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Executives

Bob Fornaro - Chairman, President & Chief Executive Officer

Arne Haak - Senior Vice President, Finance, Treasury & Chief Financial Officer

Steve Rossum - Executive Vice President of Corporate Development

Kevin Healy - Senior Vice President of Marketing and Planning

Jason Bewley - Investor Relations

Analysts

Jamie Baker - J.P. Morgan

Duane Pfennigwerth - Raymond James

Bill Greene - Morgan Stanley

Mike Linenberg - Bank of America

Dan McKenzie - Next Generation Equity Research

Gary Chase - Barclays Capital

Helane Becker - Jesup & Lamont

Michael Derchin - FTN Equity Capital

Steve O’Hara - Sidoti & Co.

AirTran Holdings Inc. (AAI) Q3 2009 Earnings Call October 21, 2009 9:30 AM ET

Operator

Good morning. My name is Carla, and I will be your conference operator today. At this time, I would like to welcome everyone to AirTran Holdings, third quarter 2009 earnings conference call. Today’s call is being recorded, and all lines have been placed on mute to prevent any background noise. After the company’s remarks, there will be a question-and-answer session. (Operator Instructions)

Now for opening remarks and introductions, I would like to turn the conference over to Mr. Jason Bewley, Director of Corporate Finance. You may begin, sir.

Jason Bewley

Good morning everyone. I’d like to thank you for joining us for a discussion of our third quarter results. Joining me today are Bob Fornaro, Chairman, President and Chief Executive Officer; Arne Haak, Senior Vice President, Finance, Treasury and Chief Financial Officer; Steve Rossum, Executive Vice President of Corporate Development; and Kevin Healy, Senior Vice President of Marketing and Planning.

I like to remind you that this call will contain forward-looking statements. These comments are not historical facts and if they you should consider them as time sensitive forward-looking statements that are accurate only as of October 21, 2009. If you like additional information concerning factors that could cause our actual results to vary from those in the forward-looking statements, they can be found in our Annual Report Form 10-K, Forms 10-Q and other SEC filings of the company.

We’ll also be discussing several non-GAAP financial measures that we believe are helpful in gaining and understanding of our operating performance, and providing a period-to-period comparison excluding special items. A copy of today’s press release, recent SEC filings and a reconciliation of these non-GAAP financial measures are available in the Investor Relations section of the company’s website at www.airtran.com.

Today we’ll be discussing our third quarter results and our outlook for the fourth quarter 2009. At the end of the call there will be a brief question-and-answer session. Now, I’d like to turn the call over to Bob.

Bob Fornaro

Thanks Jason, and good morning everyone. As you maybe able to tell, I’m suffering from a case of mild laryngitis. So, Arne will handle the prepared remarks, and I will save a little of my voice for Q-and-A.

Arne Haak

Thanks Bob. Today we are please to report our third consecutive profitable quarter, highlighting the continued year-over-year improvement in AirTran’s financial position, as reflected in our quarterly earning results.

For the third quarter of 2009, we earned net income of $10.4 million. These results do include certain one-time items. During the quarter we recognized the $6.4 million gain, primarily related to the retention of deposits from the terminated aircraft sale contract. We also recorded an unrealized loses of $6.3 million on the decline in the value of our future fuel hedge portfolio. Excluding these items, we reported net income of $10.6 million or $0.08 per share.

To highlight the tremendous turn around at AirTran, our third quarter pretax profit is more than $120 million higher than in the same quarter last year. Year-to-date our net income of $117.6 million is a record for profitability after the first nine months, and represents a year-over-year pretax improvement of over $300 million.

We are pleased to be profitable in what has traditionally been a weaker season; however our results have been impacted by the rapid rise in fuel prices. Since the beginning of the year, oil prices have risen from $40 a barrel, to well over a $70 of barrel, despite record inventories and continued weak demand for particular products. This clearly is not because of supply and demand, rather it is driven by excess speculation.

AirTran is committed to working with members of congress and other consumers, including airlines, to take action including the following key initiative: to bring transparency to all energy trading; to establish strict position limits, enclosed to London and other loop holes.

Our performance this year represents a true team effort by all of the hard working crew members of AirTran Airways. Our year-to-date load factor represents an all-time company record, and our non fuel costs came in lower than we have projected, largely because of the diligent management of our expenses by our crew members.

We are also very happy with the evolution of our network over the past year. Our performance in Milwaukee has produced excellent results this year. Our Atlanta network, which now represents 50% of our capacity, has been reoptimized to match the changes and demand. It’s already profitable and now we have begun adding Caribbean destinations. Our Florida franchise has grown and been strengthened by a relative cost structure, competitive capacity changes, and our complementary hub network, the Atlanta.

