AirTran Holdings, Inc. (AAI) Q4 Earnings Call January 29, 2008 9:25 AM ET
Arne Haak, VP Finance
Stanley J. Gadek, CFO
Kevin Healy, Sr. VP Planning and Marketing
Bob Fornaro, CEO
Jim Parker - Raymond James
Mike Linenberg - Merrill Lynch.
BobMcAdoo – Avondale
Ray Neidl - Calyon Securities
Jamie Baker - J P Morgan
Frank Boroch - Bear Stearns
Daniel McKenzie - Credit Suisse
Good morning. My name is Natasha and I will be your conference operator today. At this time I would like to welcome everyone to the AirTran Holdings fourth quarter 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (Operator instructions). Thank you. It is now my pleasure to turn the floor over to your host, Arne Haak. Sir, you may begin.
Arne Haak, VP Finance
Good morning everyone. I want to thank you for joining us today for AirTran Holdings’ fourth quarter 2007 earnings call. Joining me today is Stan Gadek, our Chief Financial Officer, Kevin Healy, our Senior Vice President of Planning and Marketing, and Bob Fornaro, our Chief Executive Officer.
As our usual practice, we will begin by reminding you that this call will include forward-looking statements and that our actual results may differ materially from these statements. These statements are not historical facts and instead you should consider them as time sensitive forward-looking statements that are accurate only as of January 29th, 2008.
If you would like additional information concerning factors that could cause our actual results to vary from those in the forward-looking statements, they can be found on our form 10-Q and other SEC filings of the company.
We will also be discussing several non-GAAP financial measures that we believe are more consistent with our tool operating performance and provide a more meaningful period-to-period comparison as they exclude special item.
A copy of today's press release, our SEC filings, and a reconciliation of these non-GAAP financial measures are available in investor relations section of the company's website at airtran.com. At this point, I would like to turn our call over to Stan.
Stanley J. Gadek, Chief Financial Officer
Okay. Thank you Arne and good morning everyone. Today, we are pleased to report that AirTran has achieved its sixth consecutive year of profitability with net income of $52.7 million or $0.56 cents per diluted share. This is a significant accomplishment particularly given the challenges from surging fuel prices in the latter part of the year. 2007 was also notable and that we served a record 23.8 million customers, generated $2.3 billion in revenue, and achieved a 76.2% load factor for the year, an all time company record. We are very proud of these results and believe they show increasing customer preference for AirTran by offering a great product featuring new aircraft with Business Class and free XM Satellite Radio on every flight combined with affordable fares and friendly service.
We believe we provide one of the best travel values in the industry.
Better still, we continue to diversify the network with our recently announced inaugural service to standalone from both Atlanta and Orlando, as well as new nonstop service from Milwaukee to New York LaGuardia Airport. This morning we continued our Milwaukee expansion with the announcement of new seasonal service to Boston, Los Angeles, San Diego, San Francisco, and Seattle. We are pleased to inaugurate these flights in response to passenger demand for lower fares and better service, and look forward to the opportunity of adding even more destinations to our route network in the future.
During 2007, we achieved our third consecutive year of unit revenue improvement as we developed new markets and adjusted fares to keep revenue a pace of higher fuel costs.
While the first half of the year's unit revenue performance was challenging, the second half were bounded as we took fare increases and adjusted our expansion. Nevertheless, fuel costs in the fourth quarter impacted our financial performance result in the small loss. Since the first of the year, we have continued our focus on revenue performance and recently increased our fuel surcharge to $10 each way on most fares. Another key element profitability has been our cost structure and in 2007, we again reduced non-fuel unit cost, achieving a nearly 3% improvement over the prior year.
In fact for 2007, we achieved an all time record level of $6.03, continuing a trend of six consecutive years of non-fuel unit cost reductions. These results are particularly noteworthy and have helped to offset fuel prices while creating a significant cost advantage over our competitors. AirTran success in 2007 would not have been possible without the hard work and dedication of our over 8,600 crew members.
On behalf of Executive team, I want to acknowledge the significant contribution and say, "Thank you for your effort and thank you for putting the customer first”. The enthusiasm of our people and their desire to serve the customers part of AirTrans unique advantage which sets us apart from the competition.
