necessary. With that being said our cash as you know, Ray, you follow the cash very closely at all the airlines, anywhere we did at 340 December 31st was very good for our company. Typically, the low point for the year, and we typically build as we go forward here. We like what we have so far on the books for the revenue it actually looks pretty good. Our advanced bookings right now are probably be about flat in the last week, 10 days we've seen a little bit more weakness and we don't know if it is going to be sustained or not. But I think we're comfortable with our cash position and that we're building we're in a period of a year when we're going to go forward and build our cash.

Ray Neidl – Calyon Securities

Great. Thank you.

Operator

(Operator instructions). Your next question comes from Mike Linenberg with Bank of America. Your line is open.

Mike Linenberg – Bank of America

Yes, hey, good morning, all. I have two questions. Arne, on the RASM forecast down 2.5% to 5.5% for the March quarter, with January basically done, can you give us a sense at least maybe what you saw in January? And then sort of part two to the question, what do you guys seeing with respect to business travel and booking trends? Are you picking up maybe business travelers, from some of the major carriers whose corporate travel policies are now forcing them to find a lowest cost carrier, lowest fare carrier? What – anything on that front would be great as well.

Arne Haak

Mike, I think Kevin Healy is here probably the best person to answer that question. Why don't I turn it over to him?

Kevin Healy

January actually looks good. We were up 5% there. We came into the quarter with a pretty good booking, felt very good about that. February right now is on track. We're in line with capacity. March is the big question mark. So advance book was right now basically flat and March obviously the biggest part of the quarter and will be the hardest to call. But generally speaking, from a corporate perspective, we have seen a consistent pickup throughout '08 and don't expect that to change going into '09. Made some changes in distribution, introducing electronic ticketing and other things like that, that improve compliance with government contracts and our business win businesses. So I generally would say those trends are positive right now.

Mike Linenberg – Bank of America

And then, Kevin, just on the booking curve, is there anything that you have seen where it's kind of shortened or any color on that?

Kevin Healy

Well, up until recently we saw fairly consistently. What you would see is beyond 60 days you would see the core bookings that the dedicated travelers and that sort of thing. People who plan in advance and we have been very aggressive in getting that on the books. So to that 14 days to 60 days we see the marginal spur of the moment bookings and that been weaker, but inside of 14 days the curve looks pretty good. The news over the last several days probably says you have to discount what's going on right now. But I would expect those – the same sort of booking trends that we've seen over the last several months.

Mike Linenberg – Bank of America

Okay. Very good. Thank you.

Operator

Your next question comes from Kevin Crissey with UBS. Your line is open.

Kevin Crissey – UBS

Thank you. Good morning. Can you talk about the competitive seats in your markets as you look ahead or not just the competitive seats, but your seats in addition to the competitive seats markets as we look at it?

Kevin Healy

Sure, Kevin, right now, when you look at Atlanta it's still 60% of our network. We're down about 7% in Atlanta, the industry is down about 5% in the first half of the year and really anything beyond four months out. You don't have a real good graph of what the industry is going to look like. But generally speaking these seats come down across the board in Atlanta.

We are still – we're redeploying some capacity in the market site BWI and then continued growth there at a time when others are shrinking, only our position in Orlando when we've seen a considerable decline. And then we've done quite a bit in Milwaukee. I think we're well positioned there. We'll be adding some new services there that we'll announce in the not too distant future. Obviously that's a market that has seen a tremendous drop in capacity. Really the whole region between Milwaukee and Chicago, lot of dip.

Kevin Crissey – UBS

Terrific. And Arne, can you go back over the taxes again. Your comments basically so on a GAAP basis what are we looking at? There is minimum cash. What about on a GAAP basis we got again?

Arne Haak

Our expectations for 2009?

Kevin Crissey – UBS

Yes.

Arne Haak

Really could be between 1% to 2%.

Kevin Crissey – UBS

Okay. Okay. Thank you.

Arne Haak

Yes, we're going to be an A&P taxpayer, and if that changes we'll certainly give you guys an update.

Kevin Crissey – UBS

Terrific. Thank you.

Arne Haak

Yes, sir.

Operator

Your next question comes from Gary Chase with Barclays Capital. Your line is open.

Dave Simpson – Barclays Capital

Good morning, guys. This is Dave Simpson. Just a clarification question. In response to Ray – I think it was Ray's question, you said coming into the quarter, you would have – may be I misunderstood, you would have thought RASM was flat but as of recently with the weakening that's what gives you to the down 2.5 to 5.5 on RASM for the quarter or are those two separate issues?

Bob Fornaro

I think two separate. Again, looking at the way the first quarter would play out, the movement of the Easter into April versus March probably impacts AirTran more than any other carrier in the U.S. This time a year passengers going to Florida beginning where 45% to 50% of our business. And so the shift into April certainly will have a fairly good impact on us. That could be April looks again absolutely super. And so what happens in the month of March is really critical. It's the biggest revenue number that we have in the quarter, and obviously, with a weak economy it really is hard to tell for us once the Easter shift occurs what the underlying strength in March will be.