While we believe that the worst of the year-over-year decline in industry unit revenue appear to be behind us, the pace of economic recovery and the price of fuel remain uncertain. We continue to work actively to position the company for both good economic times and bad. We have dramatically slowed our growth profile, improved our capital structure, continued to diversify our network, and have built a solid portfolio of fuel hedges.

Now, I’d like you to take you through the details of our financials. Our capacity decline of 0.8% year-over-year was attributable to AirTran having three fuel operating aircrafts in the third quarter of 2009 versus 2008, with slightly higher aircraft utilization this year. Our traffic is measured by revenue passenger mile, a decline by 1.7%. Accordingly we experienced the third quarter load factor of 83.8%, the second highest in company history

Third quarter revenues came in at $597.4 million, which was down 11.3% year-over-over. Passenger unit revenues declined 16% year-over-over to $0.858 as a result of a 15.2% year-over-year decline in yield. Other revenues increased $30 million or 79%. The increase in all other revenues continues to somewhat offset the decrease in passenger unit revenue, resulting in a 10.5% decrease in total unit revenues.

In July when we provided our initial guidance for the third quarter unit revenues, we noticed that the year-over-year change in our advanced booking levels had improved from the levels we observed in May and June. We expected September to be the weakest month in our outlook due to the seasonal nature of our large Florida franchise.

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

On the cost side of the equation, our total operating cost decreased by 22.2%, principally as a result of the decline in fuel prices during the quarter. This reduction in the average cost of jet fuel reduced our third quarter fuel cost by over $175 million year-over-year.

We continue to work hard on our non fuel unit cost this quarter. Our adjusted non fuel unit cost per ASM was $0.61, and increased 3.7% year-over-year, which is well ahead of our July non-fuel unit cost expectation that was up 4% to 5%. Across the company we remain committed to preserving our non-fuel cost advantage, which is the key element of our sustained success in this challenging industry.

The two areas which continue to see the greatest cost pressure are maintenance and airport expenses. Our maintenance costs per ASM were up 26.6% year-over-year, largely as a result of an increase in the number and the level of airframe checks, and rate increases in our power by the hour maintenance agreement.

Airport expenses also remain an area with significant cost challenges for the entire industry. As unit costs for landing fees and other rents were up 5.2% per ASM in the quarter, primarily due to increased airport rate. This is a disturbing trend as airports have not cut their costs in-line with industry decreases in passengers and departures. As a result, they are now seeking to raise rates to fund their shortfall, and are lobbying for even higher PSCs for new capital projects.

During the third quarter of 2009 we recognized a $6.4 million gain, primarily related to the retention of deposits due to the cancellation of and aircraft sales contract. At the non-operating level, we realized a $3.3 million gain during the third quarter from the final redemption of our investment in an enhanced cash investment fund. This gain which was recorded in the interest income line offsets mark-to-market losses that we have recorded on this line in previous quarters.

I would now like to spend a few minutes giving you an update on our financial position. Since the end of second quarter we’ve accomplished several significant balance sheet transactions. We’ve amended our credit card processing agreements with our two largest processors, with revised terms that are favorable to us.

We have also extended our $175 credit facility, which is currently comprised of $125 million revolving line of credit, and a $15 million value of credit facility. This enhancement lowers our total level of indebtedness under the facility, and increases the availability of our revolving line of credit. As of September 30, our unrestricted cash and investments balance was $408.2 million, which included a full draw on our revolver. In early October we completed $115 million convertible debt offering, and $11.3 million share of common stock offering.

These offerings were for general corporate purposes, and give us flexibility in addressing the potential put to us, of some or all of our 7% convertible notes in July 2010. On a pro forma basis our September 30 cash and investments balance would be well and excess of $515 million, when adjusted for our October 2009 capital rates. Our non-aircraft CapEx for the quarter was $4.7 million.

We have continued to add to our fuel hedge portfolio during the third quarter. As of today, we have fuel contracts for approximately 55% of our fourth quarter fuel consumption, and for 40% of our first quarter 2010 needs. For the full year 2010, we are now approximately 34% hedged, with hedge benefits beginning around $60 a barrel of crude oil. Our portfolio consists primarily of crude oil based coal options, and wide colors based on crude oil and heating oil.

In regards to our capacity plans, our operating fleet in the fourth quarter will be 138 aircrafts, a slight decrease over our fleet size a year ago. As a result of the two additional aircraft, a return to normal aircraft utilization, and our successful expansion in Milwaukee, we expect our fourth quarter capacity to be up approximately up 7% year-over-year. We expect our annual capacity for 2009 to be a reduction of 2% to 3%. We have no other aircraft deliveries scheduled until 2011.

