AirTran Holdings, Inc. Q2 2008 Earnings Call Transcript

AirTran Holdings, Inc. (AAI)

Q2 2008 Earnings Call Transcript

July 29, 2008 10:00 am ET

Executives

Jason Bewley – Director of Corporate Finance

Bob Fornaro – Chairman, President and CEO

Arne Haak – SVP of Finance, Treasurer and CFO

Kevin Healy – SVP of Marketing and Planning

Analysts

Mike Linenberg – Merrill Lynch

Duane Pfennigwerth – Raymond James

Daniel McKenzie – Credit Suisse

Ray Neidl – Calyon Securities

David Simpson [ph] – Lehman Brothers

Kevin Crissey – UBS

Bob McAdoo – Avondale Partners

Presentation

Operator

Good day. My name is Jackie and I will be your conference operator today. At this time, I would like to welcome everyone to the AirTran Holdings Inc. second quarter 2008 earnings conference call. (Operator instructions) It is now my pleasure to turn the floor over to Jason Bewley, Director of Corporate Finance. Sir, you may begin your conference.

Jason Bewley

Good morning, everyone. I’d like to thank you for joining us for a discussion of our second quarter results and our outlook for the remainder of the year. Joining me today is Bob Fornaro, our President and Chief Executive Officer; Arne Haak our Chief Financial Officer; Kevin Healy, our Senior Vice President of Marketing and Planning; and Mark Osterberg, our Chief Accounting Officer.

I’d like to remind you that this call 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 29, 2008. If you would like additional information concerning factors that could cause our actual results to vary from those in our forward-looking statements, they can be found in our Form 10-K and other SEC filings on the company. We will also be discussing several non-GAAP financial measures that we believe are more consistent with our true operating performance and provide a more meaningful period-to-period comparison as they exclude special items. A copy of today’s press release, our SEC filings, and a reconciliation of these non-GAAP financial measures is available in the investor relations section of the company’s Web site at airtran.com.

Today we will be discussing our second quarter results and our outlook for the third quarter as we outline our initiatives for adapting high oil prices. At the end of the call, there will be a brief question-and-answer session.

Now, I would like to turn the call over to Bob.

Bob Fornaro

Thank you Jason and good morning everyone. Thank you for joining us on the call this morning. Before I start, I’d like to thank all the AirTran crew members for their hard work, dedication and positive attitude.

Last April we had the honor to receive the 2008 Air Quality Award jointly awarded by the Universities of Nebraska and Wichita state. This award is based on a compilation of operating metrics that report to the DOT each month. Despite difficult economic times, our crew members are off to another strong operational year. In the second quarter, our completion factor was 99.4, mishandled bags were down to 3 per 1000 passengers, and on-time arrivals exceeded 80%. We are first among major airlines in the last DOT report with an on-time arrival rate of nearly 85%, which is a further indication of the quality operation that we run.

This morning we also announced our financial results for the second quarter 2008.

We reported a negative operating margin of 6.6% and a net loss of $13.5 million. These figures included a gain on the sale of two aircrafts (inaudible) $3 million and goodwill impairment charge of $8.4 million. Our profit reversal versus the prior year’s quarter is driven primarily by the enormous increase in fuel prices. The average price per gallon of fuel increased more than 70% from $2.20 per gallon last year to $3.75 this year for a total increase of $167 million. Clearly, we are disappointed by this quarter’s financial performance.

As we previously told you, we took steps 18 months ago to reduce our growth rate coming into 2008. After five consecutive years of 20% plus growth or more, we entered 2008 with a growth rate of roughly 10% to 12%, a rate in which we were comfortable with oil at about $80 a barrel and with a moderate accounting. As energy prices continued to advance and the economy softened, we reassessed efforts to our competitive positions in the marketplace. We understand our challenges, excessive growth and certain areas of market underperformance.

We are also well in control of things we can’t manage such as non-fuel CASM and operational performance. Our revised capacity plans starts in September as we move rapidly to reduce our capacity and drive unit revenues up to reflect the high energy prices. We are focused on five areas in order to adapt to this new environment. First, capacity reductions. We are cutting our planned capacity once again to minus 7% to 8% in the last four months of the year. This is down from our last guidance in June down 5%. We expect our year-end fleet size to be no more than 139 aircrafts versus the original plan of 147. For 2009, we have reached a second agreement with Boeing to defer four additional aircrafts. Therefore we will take only two deliveries next year. It is our intention to pursue further aircraft sales and we expect 2009 capacity to be down between 4% and 8%. We have an outside target of at least 10% depending on the number of airplanes we are able to sell. Today we have announced the suspension of service to two cities, Stewart Newburgh and Daytona Beach, we anticipate additional city closures. A comprehensive review of both our fleet and route network will be ongoing and we are prepared to do more.

