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Executives

Jason Bewley – Director, Corporation Finance

Bob Fornaro – Chairman, President and CEO

Arne Haak – Chief Financial Officer

Kevin Healy – Senior Vice President, Marketing and Planning

Analysts

Duane Pfennigwerth – Raymond James

Bill Greene – Morgan Stanley

Glenn Engel – Bank of America

Gary Chase – Barclays Capital

Michael Linenberg – Deutsche Bank

Daniel McKenzie – Hudson Securities

Kevin Crissey – UBS Investment Bank

Steve O’Hara – Sidoti & Company

Helane Becker – Dahlman Rose

Michael Derchin – CRT Capital

James Higgins – Soleil Securities

AirTran Holdings Inc. (AAI) Q2 2010 Earnings Call July 21, 2010 9:30 AM ET

Operator

Good day, ladies and gentlemen. And welcome to our AirTran Airways Second Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

And as a reminder, this program is being recorded. I would now like to introduce, Mr. Jason Bewley, Director of Corporation Finance. Please go ahead.

Jason Bewley

Good morning, everyone. I’d to thank you for joining us for discussion of our second quarter 2010 results. Joining me today are Bob Fornaro, our Chairman, President and Chief Executive Officer; Arne Haak, our Chief Financial Officer; and Kevin Healy, our Senior Vice President of Marketing and Planning.

I’d like to remind you this call you will 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 July 21, 2010. You’d 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 will also be discussing several non-GAAP financial measures that we believe are helpful in gaining an understanding of our operating performance and providing a period-to-period comparison excluding special items. A copy of today’s press release, recent SEC filings and reconciliation of these non-GAAP financial measures are available in the Investor Relations section of the company’s website at airtran.com. Today we’ll be discussing our second quarter results and our outlook for the remainder of 2010. 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

Good morning, everyone and thank you for joining us today. After a challenging first quarter AirTran has delivered a solid performance here in the second quarter. From an operations perspective the results were the best we have ever delivered in the second quarter.

Our on time performance was 83.8%, our completion factor was 99.5% and our industry leading baggage handling performance improved 4% to 1.5 mishandled bags per 1000 passengers. I want to personally thank all of our 8000 crew members for this accomplishment. This is truly a team effort.

In the second quarter we reported a GAAP profit of [$12.4] million, which includes an unrealized loss of $26.4 million net of taxes on the reduction in value of our future hedge portfolio. Including, we reported an economic net income of $38.8 million or $0.23 a share, compared to last year’s economic net income of $46.6 million.

During the quarter our capacity grew 4.9% year-over-year and we produced record second quarter revenues of $700.6 million, which represents a 60.1% increase. We achieved a record low factor of 83.1%, which was up 2 points year-over-year. Our business class load factor rose more than 5 points to over 83%, which also represents a new company record.

Typically, an increased in capacity load factors were stable and comes at the expense of yield. However, our second quarter passenger yield increased 9.4% the highest year-over-year yield growth in four years, despite a 3% year-over-year increase in average stage. Our other revenues are roughly flat year-over-year and Arne will give you a little more color on that during his remarks.

Further development our total unit revenues increased 10.7% year-over-year. On our network front we continue to make a lot of progress on growing and diversifying our revenues. During the past year we’ve opened 12 new destinations from Orlando, mostly to small and midsized cities as well as in the Caribbean. The most significant progress in developing our network has been made in Milwaukee.

While we have added only one main line destination year-over-year, we have grown our capacity here more significantly than any other city on our network. After a tough winter, Milwaukee has been solidly profitable for us in the second quarter despite significantly higher fuel costs. In fact, our unit revenue growth in Milwaukee far out paced our system average and during the second quarter was the best performing region in our network in terms as a year-over-year unit revenue growth.

While absolute profitability still trails our system average trends here are very good, as you continue to improve as our own capacity growth begins to moderate and our newer roots continue to mature. All sides parts Milwaukee as having a bright future on our network.

Finally just this week the Atlantic City Council voted unanimously to renew our lease at Hartsfield-Jackson International Airport for the next seven years, solidify our position at the world busiest airport.

On the cost side, within our non-fuel cost expectations in the second quarter. Our adjusted non-fuel costs were up 2.5% year-over-year, well ahead of our initial second quarter non-fuel guidance of 4% to 4.5% and even better than our revised guidance of six weeks ago are up 3.5% to 4%. Fuel costs rose by over $68 million, a 43% increase.

Since we last spoke to you in April we revised the term of our future aircraft deliveries, essentially retired over $90 million in convertible debt and extended our $100 million secured credit facility for up to two years.

All in all the entire team at AirTran will be pleased with the progress we are making, as Arne will elaborate the year-over-year unit revenue outlook for the next several months looks even better than what we experienced in the second quarter. Our own capacity growth has slowed down, the percentage of capacity in new routes is declining and our outlook for the second half of the year reflects substantial year-over-year earnings growth.

I would right now turn the call over to Arne to give you more detailed on our financial performance and outlook.

Arne Haak

Thank you, Bob, and good morning everyone. As Bob just mentioned, we reported a net income of $12.4 million in the second wear. Excluding these results is a $26.4 million loss net of taxes due to the reduction in value of our future fuel hedge portfolio. Excluding this item, our economic net profit was $38.8 million or $0.23 per share versus an economic net income of $46.6 million or $0.34 per share in 2009.

Excluding the changing value of our future fuel hedge portfolio, our pre-tax income was relatively flat year-over-year. For clarification purposes our fuel hedge portfolio is a net asset of $16.1 million.