During 2007, we were especially pleased to have created over 800 full and part-time jobs. AirTran success has enabled many individuals to pursue nuclear opportunities, they otherwise may not have had. This was a responsibility we would probably take on and has made possible as a result of the expansion of our company and the creation of new opportunities. In that regard, we recently announced a partnership with the State of Florida and City of Orlando a multiyear program to expand our facilities here which will provide additional space to hold our system operations control and related headquarters functions, as well as provide for a 120 new jobs over the next three years, and I would like to talk about our metrics.
During the fourth quarter capacity as expressed in available seat miles increased 15.1% resulting from 10 additional aircraft and the 7.4% increase in average stage length to 699 miles. On a full year basis, stage lengths grow 6.6% contributing to an annual increase in capacity of 19.4%. The reduction in year-over-year fourth quarter ASM's directly reflects the adjusted delivery schedule with the last aircraft having arrived in July 2007. The increase in stage-length for the quarter and full year primarily showed the increase of east-west flying, which averaged approximately 20% of total capacity during 2007.
Traffic as expressed in terms of revenue passenger miles increased 25.5% and 25.0% for the quarter and year respectively. Load factor in the fourth quarter was up 6.3 points to 75.3%, representing another fourth quarter record, in addition to the annual record load factor of 76.2%. Fourth quarter passenger unit revenue increased 9.4% to $0.9.66 year-over-year. The strong unit revenue performance was driven by the 6.3% point increase on load factor, as well as an improvement in yield of 0.4% to $12.84. Average segment fair was $93.35 representing a 6.5% increase over the last year.
On a full-year basis, unit revenue increased to 1.5%, $0. 9.69, and again primarily reflects the improvement in load factor offset somewhat by lower yield in the second and third quarter of 2007.
During the fourth quarter, non-fuel unit cost increased 2.2% primarily reflecting adjustments for certain one time maintenance of that and other true-offs, as well as higher distribution cost driven by the record revenues.
Well higher than anticipated, we do not believe this is a trend and expect to continue reducing non-fuel unit cost in 2008. On a total operating cost basis including fuel AirTrans fourth quarter unit cost increased 7.7% to $0.9.93 primarily caused by the 21.3% increase in the cost per gallon of fuel to $2.45.
However, on a full year basis, total operating unit cost declined 1.7% to $0. 9.57 aided by the full year reduction in non-fuel unit cost of 2.6% previously mentioned. Average daily utilization declined slightly from 10.9 hours to 10.8 hours during the fourth quarter and from 11.1 hours to 11.0 hours for the full year.
Utilization by fleet-type for the fourth quarter was 10.5 hours per day for the 717s and 11.4 hours per day for the 737s.
Operating performance stats for the fourth quarter and the year were 99% and 99% for completion factor, 76% and 76.8% for on-time performance, and 3.7 and 4.0 claims per 1000 for baggage claims.
And now we will review our financial performance. For the fourth quarter, AirTran recorded a net loss of $2.2 million or $0.2 per diluted share. Included in these results are net of tax charges of approximately $1.1 million or penny a share. To record the unrealized net loss associated with the ineffective portion of interest rate and fuel driven. Also included in the fourth quarter results were where true-offs our annual tax rate resulting in additional income tax expense.
Net income for the year was $52.7 million or $0.56 per diluted share. Included in the full year results are the charges associated with the termination of our exchange offer for Midwest Air Group and again on the sale of two aircraft amounting to a net of tax reduction earnings of $2.8 million or $0.2 per diluted share.
Looking now at revenues, AirTran set new records for both passenger and total revenue. For the fourth quarter, passenger revenue grew 25.9% to $553.9 million, and total revenue increased 26.5% to $583.8 million. Full year passenger revenue increased 21.2% nearly $2.2 billion, and total revenue increased 22.1% to $2.3 billion. These numbers represent all time records and reflects strong unit revenue performance in passenger demand. They also reflect improvements to revenue production, which are coming about from network diversification, changes in fleet, and improved yield management.
Looking at the individual line items of expense on the unit cost basis; salaries, wages, and benefits declined 2.9% in both the quarter and full year to $0.2 and $1.99 respectively. The reduction in unit cost stays in prior quarters primarily reflects the productivity improvements throughout the company driven by the new 737, as well as investments in customer service technology.
Productivity is measured in terms of full time equivalence per aircraft was 59.6 for the quarter and 59.3 for the year. Significantly bettering last years measures of 60.4 and 61.5 FTEs respectively.