The revenue environment has remained weak throughout this year, as lower yields have eroded total unit revenues to levels we haven’t see in three or four years. Our advanced booking continues to improve, albeit slowly, and while the pace of the recovery is uncertain, it is clear that so far this quarter we are seeing an improvement in the year-over-year decline in unit revenue, despite a tough comparison of all time record fourth quarter unit revenues last year.

Based on our current outlook, we expect our total unit revenues to be down 7% to 8% year-over-year. If our fourth quarter outlook is correct, out total unit revenues will be closely inline, or even slightly better than those we observed in 2007, which was a second highest fourth quarter unit revenues in company history.

As evidenced by our third quarter unit cost, we have seen that the year-over-year growth in non-fuel unit costs has slowed, as we start to round trip our capacity reductions. Airport and maintenance cost remain a challenge, and schedules for the fourth quarter is the last contractual step increase on our 717 power by the hour engine maintenance agreement. We continue to work diligently to offset these cost pressures and expect our non-fuel unit costs to be up 1% to 2% in the fourth quarter.

Despite the recent fuel price increases, our fuel cost outlook for the fourth quarter is down year-over-year, and is further aided by a hedge portfolio that covers approximately 55% of our fourth quarter consumption. Based on an average spot prices of $75 for crude oil, and $6 for jet fuel refineries spreads in the fourth quarter, we currently expect our economic fuel cost per gallon to be between 208 and 212 all in, inclusive of taxes transportation, fuel hedging and inter-plane fee.

In closing, we are proud of the results the AirTran team has turned in so far this year. Our core competencies of managing our unit costs, and providing high value, high quality service are well suited for this current set of economic challenges. We remain focused on sustaining our low costs, as we believe this is our key competitive advantage. We are prepared for a variety of economic scenarios. Our growth plan is more conservative. Our network and our profitability are more diversified and AirTran is better capitalized.

If the economic recovery comes more quickly, we believe that our investments and the series of high quality amenities like business class, our corporate sales program, and fleet wide WiFi internet, should allow us to participate in a recovery that maybe driven by higher business travel demand. We have demonstrated that as one of the first airlines to react aggressively to the changing economic environment last year. We are among the first airlines to show signs of recovery.

Our success is built around a solid foundation of industry leading low costs, our highly desired portfolio of products and services, a team of hard working crew members, and below customers, who appreciate our high quality high value service. The result is that AirTran has outperformed most of its competitors, and we believe that we have positioned the company to succeed in both, an economic recovery, or if economic conditions remain weak.

With that color, I’d like to turn the call over for questions.

Question-And-Answer Session

Operator

(Operator Instructions) Your first question comes from Jamie Baker - J.P. Morgan.

Jamie Baker - J.P. Morgan

I’m having a bit of difficulty reconciling Southwest’s September and October RASM out performance. I realize it may not be apples to apples with AirTran giving different capacity philosophies, but it looks like you may be starting to see them as significant pricing advantage, presumably given their no fee policy. Any thoughts on this, and whether you’re Baltimore RASM might reflect such a phenomenon, given that that’s where most of your head-to-head Southwest competition takes place.

Kevin Healy

Hi Jamie its Kevin. At this point there really isn’t anything you can point at that says, that we’re either being harmed by having to see or anyone else gaining an advantage. I think there is a significant change for Southwest, in terms of how they sort of approach pricing this year, plus the capacity decrease.

While their loads are way up, they are still at levels that are somewhat consistent with the rest of the industry, and we are setting record lows at same time. So, I haven’t seen anything and it’s something we continue to monitor. I don’t think there is much share shift occurring as a result of having or not having a bad day.

Jamie Baker - J.P. Morgan

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

Kevin Healy

Again, I think you’re seeing a big differential in capacity. We are seeing improvement on the yield front. As we move into the fourth quarter it’s obviously low; average shares are moving up and demand, particularly as you look in to November and December is very strong.

Operator

Your next question comes from Duane Pfennigwerth - Raymond James.

Duane Pfennigwerth - Raymond James

I’m wondering if you could give us any sort of range on 2010 capacity growth, and specifically given no deliveries, what’s the upper limit on capacity growth next year if thing turn out to be better than expected. And along those lines, do you have an opportunity to actually shrink your ex-fuel cost profile into 2010?

Kevin Healy

Let me address the capacity and I’ll let Arne address the cost. The expectation right now for 2010, it’s around 2% to 4% ASM increase. As we noted before, we got a couple of more aero planes. A lot of that is going to depend on what’s going on in the market place, fuel utilization and some other things that we can do. So we can move that number up and down a little bit.