Second area of focus is continued cost reduction. We began the year with an industry-leading non-fuel cost position. We made discipline as evidenced by our drop in non-fuel CASM of more than 3% in the quarter. While the reduction of growth will put upward pressure on our fourth quarter cost, we expect FTE per aircraft to further decline from 2000 levels of 60 per aircraft. Our goal is to maintain our industry-leading cost over time.

Point number three of focus is increased liquidity. In April, we raised $147 million in the concurrent equity and convertible senior notes transaction. Today we announced that we have reached a commitment for up to $150 million in the letter of credit facility that can be applied towards holdback or deposit requirements with our credit card processors. We have several aircraft sales in the pipeline which Arne Haak will address shortly. Lastly, we have reduced our planned non-aircraft CapEx 40% to 50% of our planned levels to $12 million to $18 million.

Fuel hedging, we continue to offset a portion of our fuel cost through comprehensive [ph] fuel hedging. During the quarter we realized gains of $60.8 million on our hedgings. We continue to look for hedges as they are available and Arne will spend some more time on that as well.

Finally, the fifth area of focus is revenue improvement. This is an area that has been mixed to date. We are very pleased with our new ancillary revenue initiatives such as the call centre fee, second bag fee and seat assignment fees. However, year revenue performance has lagged despite numerous spare increases. We have seen some change in closed-end [ph] and business bookings and weakness in some of our long haul routes. With double-digit capacity growth and a stage length increase of nearly 8% in this quarter, our unit revenue performance is sub par. In the fourth quarter we expect to reduce our stage length by about 7% to 8% sequentially as we reduce capacity in Atlanta long haul market and our seasonal flying from Milwaukee to the West Coast. Another part of our capacity reduction plan in the last four months of the year is tied to lower aircraft utilization in trough travel periods and various day-a-week schedule adjustments. At today’s energy prices, approximately two-thirds of our costs are variable, which means we believe aircraft utilization is less important in off-peak periods. The fuel representing 50% of our total cost during the quarter, we are mindful of the challenge we face and as always we will take the challenge head on and adapt to this new environment.

Now it is my pleasure to turn the call over to Arne Haak who will provide a detailed review of our financial performance during the second quarter.

Arne Haak

Thanks Bob and good morning everyone. As Bob has mentioned, we reported a net loss for the second quarter of $13.5 million or a loss of $0.12 per share. Included in these results are three items worth noting. First, we recorded a $7.2 million gain, $4.6 million net of tax or $0.04 per diluted share net of tax related to the sale of two aircrafts during the quarter. We also recorded a $34.2 million unrealized gain on derivative financial instruments. $21.4 million net of tax or $0.20 per diluted share related to future fuel hedges. Finally we reported an $8.4 million impairment charge or $0.08 per diluted share related to goodwill.

During the second quarter of 2007, we recorded a $6.2 million gain related to the sale of aircrafts, which was $3.9 million net of tax or $0.04 per share. Excluding these items, we reported a net loss of $31.1 million or a loss of $0.29 per share during the second quarter of this year versus the net profit of $38.3 million or a profit of $0.38 per share during the second quarter of last year. These results are unacceptable and we are taking numerous steps to address this.

While Bob has highlighted the tremendous impact of the rising cost of fuel, our revenue performance did not meet our expectations. During the second quarter we grew our capacity that is measured by ASMs by 12.3% year over year. This is the largest percentage increase in capacity in the second quarter of any major legacy or low-cost airlines and clearly impacted our performance. Our average stage length increased 7.6% year over year to 742 miles while our passenger length of haul increased 9.6% year over year to 785 miles. Passenger demand remained solid, up 13.3% year over year but average yields declined 0.8% year over year in part because of the growth in stage length. As a result, passenger revenues increased 12.4% to $658.6 million.