Our fuel hedge portfolio is simply not as valuable as it was 90 days ago, largely because of the drop in prices in crude oil during this time period, which is a very positive trend for our company. For complete reconciliation of these items, please direct your attention to the reconciliation table at the end of today’s earnings press release.

Our capacity for the second quarter grew by 4.9%, primarily due to two additional aircraft, which we delivered in the third quarter of 2009. Our traffic as measured by revenue passenger miles increased 7.9% resulting in a record second quarter load factor of 83.1%.

Second quarter revenues were $700.6 million up 16.1% year-over-year and for the third quarter in the row the highest quarterly revenues in company history despite having five few aircraft today than we did in 2008.

Our passenger unit revenues increased 12.6% year-over-year to $10.13 as a result of the 9.4% year-over-year increase in yields and the 3% increase in stage lengths on 4.9% more ASM. As was the trend in the first quarter, our pace of revenue improvement accelerated in the second quarter.

Our April PRASM was up about 6% year-over-year, May was up around 12.5% year-over-year and June was up around 19.5% year-over-year. Operating performance did disappoint versus the outlook we showed in April, largely due to a miss versus our expectations in the month of May. In hindsight, I think we were perhaps too optimistic in our outlook for what is historically showed our travel period, but we have just outlined for you the year-over-year trend is still quite positive and we expect this trend to continue through the third quarter.

Our other revenues were largely flat year-over-year. So on the unit basis our total unit revenue did not grow as quickly as our passenger unit revenue. There are a lot of components in this revenue category and the trends were not consistent during the quarter. However, the majority of the shortfall is in the area of the bag fee revenues, predominantly in second bags and oversize baggage revenues where we are seeing behavioral changes from our customers.

On the cost side, our adjusted total operating unit costs were up 12.7% year-over-year in the second quarter and our adjusted non-fuel unit costs were 6.45%, up 2.5% year-over-year. Our unit maintenance costs came in better than our expectations, while unit distribution costs and landing fees and other rents grew at above average rates on the year-over-year basis. The change in distribution costs was being driven by higher average fares and a slightly higher percentage of customers using online travel agencies.

Our airport costs rose as well as we represented net interest from several airports reflecting higher than originally budgeted no removal costs. Our economic fuel costs for the quarter was $2.37 per gallon all in, which includes the effects of fuel cuts. In regards to our financial positioning, we ended the quarter with $535 million in unrestricted cash and equivalents and a revolving line of credit was undrawn.

During the quarter, we revised the terms of our aircraft agreement with Boeing. As a result, we have reduced our aircraft deliveries by about 20% for 2011 and 2012. We will now add six aircraft in 2011. Two will be leased 717s and the remaining four will be 737s, 700s. In 2012 we’ll add six aircraft, all 737, 700s. This will reduce our growth rate to approximately 3% to 4% for this time period. More importantly, our aircraft purchase obligations have been reduced by over $200 million over the next two years.

In July, holders of our 7% convertible notes due in 2023 have the option to put the notes back to the company. Just over $90 million of the notes were put back to the company and were redeemed by the company in cash.

Finally, we revised our secured credit agreement to extend the term through 2012. While the size of the facility is smaller, reflects our improved financial position and our desire to lower our borrowing costs. To date in 2010 we have not used our revolver and we are seeking to reduce the commitment fees we pay to the lender.

As a result of these balance sheet accomplishments and our profitability, we are one of the few airlines to receive increases on our credit ratings from both Moody’s and most recently S&P. And our aircraft CapEx was $3.8 million for the second quarter and $5.7 million for the year to date.

I’d now like to spend a few minutes updating our outlook for the third quarter and the remainder of 2010. Our fleet plan for the balance of 2010 is expected to remain at 138 aircraft. Third quarter capacity is projected to be up approximately 1%, fourth quarter capacity is projected to be up approximately 1% to 2%.

We expect to take delivery from Boeing Capital two leased 717s in February next year. We will take delivery of four 737s, 700s from Boeing in 2011 with the first delivery scheduled for March of 2011.

Our advanced bookings and more importantly yield trends through the summer continue to remain exceptionally strong. July passenger unit revenues are currently trending up 17% to 18% year-over-year. Our August unit revenue outlook for passenger unit revenue growth which will grew 14% to 15% year-over-year.

While the outlook for September is always difficult to forecast based on these trends and the strong base of advanced booking for September, we are currently expecting our third quarter passenger unit revenues to increase between 14.5% and 16.5% and our total unit revenues to increase between 12.5% and 14.5%.

We expect that our third quarter non-fuel unit costs will increase by 4% to 5% and that our full year non-fuel unit costs guidance will remain unchanged at 4% to 5%. In regards to fuel we’ve continued to add to our fuel hedge portfolio during second quarter. As of today, we have fuel contracts for approximately 69% of our anticipated jet fuel volume for the third quarter of 2010, 58% of our fourth quarter fuel volumes and 45% of our 2011 fuel volumes.

Based on an average spot price of $75 for crude oil and $10 for jet fuel refinery spreads in the third quarter, we currently expect our economic fuel costs per gallon to be between 229 and 234 all in inclusive of taxes, transportation fuel hedging and the plane fees.

In closing, we are pleased with our second quarter results and diversification efforts. As you can tell we feel very positive about our outlook for the second half of the year and currently expect our year-over-year earnings to accelerate in the back half of the year.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Duane Pfennigwerth from Raymond James.

Duane Pfennigwerth – Raymond James

Thanks. Good morning.