Aircraft fuel unit cost increased 17.7% in the quarter to $3.86 while declining slightly by 0.3% $3.54 for the full year. The significant increase in fuel unit cost in the quarter resulted primarily from a 21.3% increase in the price per gallon of fuel to $2.45, and in actual dollars the cost of fuel went up 35.3% from a $163.5 million to $221.1 million.
Increased usage from the greater number of aircraft in the fleet comprised $38.7 million of this increase, along with an $18.9 million increase due to higher prices. Savings from fuel hedges and fixed forward contracts from the fourth quarter were approximately $24.3 million and $41.4 million for the full year.
Aircraft run on a unit cost basis declined to 13.1% to $1.06 for the quarter and 11.6% to $1.07 for the full year. As in prior periods, the ongoing reduction in run expense unit costs primarily results from the increased in debt financed aircraft in our fleet.
Updating our fleet information, the number of leased and owned aircraft remains unchanged for the third quarter. We have 87 717s, of which 79 are leased and 8 are owned. We have 50 737s of which 22 are leased and 28 are owned, and a total of 10 737s were added to our fleet during 2007.
Distribution expense unit cost increased 21.9% to $0.39 in the quarter and 5.4% to $0.39 for the year. The increase in distribution unit costs primarily reflects the higher revenue volume and a greater number of credit card transactions.
During the fourth quarter, 57.6% of our bookings came from Airtran.com and 58% booked for the full year. Approximately 25.6% of our customers have checked-in using kiosks while 23.3% checked-in using the internet. In total 48.9% of our customers checked in during the quarter using automation.
Maintenance materials and repairs unit cost increased 19% to $0.69 and 1.5% to $0.67 for the quarter and year respectively. The increase in the fourth quarter unit cost was primarily driven by additional accruals for FOD engine damage, and other onetime maintenance items.
Maintenance cost for block hour in the fourth quarter increased to 24.7% from $236.5 for block hour to $294.7 per block hour. For the year, cost of block hour increased 4.7% from $271.8 per block hour to $284.6. Maintenance cost for block hour are also being affected by higher cost related to the 717 fleet. However, we expect to see a reduction from these block hour rates in 2008.
Landing fees and other rents unit costs increased 16.7% to $0.56 in the quarter, and 1.9% to $0.54 for the full year. The increase reflects impart a higher number of operations for common used gates in Atlanta, as well as operations from higher cost airports throughout our network.
Aircraft insurance and security services unit cost declined 28.6% for both the quarter and full year to $0.10. As in prior periods the reduction in insurance primarily reflects the benefits from our new and modern fleet.
Marketing and advertising unit cost declined 15.8% to $0.16 for the quarter and 25% to $0.18 for the year. The reduction in unit costs primarily reflects the expiration of certain promotional programs which ended last year, as well as more efficient use of our marketing and advertising dollars.
Depreciation unit cost increased 14.3% to $0.24 and 31.3% to $0.21 for the quarter and full year respectively. As in prior periods, the increase in unit cost has been driven by the addition of own 737s and related purchases of spare parts and equipment.
Other operating expenses unit costs increased 16% to $0.87 from the quarter and 6% to $0.88 for the full year.
The increase was driven primarily by additional ground handling expenses in these stations, as well as adjustments to accruals from this (Inaudible) items.
Operating income for the fourth quarter increased from $2.1 million in 2006 to $14.9 million in 2007 resulting in a 2.6% operating margin on improvement of 2.1 percentage points.
For the full year, operating income increased from $40.9 million to $137.9 million resulting in a full year operating margin of 6%, up 3.8 percentage points compared to the 2006 operating margin to 2.2%. EBITDA for the quarter and full year more than double coming in at $26.8 million and a $181.7 million respectively.
Looking at the balance sheet, AirTran at the end of the year was $355.9 million in total cash in long and short term investments, of which $29.6 million was restricted. In addition, the company had made deposit s with Boeing of a $119.8 million. Current and long-term debt including capital leases was $1.06 billion and consisted primarily of debt related to new aircraft and pre-delivery deposit financing. All but $125 million of our debt is secured by aircraft to delivery positions.
I would now like to provide you with our guidance for 2008. Capacity additions by quarter are expected to be approximately 10% for the first quarter, 12% for the second quarter, 10% for the third and fourth quarters, and for the full 10 to 11%. Aircraft deliveries will be three first quarter, five in the second quarter, and two in the fourth quarter for a total of 10 crafts.