Arne Haak

Duane, on the cost I think we are pretty pleased with where things are playing out, except for the two areas we talked about, and that is the airport areas and what’s happening on maintenance. Really the 717 engine costs are something we’re working very hard on, but that’s going to provide a bit of a headwind for us on cost.

I think it’s too early to give any kind of range on non-fuel unit costs, but I think it’s unlikely given what we are seeing happening in the airport and what’s happening on maintenance, that we would have a material decline in our non-fuel unit costs in the next year.

Bob Fornaro

I want to add one thing, once we take this next increase on our 717 engine, so we have the last one for eight years; so once we take this step up, there is not a big increase after that.

Duane Pfennigwerth - Raymond James

Then just in terms of your fourth quarter RASM guidance, is there any detail you could give us on the impact of Milwaukee and capacity growth in Milwaukee. I don’t know if you could sort of remind us of what your foot print was year-to-year there, and what RASM might be looking like in Milwaukee on a same-store sales basis?

Kevin Healy

This is Kevin again. The footprint really for the last couple of years, each year we pretty much doubled the size of the Milwaukee market for us. Same-store numbers are very strong, which is the reason that we’re continuing to move. We built a very strong network, moving into more business markets now, and some of the seasonal routes of the past are now on a year around basis.

Now while overall capacity is up, a lot of that 7% is a result of growth in Milwaukee, as well as Baltimore and Florida in general. The majority of that is in Milwaukee and the numbers look very good.

Duane Pfennigwerth - Raymond James

I think Jim may have a question.

James Parker - Raymond James

Yes, just regarding your expansion in to the Caribbean, it appears that your growth, a significant part of it is coming in the Caribbean. A question in that regard, is the market that attractive or you’ve got two airplanes that you thought you weren’t going to have, and you got to find some places to operate them.

Also we’ve seen over the past years, JetBlue expand pretty substantially in that market as well as Spirit. So what’s the attractiveness of the Caribbean?

Kevin Healy

This is Kevin again. About 1.5 points of the growth could be attributed to the Caribbean market. Now we’ve taken our time getting into those routes, mainly to have a better understanding of distribution and other unique characteristics of the market. We went into San Guan a couple of years ago, that has worked very well. Our goal really is to be in every Caribbean market, but to be able to enter into routes where we conserve it from key cities like Atlanta or Baltimore, potentially Milwaukee.

Over the last couple of years we’ve done a fair amount of sort of scheduled charter work for some of the larger tour operators. That’s given us experience in the market, and I think we are very well prepared to move in. So this has always been part of the plan.

The new aircraft really are the sort of thing where it was fairly neutral, and then if we’re going to sell them at a good price we would have, otherwise we had the opportunity to deploy profitably. So it is and is looking for a place to put plan.

Bob Fornaro

One last point Jim, here at the Caribbean, there’s two areas to the Caribbean. Ethnic, which is Southeast far in New York, and then there is the leisure which is Mid-Atlantic Northeast, and I will say the Midwest, and that’s where our company is strongest.

So I think at the natural extension of what we are already doing, the average fairs to the Caribbean are substantially higher than Florida. So actually the current footprint, it’s really a natural extension of what we’ve been doing in Florida. You don’t have the same type of capacity opportunities, because the markets aren’t that big, but the profit potentials quite good.

So I would say overtime, you could see the Caribbean in total end up being 7.5% to 8%, maybe even 9% of our capacity in a few years. Again we are not in a rush, and again you can’t deploy a lot of the airplanes, but we can certainly add a few airplanes per year profitably.

Operator

Your next question comes from Bill Greene - Morgan Stanley.

Bill Greene - Morgan Stanley

If I look at your EBITDA margins, the last time they approached these levels was back in around 2003, and you placed a large plane order at that time. So I realized you’re talking about sort of 2% to 4% ASM growth in 2010, but would you say you sort of philosophically changed how you think about reinvesting and about your growth?

The returns calculations does it have to be more durable for you going forward; how do you think sort of about managing growth versus the margins versus returns, can you just add some color there?

Bob Fornaro

Bill, this is Bob. I’ll start and I’ll turn it over to Arne, and pardon my voice, but we placed an order for 50 firm and 50 options in July of 2003. At that time, oil was about $28, $29 a barrel, and I think we had assumed in five or six years oil could be $45 to $50, which would have been considered a stretch if you went back to 2003, and I think you have to study.