Bob Fornaro

Good morning.

Duane Pfennigwerth – Raymond James

Just with respect to May, can you talk about what was actually the variance? Was it in the month revenue and did you change something about the way that you revenue manage going forward?

Bob Fornaro

Duane, good morning. I think it was really end of month revenues. We had a very strong advance booking base and we didn’t see as much follow through as we expected. And again, I think a contrast after June, where we see -- we had very strong advance bookings and we had strong follow through.

So, again, I never know whether it is an anomaly or not but it kind of stuck out, given the advanced booking dates we expected it to be better. And as I’ve said, with July, July is pretty much closed, we had, again fairly strong within the month bookings.

So I’m not sure whether, again, May wasn’t a trended more but anomaly for us.

Duane Pfennigwerth – Raymond James

Okay. Fair enough. And with respect to guidance, how do you think about September, given what you learned about May? In other words, how do you consider, you showed a month with less visibility that’s the last month of the quarter, this month relative to the guidance that you’ve put forward?

Kevin Healy

Duane, it is Kevin. It’s a, when you look at May, it was a bit of a transition month because you came in the year with advances much lower than the prior year, where in ‘09 we put a lot on the books really early, in ‘10 we held out for a higher yield and we’re seeing that.

May was a bit of a turnover again, so look at it a little bit differently. September is sort of thing you never want to -- you never characterize it as feeling good about September. But basically, you’re going into September with good average fares, good advance bookings and, you can always do a little bit better there. But I feel pretty good about what we’ve got on the books now. And particularly the way the capacity allocations are out there in terms of the network changes that we put in place over the last year or so.

Bob Fornaro

Duane, one thing I would add again. I think, September is normally the waiting isn’t as much. It’s about 25% or 27% of our revenues inventories, now that’s meaningful. I think we are also beginning to see a little capacity modernization as we get out there.

So ultimately if our supply and demand situation is getting better and also fewer new routes, last year going into the Spirit job we added a lot of new routes. Again, that number has been down substantially as we move into the last quarter of the year.

Duane Pfennigwerth – Raymond James

Okay. Thanks very much.

Operator

Our next question comes from Bill Greene from Morgan Stanley.

Bill Greene – Morgan Stanley

Yeah. Good morning. And, I want to talk a little bit about some of the ancillary trends. The ancillary numbers are actually down over here. You mentioned the bag fees and some behavioral changes. I’m wondering if you think that perhaps we are further along in this ancillary process, United, on their call yesterday, suggested we’re kind of in the third inning there. But your trends would suggest that it’s a bit more mature. And so maybe there is a difference between the legacy opportunity and the low cost opportunity, in light of Southwest’s efforts, I’m just curious how you think about that?

Bob Fornaro

Bill, this is (inaudible), I’ll ask Kevin, you’ll see we want to get, just look out, we are not going to talk about any pricing or fee levels, but Kevin you want to talk about the trends.

Kevin Healy

Bill, I think you’re seeing behavior trends and changes in all of these things you have really from the beginning in terms of how people approach travel and other things like that in terms of the number of bags carried versus checked has really from the beginning, changed. I think with ours it is a little bit different in when you look at the makeup of the network a little bit differently.

The bigger issue really on the ancillary story is the underlying fares have come up quite a bit in year-over-year growth. I think that puts it a little out of kilter where last year, you were discounting heavily to get people on the plane and producing ancillary revenue. Now you are getting a much, much higher yield and still filling planes.

We are looking at, other ways, again, as Bob noted, we’re not going to go into any specific programs or anything like that. But I don’t think we’ve hit the point where there is no more ancillary growth going forward, I think our focus now is on some of the bundling that we are doing and also optimizing when and how we make offers and I think that, that as much as anything can draw a better take rate.

Arne Haak

Bill, this is Arne. Let me add just one thing and -- to this. First of all we kind of highlighted in the prepared remarks the trends weren’t really consistent. May was, again, was the weakest in terms of the ancillary. We had a very nice bounce back in June. So it is, evolving and the thing that I would say we can’t lose sight of is that there really are cost benefits here to the company as we price accordingly to what customers want. A great example is, as Kevin talked about this change in behavior, on checking bags, for example, while it has come down, its sole significant revenue stream but we are carrying fewer bags today.

We also are staffing our ramp in Atlanta with fewer employees. It does reduce our cost space. And if you look, a great metric that kind of highlights, if you look at the number of employees per aircraft, it has come down again. And so part of that is being able to run more efficiently, so there certainly are benefits on the cost side as well, as we run a more streamlined operation.

Bill Greene – Morgan Stanley

Sure. Just trying to compare it again to United, so United, I think they are serving the third inning of what they should be able to do on this ancillary stuff. Do you agree sort of with that description of where we are, or you think we are further along?

Arne Haak

I don’t think it’s late in the game Bill. It’s hard for us to comment on where United is. They are an international airline versus domestic airline. I still think there is a lot of stuff out there for us to consider.

Bill Greene – Morgan Stanley

Okay. Just one quick question for Bob. If you look at the merger approval process that’s under way with Continental and United and you were trying to be a little bit involved in the slot swap transaction. Can we assume that, maybe there was an opportunity there, [for carve outs] or divestitures that you would be able to take advantage, or do you just think that’s probably not relevant for you?