When we gave our initial second quarter unit revenue guidance in April, we expected passenger unit revenue to increase 5% to 6%. This was based on negative unit revenue performance in April due to the shift in the Easter holiday and extremely strong advanced booked revenue trends for both May and June. In late May, we began to observe a shift in behavior in some of our closed-end bookings and we reduced our guidance for passenger unit revenue. This behavior became more dramatic later in the quarter. As a result, our passenger unit revenues were up only $0.1% year over year. The actual year over year change in our passenger unit revenues was positive in both May and June but below our expectations. As we reviewed our revenue performance, our views on several key issues emerged. The dramatic change in oil prices is now being felt more broadly in the economy. This general economic weakening has resulted in the change in consumer behavior. A greater percentage of our customers are booking further in advance and the anticipated demand for closed-end leisure appears to be declining.

We are also seeing that a greater number of customers are waiting for sale fares than we have observed in the past. While the sale fares offered are significantly higher than last year, a greater mix of customers is purchasing sale fares than in the past. Our continued capacity growth has created additional pressure on top of that of the overall economy. In the second quarter of 2008, over 17% of our capacity was in new markets a route fully observed for less than a year. In some of our Atlanta markets, our own capacity growth has contributed to a modest decline in locum market traffic per flight and weaker unit revenue performance. While we have been able to backfill that demand with connecting traffic, this has resulted in lower realized yields and unit revenue. This has been particularly evident in some of our transcontinental routes. The decision to continue growth through the summer was made earlier this year when fuel was about $100 a barrel and the likelihood of oil above $125 a barrel seemed remote.

Finally, we believe that in some cases, significantly higher price structures have not produced incremental revenue. So far this year we have taken a number of fare increases. We have also increased our fuel surcharge and the up non-sale fares from $5 last fall to $15 today. In addition we have increased our sale fares which are now offered anywhere from $15 to $45 [ph] higher year over year, which is more than a 10% to 20% average increase. In some cases, the combination of increases and surcharges resulted in non-sale leisure fares that were too high and accelerated the shift of pricing from non sale to sale fares.

Our ancillary revenue efforts continued though to develop quite nicely. Some of these efforts like Business Class upgrades and seat assignment fees are recorded in the passenger revenue line and some are recorded in the other operating revenue line. Our other operating revenues increased 31.2% to $34.7 million. This is due to higher call center revenues and increases in non-accompanied minor, change fees and baggage revenues. When we combined all of the ancillary revenue benefits that are reported in the passenger revenue line with those in the other revenue line, our total ancillary revenue per passenger, in plane passenger is up 46% year over year in the second quarter. Although we face numerous challenges, I want to recognize and thank our frontline crew members who have helped contribute towards its other revenue growth and higher compliance without sacrificing our professionalism.

Moving on to the costs, our total operating cost during the second quarter increased by $203.2 million or 37.9%. This translates into an over 20% increase in operating cost for ASM. Of this increase, $166.5 million or 82% of the increase was due to higher fuel expense. The price of fuel rose from $220 per gallon in the second quarter to $375 in the second quarter of 2008, and this price changed the loan accounts for over $150 million or 91% of the increase in our fuel costs.

The rise in fuel prices had been extremely rapid. The increase from the first quarter of this year to the second quarter alone represented an increase in expense of over $70 million. We are continuing to manage our fuel exposure to the use of hedges and derivative contracts on crude oil. During the quarter we realized over $16 million in savings related to these contracts or $0.17 per gallon. Excluding the impact of the gain on aircraft sales and goodwill impairment charge, our non-fuel operating cost per ASM was $.5.73, which was down 3.2% over the prior year non-fuel operating cost.

Our total unrestricted cash and investments at the end of the quarter was $445.9 million. This is up from $326.2 million at the end of the year and reflects the net proceeds from our April stock in convertible debt offerings of $135 million. We do not hold any cash from our fuel hedge and derivative counterparties for unearned fuel hedges or derivative contracts. During the second quarter we purchased three aircrafts that were debt financed. Our non-aircraft CapEx for the second quarter was $2.9 million and $5.4 million year to date.

During our first quarter conference call, we gave you an update on our credit card processor agreement. We remain in full compliance with the terms of our contract. In the second quarter, we entered into discussions with one of our primary card processors and during these discussions we agreed to begin a limited level of cash holdback which amounted to $23.8 million or 8% of our exposure at the end of the second quarter. This month we have executed an amendment with our primary credit card processor, which extends the credit card processing term to Dec 31, 2009. As a condition for this extension we have agreed to the financial covenant that set holdback requirements related to our balance of unrestricted cash. We can satisfy these holdback requirements either with cash or with a letter of credit.