We’re certainly a long way from that, and quite frankly, the higher oil prices are going to mean less capacity in the entire industry going forward. Business travel will be more expensive, and so will leisure travel. So I think growth from four or five years ago, we are growing 20%, and it doesn’t make any sense, and I think you’re going to see us as more a sustained moderate growth rate. I would say also maybe 3% to 6% as we move into 2011, 2012.

I think certainly again, philosophically you have to adjust to a much, much different reality. We haven’t seen a spike in the oil prices, and this will all be much different. Arne, do you have anything else to add?

Arne Haak

No Bill, I think we’re very cognizant here that the hurdle rate has to be higher. The costs of financing aircrafts today are certainly higher, the volatility in the fuel markets require more hedging which again is another capital market cost, and so I think we as Bob has outlined, have a much more conservative view on growth.

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

Bill Greene - Morgan Stanley

Okay, so if I think about the longer-term growth rate of 3% to 6%, does it make sense that that should be expanding your current network, or do you really need to add something out west. Is that a geographic region that you’ve got to go to the next, just to balance off the network, or do you not think that way?

Kevin Healy

I think you’ve got to take it in steps, and certainly we think there’s room to expand in the Southeast and the Caribbean, which we just spoke about. I think our initiative in Milwaukee, we’re pretty happy with it right now. I think our priorities have already established our self here in the Midwest, and I think we’re on our way to really go out and create a map that looks good.

I think by heading something out west it doesn’t necessarily make a whole lot of sense. I think for us, having a diversification, which I think when you look into next year, Atlanta will probably be less than 50% of our capacity, probably 45%; Milwaukee and Baltimore be 11% to 12%; Florida will be about 30%.

So we are looking at kind of broader. From where we’ve been over the last four or five years, we’ve kind of changed the network substantially. I think over the next two or three years we don’t really have a strong focus beyond the Midwest.

Bill Greene - Morgan Stanley

Okay just one quick follow-up for Kevin. You mentioned that November and December were strong; can you talk about the holiday bookings? Are they what’s really driving that or just something else, and how do the yields look on those holiday bookings?

Kevin Healy

Right now, it is the holiday booking driving November, December at this point, but it’s been very encouraging with the advances that we have there and the average fairs are very good.

Bob Fornaro

One thing that he is missing in September and October, carrying over of course with a lot of lower capacity is the weakness in the leaving areas. Leavings were cut last year, cut in the first quarter, and right now we’re seeing the impacts of the lack of leavings especially in Florida. Companies are either canceling or staying close to home. The leaving in conventional areas are now seeing bookings again, but we’re not going to see the benefits of that until next year. Kevin, do you want to add anything else on that?

Kevin Healy

I mean, really one of the underlying issues in September, October is, that you don’t have the traditional dates of needing travels. There is sort of a divinization of needing travel back in March and April. It’s a long lead time for that to come back, but the various CVBs and others that we speak with, you are getting indications if that travel is starting to come back as well, and future bookings are building again.

Operator

Your next question comes from Mike Linenberg - Bank of America.

Mike Linenberg - Bank of America

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

Now Arne when I listened to your commentary though, it was a very cautious tone. I know Kevin, you highlighted the fact that some of the holiday bookings look strong. When we sort of look at all the different pieces here, it would seem that it’s more of an aggressive forecast, unless maybe a lot of this is just being driven by the comps being easy. I mean is that really what’s driving it? It’s maybe more optics here, and as a result we could see top line flat; additional color on this would be helpful?

Arne Haak

Actually I think we tried to highlight. I think the comps are pretty tough. We had our highest fourth quarter RASM that we’ve ever had, aiming at the revenue last year, and now we are growing into it.

The idea of flat top line, I think its certainly profitable and an encouraging tender. We are coming around; it seems also as well, the yield declines aren’t coming in as strong as they had been last summer. So, I don’t think that that’s an unreasonable expectation, but the comp is still pretty tough.

Kevin Healy

I mean in the fourth quarter last year we had planned to grow by about 9.5%, we ended up shrinking by 6.5%. I think the fact that some of the questions that Jamie was asking as well was relative to performance. So it is a tough time for us in the fourth quarter, but we are feeling pretty good about the correctional movement.

Mike Linenberg - Bank of America

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

My second question is, and this is probably for Arne; it’s just looking at your cost guidance, you had good cost performance over the past couple of quarters, and the fact that your capacity is going to be up 7% after being down for the past couple of quarters, the fact that your guidance ex-fuel is that you are up 1% to 2%, I would have thought that the cost performance would be better. I realize there’s a couple of line items that you highlighted; for example, the airport inflation, the costs that you are seeing there that have been moving up.