Bob Fornaro

There is always again some relevance. And I think, certainly, with Delta, Northwest was going through in 2008, quite frankly, we were too weak to take advantage of any opportunities that we were reassessing our situation. But right now, I think that certainly, we’ve got a lot of focus on New York, La Guardia in particular. And even a few slots are positive and I think when you look at the Midwest, again there, I think there was some opportunity. The biggest change in capacity that we see with Delta, Northwest and the Ohio valley and I think there is some retail as well. We happen to do exceptionally well in Ohio. I think there’s chances for us. I think there will be some benefits for us. And especially, we get some of these midsized markets that may lose some service. I think, again, this time around, we will be better positioned as a company to improve our position, assuming that merger goes through.

Bill Greene – Morgan Stanley

Thanks for the time.

Bob Fornaro

Okay.

Operator

Our next question comes from Glenn Engel from Bank of America.

Glenn Engel – Bank of America

Good morning.

Bob Fornaro

Good morning, Glenn.

Glenn Engel – Bank of America

Collections on business mix, you have seen a lot of other airlines talk about better business mix in the second quarter. Can you quantify that at all? Can you talk about your business mix in Milwaukee versus the rest of the system?

Kevin Healy

Glenn. It’s Kevin. Business mix is the sort of thing that is improving and particularly in Milwaukee. When you look at the unit revenue trends involved, it mentioned in the performance up there, is what you are seeing is significant penetration into the corporate market which would be expected with, as we are maturing the network up there, we initially grew it largely in leisure markets and over the last 12 months have put the focus on the business market. That is certainly improving. DWI is another, where you are seeing a good one. As you look forward, even Orlando is a market where you are seeing improving business trends, particularly with regard to meeting and convention travel. And that becomes a bigger part as we moved into the fall, where there is a significant improvement in meeting attendance at these.

Glenn Engel – Bank of America

Okay. If we were to go back and again to highlight, Milwaukee, again our biggest improvement, certainly, getting more business travelers to the west coast. But our biggest improvement is from Milwaukee to the business markets on the east coast, so. Milwaukee in the second quarter, we had a passenger unit revenue improvement in excess of 20%. So it is well above the system. And for June alone, it was probably, I believe 30%. But Milwaukee is exceptionally strong. And I think Atlanta is probably coming back faster than the system average as well. So those are the markets, predominantly, where we carry our business travels whereas, as you know we still carry a lot of Florida passengers. Those are a little below the system average of business markets. Right now are leaving us as we move into the third quarter.

Glenn Engel – Bank of America

Is the Milwaukee gain load factor or both?

Kevin Healy

Primary are yield. Yeah.

Bob Fornaro

And loads really don’t have that much room to move up in most of the markets. So it is largely on yield and a change in local versus connections as well. So generally, every indicator in Milwaukee is positive.

Glenn Engel – Bank of America

And in general, you have been trying to move toward a greater mix of O&D versus connect. Can you quantify that at all in the quarter?

Kevin Healy

I’m sorry? I didn’t catch the last.

Glenn Engel – Bank of America

You have been trying to get more O&D rather than connect traffic? I thought you had been changing the system around?

Kevin Healy

Yeah. I think that is a big piece of what is driving the overall improved performance, especially true in Milwaukee. As we improve in Boston and DC and La Guardia in particular, those are the sort of things we are carrying far more local and fewer connections. The same is true in Atlanta. We are seeing the local percentage in Atlanta per departure, improve quite a bit.

Glenn Engel – Bank of America

And what is your connect mix this year versus last year?

Kevin Healy

I don’t have that on the top of my head for this.

Bob Fornaro

Here again, to go back and talk about mix. Again, mix is determined by two things. Again, the market it’s going to go after but also your root structure. We still have probably about 40% of our customers are going to go in and out of Florida. So that is more leisure oriented. So, I think the pure business mix is probably about 30%, 35%, round numbers, given the fact it is very Florida-oriented and, obviously, the revenue is a higher percentage of that.

Arne Haak

Glenn, this is Arne. The comment I would say, we are seeing an improvement. I don’t think we are going to give you the exact number. I have [told earlier] second quarter, they are improving. If you look at the places where we have been growing and growing our network, those are areas that tend to have much higher locals, whether it is in Milwaukee, whether it’s Baltimore, whether it’s some of the point-to-point buying we are doing out of Florida. They all tend to outperform our historic system averages on our local markets. So we are less relying upon the highly competitive connecting yields.

Glenn Engel – Bank of America

Thank you very much.

Arne Haak

Sure.

Operator

Our next question comes from Gary Chase from Barclays Capital.

Gary Chase – Barclays Capital

Good morning, everybody.

Bob Fornaro

Good morning.

Arne Haak

Hi, Gary.

Gary Chase – Barclays Capital

Wanted to see if I can ask two questions just related to revenue. You know, if you take a look at the guidance that you are providing and appreciate the month-by-month color you are giving there, it does reflect some strengthening year-on-year numbers in the face of comps at least in an industry level that we think are getting harder. Wondered if you could maybe just put a little bit more color around what you think is driving that for you? Do you think it is kind of broad industry strength or do you think there is something specific maybe, Milwaukee’s fooling to an even greater extent? Is there an AirTran specific story you think that’s driving kind of the opposite of what we would expect to see around the rest of the industry?

Bob Fornaro

I think -- it is kind of hard to follow. Because it typically follows the industry norm, I mean, quite frankly, most carriers are reporting their first profit since 2008. And we have all been turning to profitability six quarters ago. So at least we have a tendency to be different and again, last year, the leisure base to Florida helped us. I think what’s going on now, we have seen, again I would say the leisure markets returned quickly last year and I think we had a faster rebound.