Non-fuel unit costs are projected to be flat to down 1% for the full year, and up appropriately 0.5% in the first quarter. Our fuel-hedge positions consist primarily of caps in three-way collars. Assuming oil at $90 a barrel, our fuel-hedges for 2008 including all taxes and fees are valued in a range of between $.55 and $2.60 per gallon. Again this is the price range for the hedges only. The percentages by quarter are as follows, 37% in the first quarter, 26% in the second, 24% in the third, and 19% in the fourth quarter.
Our estimated total fuel cost in the first quarter will be in the range of from $2.85 to $2.90 per gallon including the benefit of the hedges. Using the base assumption of $90 of barrel oil and a $15 barrel crack spread for spot purchases and factoring in the effect of hedges, we estimate that the all in total fuel cost for 2008 would be in the range of between $2.75 and $2.85 per gallon. Total fuel consumption for 2008 is projected to be approximately 390 to 400 million gallon.
Fuel price sensitivity on the quarterly basis is $2.5 million before the effective hedges for every one dollar change in the price per barrel. Non-aircraft CapEx will be approximately $25 to $30 million, and our projected income tax rate for 2008 will be approximately 39 to 40%.
In summary, we would like to acknowledge our customer, shareholders, and crew members. Each group as an integral part of our business and AirTran’s success is directly linked to their support. Looking at the year in review, we reflect down the many challenges we have faced. Most successfully some not. We have always worked hard to create value and we take pride in the knowledge that we have accomplished that and more. As we look forward to the New Year, we believe that we are well positioned to benefit from the industry changes which are surely coming.
Whatever comes our way, you can be sure that AirTran will never loose its focus on profitability and providing value to the customer. And with that, I would like to open the call for questions?
Question-and -Answer session
Thank you. (Operator instruction). Your first question comes from Jim Parker of Raymond James
Hi, good Morning to all. You’ve have done some surcharges and, I would like to know actually what the total of the surcharges is and, if in fact, they’re holding or you actually realizing higher fares or you having to move, seize down into lower fare buckets.
We’ve done really a fuel surcharge that started at $5 and now at $10 priced to most fares, not all. Generally, sales fares are exempt, but otherwise it's there in length.
And second question is, I believe that you very quietly began to charge for assigned seats, sometime in the fourth quarter. What have you done in that regard, and what other ancillaries might you be pursuing?
The seat assigned, it was an introduction that I gave the options to customers to allow them to reserve a seat for a fee in advance, otherwise they get it a check in. So, on that option, I can pay $5 for certain seats, $20 for an emergency exit. It has been exceptionally well received. We have some other ancillary things that we’re been working on, but going back in the detail those out right now.
Right. When you say well received, what proportion of your passenger are actually paying for an assigned seat.
Gentleman, I think the impact we brought in, it may well be a few million dollars a months. So I didn’t want to give a percentage, but it's something that when you take a nice look at it, at the end of the month, it's a noticeable improvement in revenue. Kevin?
And Bob, just, it look likes Delta may combine with the North-West or may be United, what would be the impact on AirTran where might there be capacity eliminated to, what opportunities might be created for AirTran by that combination?
Yeah, the -- certainly consolidation, I gotten, obviously it hit the price right now, and consolidation basically an acronym for taking domestic capacity, the market rate, again, it's about international diversification and domestic capacity reduction. If you look at where most of the halves are, and potentially the excess of, most of them have reached the Mississippi, again it's a lot more hot there, and so, therefore the bulk of the redundancies are going to be Mississippi where we basically have the bulk of our capacity. It will either be in the Southeast, certainly the Northeast and I think one of our stated goals is to keep developing our presence in the Midwest. So I don't have an answer before you, but I would say most of these combinations would create significant benefits for us in terms of just improving our revenue naturally, plus allowing us to be much more strategic in our growth plans and allow us diversify.
Thank you. Your next question comes from Ray Neidl of Calyon Securities.
You mentioned that you would continue your program of route diversification and I'm just wondering absent consolidation what your plans are in that area? How you can continue to spread your risk and diversify your routes?
What we're looking at right now for the next year Ray, is that little more than half of our growth will be at Atlanta and continuing to build the hub there. A little more than a quarter will be developed, continuing to develop at Baltimore which is good and then we'll grow out. The rest will be in the other categories. We announced this morning continued expansion in Milwaukee West, last week we had at LaGuardia and we announced five additional seasonal destinations this morning at LA, San Francisco, San Diego, Seattle, and Boston. So that takes us to a total of 13 nonstop destinations, about 20 departures a day there and I feel pretty good about that as well.