Dave Simpson – Barclays Capital

Okay. And so – so the down 2.5 to 5.5 captures some of what you have been seeing in the more recent – in the more recent trend we should assume?

Bob Fornaro

Yes.

Dave Simpson – Barclays Capital

Okay. And then just on that more – the more recent changes, anything that stands out geographically? Is that pretty broad based? Is that in leisure versus business markets? Just any color there?

Bob Fornaro

Nothing really seen. I think you say it fairly broad across the network.

Dave Simpson – Barclays Capital

Okay. Alright. Thanks, guys.

Arne Haak

I think, too, David, obviously what other people are saying about their revenue and I think you're seeing more disappointing trends from other airlines as well. You see an increase in sale activity, and given where other people are, I think it's hard for us to say that we're going to resume back to the trend that we've had earlier this month.

Dave Simpson – Barclays Capital

Okay. Got you. Got you. Thanks, guys.

Operator

Your next question comes from Duane Pfenningwerth with Raymond James. Your line is open.

Duane Pfenningwerth – Raymond James

Hi, thanks. In the capacity guidance that you provided, when do you assume the four incremental aircraft sales that you need get done?

Arne Haak

The aircraft sales are in the second quarter, aircraft sales. I think there might be one in the second and one early in the third.

Duane Pfenningwerth – Raymond James

Okay. I think you said in your comments it's going to be down two for the year and you have two locked and you're taking so it seems like you need four incremental to those.

Arne Haak

Yes, I believe there may have been one at the end of the first quarter. There is a couple assumed in the second and I think one in the third.

Duane Pfenningwerth – Raymond James

Okay. If you are profitable going forward in the first quarter, I understand you're not endorsing that, but if you are, can you just help us with what your interest expense run rate would be and what the share count would be. We've had some convert issuance and I think also some warrants in the fourth quarter. I'm getting to about 154 million shares all in.

Arne Haak

While Arne is looking at that, Duane, I would – at this point we believe we will be – prevailing fuel prices we believe we will be profitable in the first quarter.

The number, Duane, is right around 150 million in terms of diluted shares outstanding and the net interest expense will run roughly $20 million.

Duane Pfenningwerth – Raymond James

Per quarter?

Arne Haak

Correct.

Duane Pfenningwerth – Raymond James

And then, Arne, if you would, I'm sorry to ask you this on the call, but can you walk through just the change in cash flow in your unrestricted cash, sort of what was operating cash flow in the quarter, X changes in restricted cash, what were the changes in your fuel hedge collateral in the quarter and also credit card hold backs, CapEx, aircraft sales, financing, please.

Arne Haak

Duane, I think that's probably more of a detailed question, we'll handle offline with you rather than doing it on the call. Why don't we touch base after the call and we can walk you through that.

Duane Pfenningwerth – Raymond James

Okay. Fair enough. And I think Jim [ph] has a question.

Jim – Raymond James

Good morning, Bob, there is rather lively negotiation going on between Delta and the Atlanta airport authorities about the new international terminal expansion, I think the airport authorities want to double the rates and Delta is suggesting that we'll take flights elsewhere. Surely the Atlanta airport has to be using AirTran as leverage because they would want somebody to use those gates that Delta takes them somewhere else. What benefit do you foresee of this particular negotiation for AirTran?

Bob Fornaro

Sure, and Jim, it's a good question and if you read the Atlanta newspapers there is almost an article every single day. The couple things going on. First of all, there is an issue of the international terminal and what it's going to cost and to be honest with you our position on the international terminal is as long as we don't have to pay for it, Delta and the airport dissolve. Because the users of that international facility are going to pay the price of using it.

The key thing for us is capital expenditure at the airport going forward, and our long-term lease, our current leases at the airport expire, I believe in October or September 2010, and we like to have a little bit more certainty in the future of what the operating environment is going to be like. We agree with Delta on the basic fact that we want to see the cost per passenger remain the same. And again although Delta has gotten the bulk of the publicity on it I think we are in big agreement on costs. Atlanta has gotten to where it is because in the scheme of things it's the lowest cost large airport in the U.S., and we would like to see it stay that way. So we're working with Delta, we're working with the airport. To make sure that the capital expenditures are in line with Atlanta's role as a very large connecting hub.

So I don't know what is going to happen at the end of the day. I mean the big issue is by far our biggest airport and certainly Delta's biggest airport I think so again we're working on it together. I don't think there really is any gains in shift going on between AirTran and Delta as to who is going to own up each other and we don't want the same thing, functional facility and a low cost facility.

Jim – Raymond James

Bob, Delta takes flights elsewhere, wouldn't the airport invite other authorities or other airlines maybe – maybe AirTran in particular use some of those gates for domestic traffic as they do currently?

Arne Haak

I think it's – Jim, it's really too early to speculate on that. Again, the lease does not expire after two years, and I think right now our energy is going in to make sure that we have a successful negotiation at this point. Okay?

Jim – Raymond James

Okay.