We added a tremendous amount of capacity into Milwaukee last year. I think Milwaukee is still probably up about 25% to 30%. Now, the yields have really began to stretch. We have been in there two years or three in some of these markets and they are really -- we have really developed a very, very strong following. And quite frankly, our competitors has gotten weaker and we have gotten stronger. That is a real positive. Atlanta is improving for us.

That is, again, that historically has been our strongest business market. It’s starting to inch up and starting to move ahead of the system. It is important, because still 45% of our capacity. So I think those components and I think, the percentage of new roots, even post 2008, not only did we reduce capacity, we changed a lot and so I think as we move into the last few months of the year, instead of having 12% to 14% above capacity in new routes, it is down to four or five, which is a big difference, when you begin to see the numbers.

So I think that is a little bit unique as well. And again, some moderation in competitive capacity versus prior quarters. So there is a number of factors, again, Atlanta’s starting to come back a little bit and the biggest improvements are in Milwaukee, which is about 14% to 15% of our capacity right now.

Gary Chase – Barclays Capital

And you do see that as you look into these months like July and August. You see the increased contribution from Milwaukee and Atlanta versus where you have been?

Bob Fornaro

Yeah. Absolutely.

Gary Chase – Barclays Capital

Okay.

Bob Fornaro

It is slower in Florida because Florida rebounded very, very quickly. Quite frankly -- actually, we are optimistic about Florida. That is the place where we actually improved but Florida really rebounded last year. We did not see the drop off that most airlines did, because we had full capacity in Florida and when everybody left, that helped us last year. So the business markets now that are improving, yeah.

Gary Chase – Barclays Capital

Okay. And then I wondered if I could just follow-up on this non-ticket revenue question. You know, just based on a lot of different commentary that you have made during the call. I’m trying to get a sense, I mean you said you think there are opportunities to optimize that a little further, you don’t think we are in the late inning. But then, of course, you look at what you are expecting at least in the coming quarter doesn’t appear to be much different than what you just generated in this quarter.

So I guess the question is, is this something that you consider to be urgent where we should be expecting you to take action, on it soon or do you think as Kevin was alluding to maybe it’s just a natural consequence of a higher overall ticket price and people may be behaving a little bit more carefully as they approach it. And it is therefore not something that you are terribly worried about or think you need to take immediate action on?

Kevin Healy

I think it is not something we are terribly worried about at all. I think part of it is a reflection in the changing types of passengers that we are carrying, maybe a little bit of behavior change. Business travelers obviously are going to -- it’s a different set of ancillary revenues that will come from a business traveler rather than a leisure traveler and other things like that. So we talk about optimizing the offers and getting better at who and when and what you offer at that sort of thing.

I think there is upshot to it. It’s a little more technology intensive and it’s the sort of thing that we will be, we are working on and will be rolling out. But I really believe that the differences right now is just a fundamental improvement in the underlying yields, which is in part driven by the type and shift in the type of passengers that we are carrying…

Gary Chase – Barclays Capital

All right. Thanks.

Operator

Our next question comes from Michael Linenberg from Deutsche Bank.

Michael Linenberg – Deutsche Bank

Hey, good morning, everyone.

Bob Fornaro

Good morning, Mike.

Kevin Healy

Good morning.

Michael Linenberg – Deutsche Bank

Two questions, Bob, you’ve mentioned this, a couple of times you have said that you have seen some of your competitors capacity moderate some. I think Frontier, for example, I think they are pulling out of the Atlanta-Milwaukee market. I mean, what are other things that maybe that you are seeing that -- and I realize then maybe there are just a few anecdotes here. But this is the type of stuff that gives us confidence that the industry will continue to follow this path of being somewhat disciplined with respect to capacity additions? Any additional color would be great.

Bob Fornaro

No. I think referring to Milwaukee again for us -- we knew the market. We added a whole host of new routes. We’ve got 15, 20 new routes that haven’t been in about two to three years now. And again, each year, its varied, we went in, we went in for the summer only.

This year, for example, you can go into the first winter or two in some of these long haul West Coast markets or even business markets, they are particularly tough but what’s happened is the frequent flyer base in the Midwest has eroded and ours has gotten stronger. And so I think we are going to see fewer frequencies by Midwest to the East Coast markets, which are very important.

Michael Linenberg – Deutsche Bank

Okay.

Bob Fornaro

And again, I think things like Milwaukee, they’ll be others as well. The positive there’s been some moderation and I think we’re again, better positioned. Again, I think to improve Milwaukee. We like…

Michael Linenberg – Deutsche Bank

My second question, you gave us kind of an early read on what July and August rising trends were looking and of course that’s without a lot of the close in stuff, but kind of an early read. And you sort of, you’ve provided the guidance for unit revenue for the full September quarter, which would suggest that September’s probably going to be maybe similar to August, up a pretty healthy amount, again, it’s a bit out there. I’m ensuring, I think it was either you or Arne who just talked about a very strong base of September bookings?

Have you seen an elongation of the booking curve, I mean, because of the higher fares, are people booking further in advance which are allowing you to put more people onto the books at higher fares. I mean, what’s going on there? Has there been an evolution over the last 12 months? And I realize this is all in the context of the fact that you’re probably just seeing a better mix because you now fly to more business markets particularly in and out of Milwaukee?

Bob Fornaro

I will start out, generally, I’d turn it over to Kevin. But the fact is we are, what 2009 was may have been the biggest anomaly, we’re still worrying. But 2009 was a period of time where we kind of had the weakest advance bookings and I think there was a lot of late discounting. I think we’re generally seeing a trend towards an elongation of the booking curve and I want you to just take it further Kevin.