Okay and with the possibility of consolidation, I take it that like other airlines you should be looking for maybe some asset pickup. I am just wondering would this at all change the Midwest airline situation with the investment to buy TBG and Northwest?
Yeah the Midwest situation again, first of all, as you know that transaction has been delayed. Certainly DOJ has seen some competitive issues, but they may well approve it at the end of the day. But we think we can compete there because it’s really out to serve, you got a high cost carrier there that basically charges too much. Well I think, Milwaukee remains an opportunity really under any scenario. I think certainly if you start putting some of these very large carriers together, there maybe small carve outs. Certainly if you look at New York, there has to be some carve out even in the Walsh International. So, those are places that we actually would like to strengthen our hand because some of the best airports in the country. So we think we would like to actually again participate in some of the small carve outs that we anticipate.
Great, thank you Bob.
Thank you. Your next question comes from Jamie Baker of J P Morgan.
I guess a question for Kevin or for Bob. You spoke enthusiastically about demand and your release. But I didn't hear you quantify any rise of guidance for the first quarter. I don't want to read too much into this fact, but you don't have as easier comp in the quarter but you are growing less quickly. I mean, should we assume that high single digit RASM is at least possible in the first quarter?
Jamie we feel pretty good about the advances that we have in the books right now, and I think where we're looking at is 6% to 7% unit revenue improvement in the first quarter.
A lot will depend on how the closings come in March that's the strongest part of the quarter obviously.
Well as a followup to that, I mean, your commentary in this regard is nearly identical to that of every one else this earning season and frankly I'm a bit surprised, not as it relates to AirTran per se but I just figured we would've seen some evidence to the slowdown by this point. You guys have lived through prior downturns. Aren't we at the point where we should be seeing demand erosion or is it still premature, given travel being a planned event. I'm just wondering if you're as surprised as I m?
Hi Jamie, this is Bob here. I think it's still too early to tell. I think people make their travel plans for the holidays and then they take a fresh look when they enter the New Year, it's kind of the way people tend to act. We feel very good about January we were very disappointed in our capacity. And as we look out on the last, say, 45 days in the first quarter, we are trying to sell higher prices, and we really need to see whether people will pay those prices. So it is really too early to tell. I think the issue for AirTran and most other carriers is, how high will the unit revenue improvements be? I think we are certainly going to see them, a lot of these things are fear-driven. But the question remains whether we can raise the fares and raise the load factors simultaneously. I think we feel pretty good about 6% to 7%, but that depends on a very strong March.
Okay. Thanks for the call. I appreciate it very much.
Thank you. Your next question comes from Frank Boroch of Bear Stearns.
I guess, following on to the question, Bob, the last couple of months some of your comments seemed to suggest you are thinking of slowing some growth in '08 for capacity and I guess, given that is announced, it hasn’t been announced today, if we strip out the Easter effect with the current fuel assumption and the CASM X fuel guidance, it looks as though AirTran could be on track to post a year-over-year earnings decline in '08 and I'm just trying to think what you're thinking around that? I mean is your goal to grow earnings this year or is this sort of the longer term strategy and sort of what can shareholders look to you for long-term value?
Frank you've got a couple of very good questions there. Let's talk about capacity; we’re still reviewing our capacity plans. And this is really a ongoing situation but -- as we started 18 months ago, we've taken steps to slow down our growth because fuel expenses are a 40% of our cost. And we're really looking at this situation now. It's likely we'll reduce capacity further this year, and we'll begin to focus on 2009 as well. Now oil prices stay high, this is not a one year problem, I mean, its something we need to make a permanent adjustment to. Regarding year-over-year earnings, with oil at $90 a barrel and no consolidation, it's very hard to increase your earnings at a year-over-year basis. I mean it's an awfully total challenge. So again, I think consensus now is, some of the estimates are stale, but I believe consensus is about $0.30 or thereabouts right now. But they hit 2007 numbers with $90 a barrel, its tough especially with perhaps a weakening economy and so, therefore we've got to be more disciplined in capacity in the past. Our costs are going to go down as we've talked about today. And quite frankly we're scrubbing those to see if we can reduce our costs further. But we have to manage really what we can and I can guarantee you, we are always disciplined on cost, but we're going to be even more aggressive on cost then we had expected.