During July, we have also received a commitment for an asset-backed letter of credit facility from a major financial institution for up to $150 million which can be used to satisfy holdback requirements with one of our credit card processors. Although we have pledged certain assets to secure our reimbursement obligations under the letter of credit, we believe that our pledge agreements do not materially impair our ability to sell B737 aircrafts, enter into sale leaseback from B737 aircraft or seek to enter a variety of other liquidity enhancing transactions.

During the second quarter we have reached agreements to sell five aircrafts that will be sold in the third and fourth quarter of this year. Since the first quarter, we have also reached two agreements with a Boeing company to defer our new aircraft delivery. The net result is that we have moved 22 aircrafts from 2009 to 2011 to 2013 to 2015. Based on our aircraft sales and these deferral agreements, we will now end the year with no more than 139 aircrafts, down from our original plan of 147 aircrafts at year end. Our revised delivery schedule for 2009 now contains only two deliveries, one in the first quarter and one in the second. In 2010, we are currently scheduled to take seven aircrafts down from 14. While credit markets in the economy are pressuring the aircraft market, we continue to see interest in our Boeing B737-700 aircraft for additional potential sales in late 2008 and also in 2009.

I would now like to share with you our updated guidance for the third and fourth quarter. While we have been successful in raising our prices and demand for our products generally remains strong, at our current capacity level our recent yield performance is below our expectations. We know that we need to increase or realize the average fares and we have taken some very significant increases to our fare structure. Some fares still need to be increased further and some fares may have been too high. We also know that our capacity needs to be reduced to a level that will support price increases to cover the increased cost of jet fuel. This capacity will begin to come out in September and we have accelerated the amount of capacity to (inaudible). We now expect our capacity to be down 7% to 8% in the September to December period. As a result of these capacity reductions, we are currently projecting our third quarter capacity to be up 3% to 4% year over year in the third quarter and down 7% to 8% year over year in the fourth quarter. Full-year capacity is expected to be up 4% to 5% down from the expected growth of 10% to 12% at the beginning of this year.

Our advanced booked revenue for the remainder of the third quarter remains well ahead of last year. We expect our unit revenues to be up 2% to 3% in July and August. Our current scheduled plan calls for a more than 21% reduction in ASM from August to September, which is more than double last year’s reduction. We are currently projecting a double-digit improvement in unit revenue in September. Yesterday, we also announced new E-ticketing capabilities at the NBTA conference in Los Angeles. While AirTran pioneered ticketless travel 15 years ago, our interface with traditional travel agencies, online travel agencies and corporate travel departments has been somewhat complicated and limited to either paper tickets or some ticketless travel reservations. These capabilities now allow our key travel partners and corporate travel managers using the SABRE GDS to book air, train [ph] travel in the same fashion as they book all other airlines. In the coming months we expect to announce additional GDS capability such as improved seat assignment, Business Class upgrade functionality, frequent flier recognition and expanded corporate program innovation.

We expect our non-fuel unit cost to begin to rise as capacity comes down September 2008. Before the third quarter, we expect them to be flat to down 1%. It is too early to comment on fourth quarter costs as the fleet plan still remains in flux. We continue to work to hedge our fuel exposure with a portfolio of swaps and various types of collars against those crude oil and jet fuel. With an underlying assumption of $132 crude oil and $30 crack spread, we expect our third quarter economic fuel price per gallon to be between $385 and $390 all in, net of the effect of hedging and derivative contract. We had bought derivative contracts and hedged nearly 70% of our fuel for the remainder of the year and over 20% of our consumption for 2009.

We have contracts to partially protect roughly 77% of our third quarter fuel consumption. Based on that we explored the curve [ph], which resulted in an average crude oil price of $132 of crude oil and the $30 crack spread for the third quarter. Our all in price of our derivatives and hedged fuel would have been between $365 and $370. With an underlying assumption of $125 and $27 crack spread, we expect our fourth quarter economic fuel price per gallon to be between $365 and $370 all-in net of the effect of hedging and derivative contracts. We bought derivative and hedge contracts for approximately 61% of our anticipated fuel consumption in the fourth quarter. With the underlying assumption of $125 crude oil and a $27 crack spread, the all-in price of our derivative and hedge fuel would be between $345 and $350 per gallon.