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

Arne Haak

I don’t think we’re being conservative, and I think it’s all in the area of maintenance, and it really goes back, unique and genuine agreement that we inherited when the 717’s were originally ordered.

It’s not uncommon to see step increases as an aircraft wages, but the way this maintenance agreement is worded, is that the ten years of the whole programs. So in the fourth quarter we will pass the tenth year anniversary of the first 717, and that figures a cost increase across the whole fleet at one time, 86 airplanes.

So normally you see this stuff kind of lead in to one, two, and then it kind of builds some momentums; we’re taking the whole buy at once, and that is what’s driving it. If you strip that away, I think you would see the kind of cost guidance that you’re expecting on the other non-fuel cost items.

Operator

Your next question comes from Dan McKenzie - Next Generation Equity Research.

Dan McKenzie - Next Generation Equity Research

One house cleaning question here; what’s the WTI or jet fuel equivalent for the hedges in the fourth and first quarters, and also for 2010?

Arne Haak

It’s kind of hard question to answer, because it is the portfolio of hedges Dan. The way I describe is, most of the hedges and we will put this in when we file our 10-Q later this week. We will give you kind of dial-up fuel you guys have come to appreciate, but the fourth quarter hedge book is largely a call option in the low to mid 60s.

Next year probably the first, I’d say 15% to 20% of the hedge book is again call options in the low to mid 60s. The remainder of the hedge portfolio is largely callers with production and I guess high 60s up to about 80s, probably the highest accrued equivalent where we are.

Dan McKenzie - Next Generation Equity Research

Okay, and then I’m hoping you could talk a little bit more about Milwaukee. I appreciate the comments that you guys have made already, but based on the schedules data, it looks like the new owner of Midwest does not want to give any. I’m just looking ahead to the fourth and first quarter. It looks like AirTran is expanding to more business markets from leader markets.

I was wondering if you can talk a little bit more about how you are viewing the competitive dynamic looking ahead, and any potential marketing campaigns to target some corporate travel spend there.

Arne Haak

Dan, this is Arne here, and let me give you kind of some brief thoughts, and then Kevin can expand upon our expansion into more year around flying and into a more business market.

You do have the Midwest airlines trying to resurrect itself. If you look at the results for the first half of the year, even in a low fuel environment, they have some pretty disappointing margins if you look at kind of where the pretax margins where for the first six months of the year.

So they are trying to see if there is something there that they can salvage, but when you compare to what we’ve been doing Milwaukee, we’ve been very pleased with our performance. We are solidly profitable in Milwaukee, and I think our optimism about this opportunity and about the performance here is reflected in our capacity. I’ll let Kevin kind of talk more about the different kinds of markets that we are going into.

Kevin Healy

As Arne said, we’ve been in Milwaukee since 2002, and really have been developing the network steadily over time since then. I think one of the key pieces is, we have the cost structure to be able to compete really with both the Republic, as well as Southwest and we have a product, that beyond just I think is being superior is consistent.

We have the jets in the key markets, and WiFi on every flight and such. So we’ve been at it for a very long time. As we’ve said initially, we’ve built the leisure bay and carrying an awful lot of people there, and now number two in terms of carriers in the market place, and now are expanding into the business markets as you noted, and I think we are very well positioned and feel very good about how we are doing?

Kevin Healy

I would just kind of go back and add one more thing. Midwest over our 20 year period of time did a great job in the local market, and the community really rallied around them. The public is not going to fool anybody. I mean the Midwest is gone. You can call it what you want, but any business traveler in that part of the country knows, that what use to be Midwest doesn’t exist, and I think that’s an event. They have no home town advantage, and right now gives us an opportunity to makes in-roads in the local market.

Again, you’ve heard those kind of speeches over the year, but the Midwest brand is gone, and right now it’s just the name, and that really opens the door for us, and like I said, it’s a big increase to growth as how historically we took the steps, and this year we are going to fly the West Coast capacity and flights to blossom year around.

So we are taking the step. The step began in the spring, and it continues through the fall, and we’ll see what would happens. We’ll give it a year. We’ve got no track record right now from a marketing perspective, and so I think again we’ve got our hands full certainly, but I think they’ve got a real challenge in our another hand as well. All we’ve done is basically done a few paint jobs, and cut a few costs and laid off some people, but the fact is, ultimately they’ve got to start carrying some customers.

Operator

Your next question comes from Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

I wanted to ask a few things; first on the revenue progression to the quarter. Could you give us any flavor for how you know July, August, September progressed. Then I also would like to get some thoughts from you.

I know in the past you’ve talked about the thought that September will have a lot of very soft bookings and steep fair sales that you had overcome. How does that look as we move into October, November, December? Do the headwinds really abate there, and how much impact could that have on the comps?