One followup of '08, when you think about structurally sort of the load factors that the network can support given a lot of the growth, I don’t know maybe this is for Kevin, where do you see sort of maximum load factors topping out? What can you run at, is it 78% on a full year basis given the seasonality of the system or where, what are the limits?
I think we can get a couple of more points or so this year in the plan, as our summer, our third quarter is much stronger than it has been historically. As we get into longer haul that tends to help us drive up the load as well. So, I think there is a little more upside on the load.
Okay great. Thanks a lot.
Thank you. Your next question comes from Daniel McKenzie of Credit Suisse.
It relates more to non-hub flying, something that you guys are doing more and more out here. And I guess in particular AirTran has gone into a number of markets historically only to pull out a little bit later. And so, I hope if you can provide some perspective about why the non-hub flying, you guys are engaging in today is different than the non-hub flying that has been downsized in the past?
Well, I guess, you've got a good question and I guess it has to do with discipline. First, if you take the approach that you're not try things and you'll never succeed in this business. And for the most part, we have hit many of the revenue targets in some of these routes. But – when I joined this company, and a whole bunch of people on our room oil was delivered down with a barrel and now its 9, and so, we’ve seen fuel as a percent of our expenses go from 15% to 20% to 30% to 40%, which means ultimately it’s going to raise your fares, and which means the stimulation of the market is slower, and so, starting up new routes takes longer, it's a simple matter of fact. So we could stand around, and, at the end of the day we’re going to make, we’re going to be profitable. And so, sometimes we have to back off because our profitability is our number one objective. Rather than pretend that a route is working, I could tell you as we speak today even with the improved profits in this industry, most airlines lose money domestically. And I think there is probably only 2 or 3 actually are profitable. So you have to put that in the proper business context. We've taken a step to reduce the growth.
Certainly we can't grow 25% a year with oil prices where they are. That’s why we trending down towards 10%. We'll open up fewer of those routes and quite frankly, we positioned ourselves where we can live through these extended true-offs of a lot of these different routes. So, I think we've changed direction a little bit. But I am -- I am going to certainly going to tell you there isn't a carrier in this business who is making money on every route, and sometimes you have to back off and make sure you preserve the financial strength of the organization.
Got it, okay, thanks. And I guess, just following up on that, can you guys share for me RASM trends with respect to sort of hub and non-hub flights. In other words are you seeing more strength in RASM at your hub or are you starting to see some RASM strength in the non-hub flying, if you could just provide some revenue perspective that would be helpful as well?
Unidentified Company Representative
Yeah. I just got a little bit and I will turn it over to Kevin, but if have to look at the -- again the operations with two-thirds of say Atlanta hub, one-third non-hub. The cost in the non-hub piece are all lower, and the routes are more leisure oriented. So those yields will be longer, but the cost will be lower.
And I think right now the hub operation is stronger because we have – again, we got 32 gates in Atlanta, and that allows us to be much more selective in terms of some of the revenue choices that we make.
Got it, okay…
The nature of hub versus non-hub is different, we carry a lot more of business obviously, through Atlanta, but then even Baltimore is growing, market play of Baltimore, Boston they're good business markets. But largely non-hub flying for us is leisure.
Got it. Okay, great thanks again.
Okay. Thanks Dan.
Thank you. (Operators Instruction). Your next question comes from Mike Linenberg of Merrill Lynch.
Good morning all. Two questions. First, Kevin or Bob, what -- you talked about advance booking mean good. What sort of trends are you seeing as supply comes out of this system. Are you seeing the booking curve lengthen at all on one hand and then on the other, and sort of related? Many of the carriers have started putting back in place the dreaded Saturday nights day restriction in order to get the lowest fare and some of the minimum nights stay requirements are being expended. Is that stuff that you're looking at? Have you guys in put some of those fences if you will back into the fare structure?
As far as adding a Saturday night stay or any of that sort of thing, it's not something that we're considering. Generally speaking, I think a big piece of our success is the ability to have a customer come to our website, understand the price rules, and buy a ticket with confidence, that they got the best deal. And, we do have some segmentation based on advanced purchase and other attributes, but we think that’s -- we can manage through that better than adding fences that they’re trying to cut off business travelers from a low fare. And is that a carriers to that, that generally is going to be to our
And then on the advance book?.