Kevin Healy

As I had mentioned earlier, coming in to the year, it’s been a tough year to gauge what is going on with advances because it came in with a much lower base than the previous year. But that was expected and it was designed to drive up average fares and we closed pretty well throughout the first part of the year.

As you get into the fall you’ve got a different look on things where we were last year, where you were trying to drive volume and the average fares kept falling and falling even relative to 2008. We’re now seeing stronger advance bookings and good average fares.

So it’s a sort of thing now where you can get a good base on, we’re getting a better mix of day of week type flying and putting more seats where you need them, less seats where you don’t and getting better at sort of targeting demand with pricing offers.

So, it feels very good about the sale levels that we have out today are higher than they have been in the past and you’re still getting real strong volume.

Michael Linenberg – Deutsche Bank

Good. Very good and thanks.

Bob Fornaro

Thank you.

Operator

Our next question comes from Daniel McKenzie from Hudson Securities.

Daniel McKenzie – Hudson Securities

Hey. Good morning, guys. Thanks.

Bob Fornaro

Good morning, Dan.

Daniel McKenzie – Hudson Securities

I’ve got a couple of questions to just sort of peel back the onion on a couple of things that have already been raised and the first question is kind of a two part. But, glancing at the schedule data in comparing Milwaukee to Orlando and Atlanta, I’m counting 58 destinations out of Atlanta, 46 out of Orlando, which compares to 25 out of Milwaukee. And what appears to be missing at Milwaukee are some of the smaller markets that have historically been AirTran’s niche.

And given rising labor costs, I wonder if you could talk about opportunities to fill up Milwaukee further and then related to that, AirTran’s had a mixed history using RJ’s. But could you talk a little bit about that mixed history or how that mixed history may or may not apply to Milwaukee looking ahead?

Bob Fornaro

Well, you know, I think as we mentioned Atlanta, Orlando, Milwaukee, I mean, they are really, I mean, they are all different. And you know Atlanta we have solid, in fact, 250 departures a day. So you can fly to some cities but you can supplement the markets with connections. But Orlando, I think between out number of cities and carriers like region and we always be see it in markets like El Paso, Orlando and Las Vegas, most small cities or small markets can port throughout this year because of the large volumes. Milwaukee is arguably, is completely different.

It is, we don’t have the volumes and particularly turn to leisure roots serving at Florida but you kind of, have to be cautious. And you have a building kind of take a very long time but you do not have quite the size or the scale that you have in Atlanta. You have the 717, it is a pretty good airplane for small markets. You know, I think, again standard Dallas. We are looking at a few others. We have 717 to it.

In terms of the RJ, we have a small RJ operation in partnership with SkyWest. And there might be some small opportunities for additional RJs up there. But again our primary focus is again trying to focus on, 717, 737s. Look at really what we are doing, it is you know, we -- it is really kind of establish ourselves you know, all the airlines with business class on every flight, that is helping us tremendously up there, even so some of the commuter airplanes are pretty good, generally speaking, of the cabin difference, is substantial, compared to most RJs.

So I guess, I think for us and you will be focused on main volume airplanes. And we are seeing again heavy flows of traffic coming from northern Illinois. Milwaukee is kind of playing out just like we thought. For us, we are sorry that we’re in the local market and we’ll bring it in southeast Wisconsin and northern Illinois. And that’s kind of a textbook example of what you would like to see in an area that was historically been overpriced.

Kevin Healy

The other thing I would add is Milwaukee as I noted before, when you look at it, it is still a growing part of our network in the entity that we are building on. And you know, a different when you compare say Atlanta which was when we arrived, more or less fully developed. This is more similar to Baltimore, where we came into it and have grown it fairly consistently.

And we are a long way from being done up there, but I think it’s -- their approach has worked pretty well, initially started with service to Atlanta and Orlando, built and got into a very good position in the leisure market and have consistently grown into the business now, to a point where at which point, you are at critical mass where it can really start building off of itself, that is going to be debatable. But, I think we are in a very strong position to continue the steady growth that we’ve done in the past.

Daniel McKenzie – Hudson Securities

Okay. Yeah, very helpful. Thanks for that. And then my second question, you know, looking ahead, it looks like almost half the competitive capacity coming into AirTran’s market is coming from Delta, the other half, largely from Southwest and JetBlue. So it looks like the mix of competitive capacity is changing versus historical patterns. That, of course, suggesting to you guys AirTran’s cost structure will need some depth versus where it has been historically. So, I’m wondering how you are thinking about managing the cost structure looking ahead, versus where it’s been historically relative to the industry.

Arne Haak

Managing the cost structure is, I think, we’ve gotten again really our company in 32 areas. Very good value, very good operations and we lead with our cost structure and that is the combination that, that works and I think if we try 20 deviate from that formula you know, it we’ll see mixed results. The cost again and the quality operations you really go hand in hand.

You mentioned the Delta Southwest, you know, those are possibly our key competitors. They watch everything that we do. But even when we keep -- we keep taking advantage of these costs. You know, I get into we have been asked for a long time. We think we have got some pretty good cost advantages versus Southwest now and they are really big ones, versus JetBlue. And again [big task] versus Delta, I think it is, we do two budgets every year, one in fact, you know this is what we do. And we manage what we are doing. We’ve already mentioned -- on the go -- we are getting benefits by carrying fewer bags.