Arne Haak

Hey Gary, this is Arne. I think as we looked through the quarter, July was the best, and I assume you’re talking about kind of the year-over-year, not just an absolute seasonality, but how the year-over-year trends are playing out.

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

September was weak, but I think it was dead on what we thought it was, and actually in a couple of ancillary areas has done a little bit better. So I think September kind of played out the way we thought it might have a little bit better, and really I think the surprise for us is really kind of the back half of August, but we didn’t get kind of the summer season extended as far into August as we thought.

Looking into October; as Kevin highlighted, the medium convention piece in Florida is really where you are seeing a little bit more weakness than you have seen, as the family and vacation travel kind of dies down with the start up of school. That stuff is coming back. It looks very good as move past here in the first part of October, and into the back half of the quarter, that part of the business is coming back.

Gary Chase - Barclays Capital

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

Arne Haak

In terms of year-over-year unit revenue?

Gary Chase - Barclays Capital

Right, right.

Arne Haak

Yes, it was. It was the weakest month of the quarter, and that’s to be expected. We have large seasonality issue here in Florida, and last year if you looked at what we did in September, we cut our utilization way, way back because of record high fuel prices.

Gary Chase - Barclays Capital

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

Kevin Healy

I think you are right. This is Kevin. I think you’re right and that some of the fair sales were more dramatic in September or to travel in September. We’re starting to see the average fairs improve moving into the fourth quarter, and some of the weakened fair activity or increases having a bit more traction.

Bob Fornaro

Again, September’s yield was by far of the weakest on a year-over-year basis. The average yield was down 16% for the quarter, and with September being clearly the most month and above than average.

Kevin Healy

Which again is expected; if you broke September down last year, we were booking into a plan, 8.3% increase in capacity, and ended up down almost 10%. So it’s a fairly significant swing last September, just trying to put yourself in a position to get through it, and the unit revenue as a result actually looks good on a year-over-year basis. Last year, it’s probably the hardest comp in the last four months in the year.

Gary Chase - Barclays Capital

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

Would we expect to see that reverse next year in an environment where business travel gets better, and one of the main reasons I’m asking is, if I just look at normal seasonality of your capacity, based on the 7% growth regarding to in the fourth quarter, it feels like you’re going to want to breakout about 4%, about 2% to 4%; you’re going to want be higher than four next year. So I’m just wondering if maybe some of the seasonality shift in here with network.

Kevin Healy

Talking about Atlanta a little bit, I think we’ve gotten Atlanta to a size and optimized it in a way that it’s really working very well now. So we’re done in terms of shrinking the Atlanta portion of the network. Most of the growth that is in the number for the end of the year is Milwaukee, which is now more of business in leisure. Certainly, the growth aspect of the network is into more business routes than leisure.

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

Bob Fornaro

The one area that you guys wait to wear us out, if we wanted to increase the utilization, it would probably be more likely “what are you going to do with the West Coast markets say for May to August?” plus we have the most flexibility, and it really is too early to tell.

I think right now the moderate growth makes sense. There may be some other opportunities to increase that growth if someone approached us with a right deal, and a number of airlines aren’t going to be able to take their aero planes in 2010 and 2011, and so we could conceivably consider taking an aero plane early if the price was right, but I think for us, our primary goals to be solidly profitable first, and again solidify the network as it now stands. Again I think after last year, I think profits come first right now.

Gary Chase - Barclays Capital

And then just very quick one for Arne, is there any reasonable shot that the collateral posting requirements will exceed the revolver, maybe if you could put a dial-up posting along with your dialup…?

Arne Haak

Well, it would be a very boring chart, because it would be 000000.

Gary Chase - Barclays Capital

So, you don’t have posting requirements on the hedge book?

Arne Haak

On the hedge book

Gary Chase - Barclays Capital

On the fuel hedge book, yes.

Arne. Haak

Very modest; we have most of the portfolios options which have no posting obligations, so there are some very broad colors, but they are not costless colors. The floors on those things are down around $50 a barrel. So we paid for them to a certain extend by paying the premium on the color. We’ve kind of taking a lot of that risk away.

Gary Chase - Barclays Capital

Because you just hate to hear when fuels are collapsing, that might be a bad thing?

Arne Haak

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

Operator

Your next question comes from Helane Becker -Jesup & Lamont.

Helane Becker - Jesup & Lamont

Most of my questions have been answered, but Bob I just kind of wanted to pursue something you talked about earlier in terms of the cost side, that’s airport fees. How much flexibility do you have with the airports to get them to lower their fees, and to make that costs more inline with what you’re seeing from your other suppliers?