The structure of our hedge portfolio will also give us the flexibility to benefit from the reductions in the price of crude oil and jet fuel. Approximately 3% of our hedge contracts for the third and fourth quarter involved slots or fixed price arrangements. The remainder of our portfolio is comprised of either caps or collars. Our regular debt payments not related to aircraft sales and deferrals is $17 million in the third quarter and $23.5 million in the fourth quarter. In conjunction with the aircraft sales and deferrals, we anticipate pre-paying over $98 million in aircraft and purchase deposit debt during the remainder of the year. We are currently projecting our non-aircraft CapEx in the full year to be between $12 million and $18 million.

One final item of note in regard to our tax rate, as of June 30, 2008 our deferred tax liabilities exceeded our deferred tax assets by approximately $11 million. We plan on recognizing the financial accounting tax benefit of future losses only to the extent that deferred tax liabilities exceed deferred tax assets. What this means is that at this time our likely tax rate for the remainder of the year will be approximately 0. Once we can actually use the tax benefits, we will again be recognizing additional deferred tax assets. It is simply a financial accounting matter and will not affect our ability to use cost and any future losses to offset future taxable income.

So in summary, the second quarter was clearly more challenging than we could have imagined at the beginning of this year. The challenges of high fuel prices in a weakening economy are dramatically affecting all airlines around the world. We remain convinced that these challenges will also present opportunities and we are laser focused on positions of the company so it can be a successful, strong, and viable low-cost leader in the US marketplace. High oil prices will impair the economics applying lower yielding leisure customers on connecting our itinerary for all airlines. This will result in our Atlanta hub getting smaller but it will also result in larger capacity cuts by other carriers from high-leisure markets like Florida which will create point-to-point opportunities for AirTran. We have already seen several airlines withdraw completely from certain Florida cities and just last week we announced new point-to-point service from Milwaukee to Florida. In the past, we have always moved quickly to capital on opportunities and today we are moving even faster and working to adapt to the challenges presented by fuel in the economy. In the last three months, we have already executed on the fleet plans that we laid out in April and with a further rise in oil and a weakening economy, we are doing more. We firmly believe that we remain uniquely positioned with low cost, high quality service, a young fleet and friendly crew members.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Your first question is from Mike Linenberg with Merrill Lynch. Please go ahead.

Mike Linenberg – Merrill Lynch

Yes, just a couple of questions on the holdback here. If we think about the $150 million letter of credit facility that you have, what is the percentage of holdback would be implied by that $150 million, will that cover like a 75% holdback, a 50% holdback, I am just trying to get a sense of the size of that processor agreement?

Arne Haak

Sure Mike, this is Arne. First of all, the details of both our LC agreement and our credit card processor agreement are subject to confidentiality clauses. So, we are kind of limited to what we can say, but here is what we can say. The $150 million letter of credit today would satisfy over 50% of our exposure with our primary processors.

Mike Linenberg – Merrill Lynch

(inaudible) you said over 100%.

Arne Haak

Over 50% of our exposure. It is a seasonal – it moves seasonally, it declines, it tends to peak in the second quarter and it will decline through the end of the year. The lull point is the year end and then it begins to build up again in the first quarter and then peak again in the second quarter. So, it is typically – if you are looking for a way to try and model it, I would suggest you look at the air traffic liability line historically on the balance sheet and it is a percentage of that liability.

Mike Linenberg – Merrill Lynch

Okay good and then just my second question when you go back to RAASM and I think for the quarter initially you thought it would be up I think you said like 4% to 5% or sort of mid-single digits when it came in where it was just up a small amount basically flattish, where in the quarter, where were the areas that were trouble spots? You listed, sort of ran through four or five things, there was a lot of new long haul service out of Milwaukee, if we were to exclude maybe some of the new stuff, maybe look at it on a same-store sales basis, were you up several percent, what was the biggest drag in the quarter? Just a little more color on that front would be great.