We have always had the best baggage delivery numbers in the industry. They have gotten better. We need fewer people with all the ranks. We need to look at all this stuff. So I think the discipline if we have been doing it so long really it is second nature. And I think it widened our advantages over the last company of years. I think we could stay there. So, again, I don’t see much changing. You know, what we have seen is we have seen a lot of the legacy carriers reorganize through bankruptcies and we still have huge advantages.

So I think you know, certainly over the foreseeable future. I don’t see this limiting our cost leadership. A lot of it is internal focus and a just a much different mind set than other carriers have.

Bob Fornaro

Dan, I think we have always understood what our core competitive strength here as a company is and our ability to manage costs because we compete with the world’s largest airline in Atlanta. We compete with the world’s largest low cost airline in Southwest. We do it, we do it successfully and we’ve been able to do it for quite sometime. And so, I don’t think that the capacity that you are talking about is anything unique or anything really new, to what we’ve seen over the last several years.

It is just -- this is the world we operate in. We have a company that can do it, can do it successfully and there is not a long list of airlines that have been able to deliver like AirTran has.

Daniel McKenzie – Hudson Securities

Okay. Great. Thanks a lot. Appreciate that.

Bob Fornaro

Thank you.

Operator

Our next question comes from Kevin Crissey from UBS Investment Bank.

Kevin Crissey – UBS Investment Bank

Good morning. Just a couple of quick questions.

Bob Fornaro

Hey Kevin.

Kevin Healy

Hey Kevin.

Kevin Crissey – UBS Investment Bank

Tax rate? Are we back to the 39 now?

Arne Haak

We are.

Kevin Crissey – UBS Investment Bank

Okay. And second, have you guys used ITA software for your website search and such?

Kevin Healy

You mean -- we do, no not directly.

Bob Fornaro

No not on our website.

Kevin Crissey – UBS Investment Bank

Okay. Thanks. Need to go.

Bob Fornaro

Okay, Kevin.

Operator

Our next question comes from Steve O’Hara from Sidoti & Company.

Steve O’Hara – Sidoti & Company

Hi. Good morning.

Bob Fornaro

Good morning.

Steve O’Hara – Sidoti & Company

I was wondering if you could just state whether you think you get a benefit from having a lower bag fee in your network versus carriers that have higher bag fees in those same markets?

Kevin Healy

This is Kevin. I’m really not going to get into bag fees relative to anybody else. If you look at the broader question of the bag fee impact on demand, I’m not, there is no way to really measure it. If you look at loads overall, we are still getting record loads and various revenue performance. So on that, I don’t think there is really much we can comment on.

Steve O’Hara – Sidoti & Company

Okay. And in terms of the cost structure, I mean, are you focused more on keeping a relative advantage or maintaining you know, your cost structure to the best of your ability?

Bob Fornaro

I think it is the latter. One of the things that I think is, we could paint this industry with a brush and a focus on, you know, relative performance. And generally again as an industry, you want to perform and that leads to the kind of paint you into a weaker position. And so for us, it really is, had to be the absolute number. That mean, I think that needs to be the primary focus.

What you have done at the end, you can look back, you know, the result is relative. But from an actual perspective, you’ve got to look at there stuff constantly. Again, it is ultimately, it is very, very disciplined process. It is very unpleasant to work around AirTran no matter because I guess -- actually get the budget process starts around Labor Day and it goes a very long time.

It is just typically, you know, when we budget every year, you know, big year, which we’ve done again this year. And it is a practice of again really constant focus. Like I said, I think we are very, very comfortable again really, where we are. It’s certainly harder when you are not growing but it doesn’t mean there is not things you can improve. So when you look at it right now, I think, we understand we are in a very good position.

Steve O’Hara – Sidoti & Company

Okay. And then I guess finally, I think you said you were going to begin some leased aircraft next year. And I’m just wondering does that affect the -- I assume the maintenance costs to be higher on a leased aircraft versus a new aircraft? And is that, but I also assume that could be kind of factored into the lease rate?

Arne Haak

Steve, this is Arne. The lease rate, I mean, to you 717 obviously, what lease rate is, they are quite competitive. And because we have our 717 fleet on a large amount of power by the hour relationship with the original manufacturers, for the most part, the cost profile should be no different than the rest of our 717s.

Steve O’Hara – Sidoti & Company

Okay. Thanks a lot.

Operator

Our next question comes from Helane Becker from Dahlman Rose.

Helane Becker – Dahlman Rose

Hi operator. Hi gentlemen.

Bob Fornaro

Good morning, Helane.

Helane Becker – Dahlman Rose

I just had one question related to the third quarter specifically. As we go into the summer months, very often your operations in the southeast get infected get affected by hurricanes. So could you just talk about a, your planning in dance of, kind of what you are thinking about where your capacity is and so on and then two, what would sent actually would be the additional of routes in Milwaukee and some of the service you have added in Baltimore is now really so southeast focused?

Bob Fornaro

Well hurricanes, you know, you drive by the church and light a candle and hope they stay away. That is really the best hurricane strategy and quite frankly, we actually get, we don’t have many new buildings, but we actually just opened up a new system of operations, new call center right across the street where we are. If we look back at our operations, September is arguably our weakest month of the year from a revenue standpoint. And it is kind of the way it works for us.

You know, we pulled down a capacity level in September. It is probably 22%, 23% below July but the adjustment capacity is even more so in the Florida routes. It is typically a weaker month down here. It is one of the -- the real weak month is September. So we are, we have deeper pull downs than we did, say, four or five years ago. We try to do that with weak capacity. So that’s -- I think in terms of the impact, you know, four or five years ago, we probably had 95% of our capacity in the southeast and today, it is probably 65% or 60% because of a bigger Baltimore operation and the operation in Milwaukee.