Operator

(Operator instructions). Your next question comes from Helane Becker with Jesup & Lamont Securities Corp. Your line is open.

Helane Becker – Jesup & Lamont Securities Corp

Thank you very much, operator, thanks gentlemen, for taking my question. Bob, as you're thinking about your (inaudible), the capacity changes that are being made this year, can you just talk about, markets where you think you need to continue to have strong presence in markets that you can reduce capacity in and where it's important for you to continue to show growth?

Bob Fornaro

Sure. What I can't answer Kevin can. But I think briefly we made the key changes in the fourth quarter. We made the adjustments in Atlanta and because that's the largest of the last three or four cities didn't work in this kind of environment. We're going to have some growth in Baltimore, some very, very successful for us. Florida is important, but again this is not going to be growing. Our big focus is going to be in Milwaukee. And we think we've got a great opportunity up there. Midwest has dropped more than a third of its capacity. I think over the last year name recognition has really improved. Quite frankly they're not a relatively weak carrier, a year ago they flew 37 to 38 mainline planes but today they fly nine. So carrier that was once known for premium service is pretty much a commuter airline right now, a regional carrier. That's going to be where we're going to focus a lot of our new activity. Kevin, can you add anything else to that?

Kevin Healy

We adjust the network over the years to maintain profitability. I feel pretty good about where we are in Atlanta now and the opportunities elsewhere. Florida is a key presence and holding our position in the grand scheme of things makes us a bigger player here. And as Bob noted Milwaukee I think it has a tremendous upside potential for us.

Helane Becker – Jesup & Lamont Securities Corp

Okay. And so there's no thought to trying to build that to like western part of the U.S.?

Kevin Healy

Well, we continue to have seasonal service in the longer haul markets in the summer. So, in growing in Milwaukee is diversifying the network somewhat in the Midwest, and that's including, we currently have service to Washington, New York, Florida and then seasonally we're going out west, we're in Las Vegas on a year round basis already. I think we'll change the network a little bit adding some mid-range flying and more sustainable year round markets there. And I think that balances out to network very well.

Helane Becker – Jesup & Lamont Securities Corp.

Right. Okay. Thank you very much.

Kevin Healy

Okay.

Operator

Your next question comes from Bob Mcadoo with Avondale Partners. Your line is open.

Bob Mcadoo – Avondale Partners

Could you just repeat what you said about first quarter '09 total RASM as opposed to passenger RASM?

Kevin Healy

Total RASM is – the key being we look out at the year is the ancillary revenue growth is supporting any real weakness, and we're looking at really a range on total RASM probably of up 1 to possibly down 2. A bit of a wide range, but generally speaking we're looking at the total RASM number and feel very good about it.

Bob Mcadoo – Avondale Partners

And the ancillary revenues, you have bag charges, what else is in there? Is that really the issue?

Kevin Healy

Bag charges is the biggest certainly. We started the second bag fee last summer and introduced first bag fee for travel affecting in December. You didn't really see the full number there, but that will be the biggest driver in 2009.

Bob Mcadoo – Avondale Partners

So you don't left that until you get clear to the end of '09 is what you're saying, virtually in the end of '09 in terms of the growth?

Kevin Healy

Yes. We got a small percentage starting December 5th which ticket issued after – on or after November 12, I believe.

Bob Mcadoo – Avondale Partners

So while your holiday actually was people (inaudible) So as we try to think about what that number might be going out into the year, can we – is it reasonable to look at this relationship between total RASM and passenger RASM and try to use that difference and run it out, as to calculate what your daily run rate is.

Arne Haak

Bob, this is Arne here. That number – I guess our expectation is that it will take some time to (inaudible) give you a mature number. But if you're trying to model it, it's probably taking a percentage (inaudible) how many you expect to check bags. And I think there has been a fairly wide range of that by other people outside of AirTran on what that range is. So depending – it's going to depend on how people change their behavior.

Bob Mcadoo – Avondale Partners

Okay. Alright, thanks.

Operator

This will conclude the question and answer portion of today's call. I'll now turn the call back to Bob Fornaro for any closing remarks.

Bob Fornaro

Yes, thank you, and again, once again I would like to thank everybody for joining us on the call today, and a special thanks to our AirTran crew members for their support and hard work last year and certainly in the future. I do have a couple of takeaways from today's call. Again, just for starters, clearly 2008 was disappointing, we started the year with a double-digit growth rate and it was certainly not the right place to be given the surge in fuel prices that accompanied that growth. And quite frankly we acted early and decisively. We adjusted our capacity from a planned growth rate of 12% in the fourth quarter to what you saw today a minus 6% to 8% range. So, again, we planned on doing, we had a significant adjustment in capacity. Our underlying business has recovered as evidenced by our $55 million profit in the fourth quarter. We are well positioned for full year profit in 2009. And as I mentioned before we expect to be profitable in the first quarter at prevailing fuel prices. Again, thank you for joining us today.

Operator

This concludes your conference call for today. You may now disconnect.

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