Bob Fornaro

Mike, good question. I think at your conference we even thought we will be up 2.5% even in the middle of June. When you look at the areas of underperformance, I think if you look clearly almost everything really long haul. Last year our long haul was at their best performance and we were anticipating a strong performance this year. It did not occur. So, we had 8% of – yes, we had a very, very big increase in stage. Last year we had 20% of our capacity in East Coast routes and this year it is about 28% to 29%. Our long haul routes certainly they are below the average and in some cases in the quarter, those were actually down. So, they actually pulled us down several percentage points. I mean, East West clearly was a negative. I think when you get into the new Milwaukee routes which when we went in those routes, we were looking at $90,000 to $100,000 a barrel and they were flying these routes with the oil up substantially higher. Finally, I think in terms of our absolute capacity in Atlanta, a lot of it at the margin was still with connections. (inaudible) local fares have been rising, again two locals are certainly better than obviously one connecting itinerary. But the big issue is really the long hauls which were very disappointing and mathematically when you start taking those routes out, when you get to the fourth quarter, you get to see a very, very strong increase in unit revenue.

Mike Linenberg – Merrill Lynch

Okay, very good, thank you.

Operator

Your next question is from Duane Pfennigwerth with Raymond James. Please go ahead.

Duane Pfennigwerth – Raymond James

I think it is just regarding your unit revenue guidance for the third quarter, can you talk about what is different about this forecast, the assumptions behind it versus the forecast you put forth for the second quarter?

Bob Fornaro

I will just start and maybe Kevin, you could join in, I think mentors are giving detailed forecasts, we are looking at July and August, we can get a pretty good glimpse. Both of these months had very, very strong, advance bookings come again with some deterioration. Both of them have a lot of long haul capacity which has become (inaudible) that’s why we have broken into two pieces. When we get to September – first of all so many things change, we had a planned capacity increase of 10% and now the actual increase is going to be down about 7% or 8%, that’s a real big change. Actually, when we get to September there are so many moving pieces. We really have to learn a lot about how booking patterns will change, this is the biggest capacity change in the industry that we have seen since the 09/11 period. We have seen a lot of capacity come out of Florida market, a lot of the cities are down substantially. So, travel patterns will be different, flows will be different and we are never really sure what travel we are going to be doing. So, we think we are going to see at least a double-digit, a lot of that is due to the fact (inaudible), advance bookings look very, very good but I think we really have to wait till we get close to September to see how the actual travel patterns begin to shift and change.

Kevin Healy

Yes, this is Kevin. When you look at returns that we noted earlier that we started to see at the end of May, you are adapting to that change in the pattern and the expectations on demand is changing. So, being able to shift fairly quickly and in our expectations and the way we approach the market, we are adjusting off of what we have seen and you are starting to see the benefits in the third quarter.

Arne Haak

Duane, this is Arne and let me add one thing for you too, and I think when you say what is changed versus the guidance, we had fairly significant negative RAASM in April and if you had seen our advance booking reports back in April for what we had on the books for May and June and how much they were up and how much the average fare was up, you would accuse me of sandbagging my guidance. We did have positive unit revenue improvements in both May and June, they just weren’t anywhere near the magnitude. The closing bills were not anywhere near as strong as what we had thought or what we had seen historically. Now, if you look out at our guidance for July and August, we still have a lot of this capacity in place and I think we have much more muted expectations with unit revenue guidance of about 2% to 3% versus what we would have thought of May and June back in April.

Duane Pfennigwerth – Raymond James

That’s helpful color, thanks. Then, can you just quickly, what was operating cash flow in the quarter and could you break out the cash gains not the book gains but the cash gains on the two aircraft sales? Thanks.

Arne Haak

Sure Duane, just hold on one second, I will put it in front of you. The cash gains, I think, we will put that in our EK they are not materially much higher than the booking. It’s just a little bit. If you look at the free cash flow for the quarter, it was roughly a cash burn of about $35 million in the quarter.

Duane Pfennigwerth – Raymond James

Thank you.

Operator

Thank you. Your next question is from Daniel McKenzie with Credit Suisse. Please go ahead.

Daniel McKenzie – Credit Suisse

Hi, good morning, thanks. One very quick housekeeping question here, excluding out of period hedges and other special items, I am arriving at a loss of $0.29 for the quarter. But I just want to make sure that I adjusted the taxes correctly.

Arne Haak

No, that’s what we have too Dan. I think it is 28.52 and it goes to $0.29.