The advance booking – we came into the quarter real strong and continue to see that we keep an eye closely on as we've raised fares and taken increases, you’re sensitive to a point where that starts having diminishing returns, but it's a balance. We will continue to offer sales. We initiated another this morning and I think driving demand and keeping sort of a moving price to maximize the demand is the key for us.
Okay. And then just on a second question, and this is a question for Bob. With respect to Northwest Midwest, I think, Bob you sort of screw out the comment that there may be some competitive concerns there and that may be holding up the deal, and of course, when the deal was announced, you probably were only serving 4 or 5 markets from Milwaukee and I think with Washington or with LaGuardia, I think you're at your ASM, I think you're trying to get some slots to serve Milwaukee from National, and then you just announced another slew of city. So, if anything, I guess, one of the arguments that some would have against the deal would be that this would be a market where new competition would face difficulty getting into and of course you guys are sort of an example of the opposite of that. In fact, one could argue that because of your actions the deal stands a much higher chance of going through. And so, I'm just – I am curious about the strategy here? You know, Midwest, you wanted yourself and yet now here's an opportunity that may be by your actions you've sort of pushed them into Northwest, I mean, just thoughts on that?
Well, if you look at the situation over in Milwaukee with Midwest, I think we should be – if you look at the whole situation, a year ago they made some claims about significant profitability they would see in the year. They missed the numbers by a mile. So they end the year with very, very disappointing results. And between TPG and Northwest is that they are now investing almost $500 million. I think certainly as the buyers look back, it may well be seeing some buyers remorse there as well. They also have 30 – they’re paying at a time that their deal was done at $52 a barrel, now it's 90. So, I think Midwest has got some real issues. It has announced the layoff of 3 to 400 people where they made all the promises about how good they were for the community. So we more or less have said to more ourselves, let them have it, and the situation will be even worse, and we are going to go compete aggressively with them. And certainly if they are in a backdrop of, let’s say consolidation, there may be the more opportunities in the upper Midwest than they are today. So we just got tired of really waiting around. We think Midwest has got a lot of issues and they will only get worse after this deal closes.
Okay. Alright, now that’s great. That's very helpful. Thanks guys.
Thank you. Your next question comes from Bob McAdoo of Avondale.
Quickly, in the earlier conference calls, you talked about pulling down capacity seasonally in the January, February timeframe things like Chicago, Boston, and whatever. I'm just curious for some color as to -- are you glad to do that, does that still look like the right thing that you've done, are you getting the kind of results there that you would have thought in terms of what it's going to do this quarter, and are you going back into all those routes that you did pull back?
I think we had a very strong January and I think that does show that it's the right move to move out of some of these weaker routes, particularly in this fuel environment, and I think you’re seeing that in today's announcement as well shifting capacity around outside of the hub when and where the demand is. So we will be going back in the Chicago route that you mentioned and doing more seasonal flying during the peak period, and not trying to run that through the off-peak where whenever you tend to make it (inaudible).
Thank you. There are no further questions. At this time, I would like to turn the call over to management for closing remarks.
Yes. I would like to thank everybody for joining the call this morning, and just, again a couple of highlights. I think we took a couple of very positive steps in 2007. We had a fairly good year from the earning standpoint compared to prior years. Non-fuel cost dropped for the sixth consecutive year in a row down 2.6%, and we ended the year on a strong note from the unit revenue perspective, and that’s real positive as well, and I know we’ve talked about it much today, but we had – basically had the best operating metrics in the history of our company which is really attribute to the AirTran crew members.
Our RHI (Ph) for the year was approximately 78% which is probably No.3 for all major carriers. Our bag numbers are probably an industry leading numbers this year with either No.1 or No.2, it certainly were No. 1 of all the major carriers, and we had excellent metrics in terms of involuntary bookings and completed factors, we feel very, very good about those.
However, as I said fuel challenged $90 a barrel, it means 40% of our expenses and so, AirTran will continuing to review our capacity, and again with the buyers towards reducing it further. And as it comes to expenses we have forecast our expenses will e down and we will manage those even more aggressively.
I think finally, we think circumstances are really right for change in this industry. The talk of the consolidation is here because the domestic market is relatively weak, this capacity here and consolidation can play a very big role in reducing this, and carriers like AirTran were efficient enabled and can really capitalize on the opportunities that the situation can provide. So with that, I appreciate you joining us this morning and we’ll talk to talk to you in a few months. Thank you.
Operator: Thank you! This concludes today’s conference call. You may now disconnect.
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