Bob Fornaro

I think it’s very hard, because they don’t necessarily have the same P&L constraints. Some airports are hungrier than others, because they are looking for service. I think the key place to draw the line is keep PFC’s really where they are, and it really stopped the increase in spending and there’s been a number of announcements about various projects going on.

Right now, with the industry in the kind of condition it is, we go to be focused on functionality, and costs, and everything else is a lot true. So I think we’ve go to start out certainly with no more increases, and it’s also a matter of managing headcount like what we’re supposed to do in times of crisis.

Again, there isn’t as much leverage perhaps, but there is always some for airports to maintain their budgets. When one, traffic has gone down to 7%, 8%, it’s ludicrous. So they need to make a certain number of tough decisions, but the key thing is you’ll stop the spending, and try to keep spending more in-line with passenger revenues.

Again, it’s hard to convince airports and others that a $1 or $2 is very, very important, and we’ve been trying to bang that drum, but you know better than anybody, $2 to an airport versus $2 to an airline is a very, very big deal, and that message just doesn’t get through. So we see one more time to stop the increases is the best place to start.

Operator

(Operator Instructions) your next question comes from Michael Derchin - FTN Equity Capital.

Michael Derchin - FTN Equity Capital

A couple of quick ones; one, a status on the labor situation?

Bob Fornaro

Good question. Right now, I think as you know we had long drawn out negotiations with the pilots. I mean I could categorize it as we are meeting productively and we’re actually making some real progress. After a number of years, a very little progress, so I would consider it as positive and plan to say no more on that.

Our mechanic agreement was amendable October 1. We actually have an agreement out, that is in the process of being voted, and we should know that those results I think are back today, which would be a real positive for us. The flight attendants, we’ve been meeting regularly. I don’t see an agreement perhaps by the end of the year, but I think it early next year we could move forward there as well. So I think most of our agreements are open now, and I would say we are making some very good progress.

Michael Derchin - FTN Equity Capital

Just one more question, and that relates to something you mentioned Bob, actually on the ethnic Caribbean market, which it seems like JetBlue is doing a real good job tapping into. I think it could be an opportunity for you, particularly with your base in Florida. Is there a reason why that’s something you’re not perusing.

Bob Fornaro

No, I think the south Florida market is pretty crowded right now with JetBlue, Spirit and American, so it’s a pretty good market, but to get a fourth carrier in there, you get to a point where its can become over served.

Now looking at Orlando, we have added a few destinations here, because in the greater Orlando area, about a quarter of the population is Spanish speaking and growing. So I think Orlando could create some opportunities, and we have 65 flights to-date here, so we could also bring a lot of feet from our north eastern and mid west markets. So I don’t look at trying to be the fourth wheel in the southeast area. Kevin

Kevin Healy

Michael, I’ll just add to that. Its not that we are not pursuing the ethnic market, we are. It really is more of our Caribbean strategy. It’s design to leverage our strength in our market from the Atlanta hub, from our focus city in Orlando and Baltimore, and I think we will be far more successful doing that, than trying to create new markets or trying to be the fourth guy in.

Operator

Your next question comes from Steve O’Hara - Sidoti & Co.

Steve O’Hara - Sidoti & Co.

I was just wondering, maybe you touched on this already; the converge that’s coming that can put in 2010, have you guys bought any of that back, and do you have any flexibility to do so between now and then?

Steven Rossum

This is Steve. We purchased last year just short of $30 million worth of convertible debentures at an average price of just north of $0.81 on the dollar and we mentioned that in our public filing, and we haven’t done any pre purchase of those inventories since then. Right now it’s our current expectation to pay those bonds off in cash if they are put to us next July, and we are always looking at our corporate financial structure and our capital market structure for opportunities

Steve O’Hara - Sidoti & Co.

Okay, then you maybe touched on this as well, but the 2010 capacity, what’s the top end given the fleet you have right now, for growth possibility?

Kevin Healy

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

Operator

There are no more questions. We will turn the call back over to Mr. Fornaro for closing remarks

Bob Fornaro

Thank you. I’ll be brief, and I like to thank everybody for joining us on the call this morning. We are happy to report our third consecutive quarterly profit, and continue to feel good about the changes we have made to our business and our route network. While no one can predict the pace of the economic recovery in our industry, our industry relating cost structure and high quality product position us well in the coming months and years. Thank you for your time this morning.

Operator

Ladies and gentlemen, that does conclude our conference for today. Again, thank you for your participation.

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Source: AirTran Holdings Inc. Q3 2009 Earnings Call Transcript
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