Daniel McKenzie – Credit Suisse

Got you. And then can you remind us of how many of the B717s are owned by Boeing Capital, and also just related to that, how would you assess Boeing as a source of liquidity in a worst case scenario?

Arne Haak

Dan, first of all, I guess on the fleet, we are having a fleet today of 87 B717, we lease 77 of them from Boeing Capital. In regards to working with our vendors I think it is straight to say we are talking to all of our vendors. One of the things that Boeing has been particularly helpful with in the quarter has been the deferral of the aircraft, I tell you what, it feels very good to kind of have addressed where we felt we needed to be in April when the oil was $110, $115 with a fleet plan now we have addressed that now with the deferral of deliveries and the sale of other aircraft deliveries.

Dan McKenzie – Credit Suisse

Understood. Then a second question here, A number of carriers are continuing to ramp up Latin America pretty strongly, given the economic growth there and report even immediate contribution. I know that AirTran put a spotlight on Latin America as well when you guys were initially taking the B737. So, I am wondering if you can talk about the pros and cons of that geographic region today.

Bob Fornaro

Good question there Dan and I think if we want to focus on Latin America or the Caribbean I think I would just take a step back, our focus has been on trying to develop our domestic marketplace. We felt our options were best there really in the short run. And as we go into a period of about two years of really dull growth or declining growth, I think we are going to take a step back and look at what we are growing. It is likely that we will begin to add some Caribbean flying again. When you think about these Latin American flights, especially one flight a day in a city, I think it is the kind of thing that you consider when you go into a slower growth period which we are now. We feel pretty good about our result in San Juan which is again a domestic market but we are obviously starting out there a dense Caribbean market such as (inaudible) and maybe even certain Latin American points could start this. But the clear thing for us is I think we are going through again a review top to bottom of our strategy. As carriers adjust just as we adjust, we think there is still some more opportunities for us point-to-point Florida and again I think some Caribbean routes will come to the forefront this year. Again, we are moving into a period now that is much different than the last two years. Our focus is going to be almost entirely on the balance sheet and making sure that we do reduce our capacity and make sure we push our cost down, we want to make sure we come out of this and the industry begins to adapt and move forward that our cost structures is the industry leader.

Dan McKenzie – Credit Suisse

Okay, good, thanks. I appreciate the perspective.

Operator

Thank you. Your next question is from Ray Neidl from Calyon Securities. Please go ahead.

Ray Neidl – Calyon Securities

Yes, good morning. As far as with the slowdown in the growth, what are you seeing possibilities in Atlanta and possibly more, do you intend growing in Milwaukee but with the Delta North-West merger, there is probably going to be a little bit more pressure I would think than your home base in Atlanta and I am just wondering about the future of Midwest and the North-West investing to Milwaukee, do you see yourself shifting more your capacity up to Midwest?

Bob Fornaro

Another good question, this is Bob. I think we will know when we step back, we don’t know what oil prices are going to be and I certainly would feel better at a 100, you know the fact is we have to plan for a very, very wide amount of volatility. And so wherever oil ends up, we have to plan for volatility that far exceeds where it has been over the last couple of years. What that means is we have to go basically route by route and decide and say, here we go, it is the Atlanta route where we flew six or seven flights where the flying is more appropriate today. Because what we need to do is, we created the market in Atlanta with the low fares, for closed-end reasonable and business fares and quite frankly those average prices need to come up. What that says is, whenever the prices come up, the market is going to contract. So, we have to find the right levels in Atlanta and clearly this summer 260 departures was too much with oil hovering around $135. So, we have got to make some adjustments there. Regarding Milwaukee, we are very, very comfortable flying some of these four in a route [ph] that perhaps Midwest is walking away from. But, I think from an approach we have got to be prudent, our priorities have clearly shifted. Growth is far down the list of things that we are interested in. I think, number one is obviously maintaining the liquidity and alternatively recovering the profitability. Those are two key criteria, everything else is a distant third, fourth or fifth. That is where our focus is going to be. Opportunities are sometimes nice but opportunities also take time to kick in. So, our goal is to have a fewer number of routes in development. Right now, I think I already mentioned the number was 17%, 18% of our routes were brand new this year, that’s too high. And so, we’ve got to be a little bit more conservative going forward.

Ray Neidl – Calyon Securities

Okay and in this atmosphere with the industry shrinking and your partner Frontier shrinking very rapidly, are you looking for coaching [ph] your partners possibly Jeff Lou or Southwest Airlines or even looking international the way that Jeff Lou did with the (inaudible) and maybe even getting a foreign investor interested that way.