So it is smaller, it is certainly what it was in capacity, again we reduce our capacity, in September again -- more than we did again four or five years ago. But yeah, beyond that, it really is, it really is hard to tell. And again it is some years you get two or three of these things and some years you get none. I would say generally speaking we probably don’t focus on it as much as we used to but it is kind really, you can’t plan on it. But we do focus on pulling September down because of the weakest and leisure traffic during that month.

Helane Becker – Dahlman Rose

Okay. Okay. Great. That is very helpful. And then, I just I wanted to get one clarification on the maintenance costs because with the fleet, that was the only one I thought was maybe a little bit higher than I might have expected with the relatively new fleet and coming to your maintenance holidays. So is that the run rate we should be thinking about and then going into 2011 with less capacity growth planned? Are your increase likes likely to moderate?

Arne Haak

Helane, this is Arne. In regards to maintenance, I think this is -- actually our maintenance came in a little bit better than what we thought. We had a big increase this year related to 717s. That we are not going to see the same kind of increase year over year next year on our 717s, that’s all. It’s going to be a much more CPI like look on 717 maintenance costs. 737s, there are few of them. They are upwards trending but it is not a dramatic increase.

I think, it is a fairly routine look. The question, I think, absolute maintenance, dollars are probably going to be pretty similar in the third quarter. Maybe slightly higher depending on where the block hours come out and completion factor.

For next year, you know, I think the trend is likely to be up. We can’t get any kind of firm numbers yet you know, that is something whereas Bob said football season is kind of -- or budget season is kind of like football season around here. You know, we are going to spend August and we might let up a little bit come January before we start talking about where we think the costs are going to come out.

We are going to be very specific. Again, we have a 175, 180 engines for the 717s and a very few increased, the final one in most of these airplanes have got another eight, nine years to go in terms of contracts. This is the last big increase, other than we have CPI. So a step up this year actually begins to moderate in November, December and then again I think again it won’t be level, but yeah more moderate, as we go forward.

Helane Becker – Dahlman Rose

Great. Okay. Thank you for your help on that.

Arne Haak

Great.

Operator

(Operator instructions) Our next question comes from Michael Derchin from CRT Capital.

Michael Derchin – CRT Capital

Hi guys. Just, a quick one on the status of the pilot negotiations and also whether in that regard, whether the failure of the spirit strike, you know, has any implications in the negotiations.

Bob Fornaro

Well I think I won’t give a very detailed answer because I think we can take it or not to negotiate in the press. But again, having said that you know, we -- our pilots and manager, we separately met with NNP. We have gotten back to the table. And just so, it is probably over the last seven or eight days, we have had our best progress than we have had in months, which is, I would say real positive. So you know, I would say again I have been optimistic.

Again, I think we still have a shot of getting a deal by the end of the summer. I look at the progress we have made recently. You know, I feel you know even better about that. So again, I just kind of go back at the end of the day. We have a great group of pilot. You know, they work hard. I think -- as a group, we all go know collectively what it takes for us to be successful, it is quality, good cost structure. And we are going to make adjustments to the agreements and we are starting to see things, you know, come together if I can, trend off, where we have been over the last couple of weeks.

Michael Derchin – CRT Capital

Great. Thanks very much. Great help guys.

Operator

Our next question comes from James Higgins from Soleil Securities.

James Higgins – Soleil Securities

Good morning everyone.

Bob Fornaro

Hi, Jim.

James Higgins – Soleil Securities

Question, clarification on the longer term capacity outlook. I believe, I heard a figure of 3% to 4% ASM growth in 2011 and 2012. Not prepared, is that a total growth over that period or is that a per year growth?

Arne Haak

Per year growth. And I would probably say, 2012 is probably at the higher end of the range, depending on how, what kind of utilization rates we have on the aircraft list. The timing of the deliver in ‘11 are more weighted toward the front half of the year.

James Higgins – Soleil Securities

And then that actually brings us up another question, which is relative to peak utilization you’ve seen over your network in past years. How far from loads are your potential capacity levels are you?

Bob Fornaro

I think if you look at where our utilization is now, it’s about 11. I think maybe peak, it’s been about 11.4, Kevin.

Kevin Healy

Yeah.

Bob Fornaro

You know, generally -- philosophically, we try to run and we have led up to probably adopt another 15 minutes out of 40. But this would make, but that is about the biggest that we could push it.

James Higgins – Soleil Securities

Thank you very much.

Bob Fornaro

Okay.

Operator

And it does not show any further questions, I would now like to turn the program over to Mr. Bob Fornaro.

Bob Fornaro

Great. And again, I’d like to thank everybody for joining us on the call tonight. We’ve accomplished a lot over the last year. We’ve renewed our lease in Atlanta, we’ve defined the terms of our aircraft deliveries, we’ve improved the financial profile of the company, achieved significant improvements in unit revenue and we’ve continued to maintain our low cost advantage. And I’d just like to say I’m really encouraged by the continued growth of our yield improvements, the growth of our profitability and our competitive position in Milwaukee. And I think it sets us up for good earnings growth in the second half of the year. Thanks for the time today and I’ll see everybody in October.

Operator

Ladies and gentlemen, that does conclude today’s program. You may now disconnect and have a wonderful day.

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Source: AirTran Holdings Inc. Q2 2010 Earnings Call Transcript
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