Bob Fornaro

Eve n without really speaking of the specific partners that are out there, one of the things that Arne mentioned was E-ticketing and one of the key aspects of the E-ticketing capabilities that we introduced or announced yesterday will facilitate coach [ph] share and a number of different things like that. That’s part of putting yourself in the position to evaluate what the options are. So, it is certainly something we are considering.

Ray Neidl – Calyon Securities

Okay, great. Thank you.

Operator

Thank you. Your next question is from Gary Chase with Lehman Brothers. Please go ahead.

David Simpson – Lehman Brothers

Good morning guys, it’s David Simpson [ph]. Couple of quick nips on the credit facility, first of all, is that just limited to the holdback or is that a general facility?

Arne Haak

David, this is Arne again. As I told Mike, we are kind of limited but here’s what we can say, it is just applicable to credit card holdback.

David Simpson – Lehman Brothers

Okay, and if you can say that extends out through 12/31/09?

Arne Haak

Yes, it does. That is the term of the extension.

David Simpson – Lehman Brothers

Then, I think Bob you told there is a outside chance of a 10% reduction in 2009. I was just wondering what sort of pieces that cut? Is that a function of oil or is that a function of how economically you get to pass it out, just some color about what exactly that is really sensitive to?

Bob Fornaro

I think it’s tied to – we got an order to pick the oil price, we go into the assumption that is well above $100 and we just deal with it. (inaudible) what happens is it restructures our balance sheet very, very quickly, if it ties in it we get minimize cash flow but I think it is a matter of being able to reduce the size of the fleet. If you look at what has happened with a fleet, all the while the aircraft market is, I couldn’t call weak and it can’t call it is strong, but what happened was when oil went into the $130s and $140s, you could see a change in the aircraft market because all companies became affected at those rates. If we ended up in an environment where oil is somewhat below $120 or maybe all of a sudden the pressure is off a little bit and you start thinking about replacement. And so, we think probably 10% closer to where we would like to be but it is a matter of being able to sell the airplane and flying customers. But I think in terms of (inaudible) at our buyers is in the long run we don’t want to be cutting utilization because most of our airplanes are new, all these airplanes nine years old, so utilization cuts are not the way to go for us. We like to remain highly efficient, we would like to do it with fewer aircraft units. So, I think our ability to sell or sublease airplanes is critical.

David Simpson – Lehman Brothers

Then, could you give a little update on where you are on the labor side, I think you have asked for about a 10% pay cut? Can I have a little color on how quickly that could happen and kind of where you are in terms of executing on that?

Bob Fornaro

Good and what we ended up talking about was for a six-month pay cut for various labor groups which are approximately 50% organized and 50% not organized, we actually had a vote on one of them was relatively close but our mechanisms voted it down. Again nothing surprises me because most people given a choice don’t really want to cut their pay. One of the problems that we have faced is the airplanes are full and I would like to say an environment like 09/11 where the struggles in the industry were obvious this time around I think with higher oil prices it isn’t as obvious to people the struggles and issues that we face. So, I think over time we will go back again to the (inaudible). We are going to keep our number one cost position. We think that’s the most important core asset we have to hand as we run a good operation but we have to remain efficient and the priorities here are balance sheet and profitability and growth is, again as I mentioned before, a distant third zone. I think we will end up revisiting these issues as we get into the fourth quarter. We are not raising money or getting letters of credit to spend it we are using these things to give us the time to adapt and create a new foundation, one that can compete in any energy environment. So, we don’t feel any sense of relief we are prepared to cut more. We will get our cost down and we will become more efficient if we – obviously we think the pay cuts although not huge – there is going to be $50 million over six months we think it sets the right tone to everybody in the company, to our vendors and everybody dealing business with us. It’s really mostly about collar, there is no silver boat to be able to be profitable with oil at $130. All the savings have got to come from multiple areas. So, minor setback we have long ways to go and again we need to achieve efficiencies in every single area.

David Simpson – Lehman Brothers

Okay, got you. Just one last bit, you guys have been a cash tax payer and would there be a refund later in the year?

Bob Fornaro

No David, we are not cash tax payer.

David Simpson – Lehman Brothers

Okay, great. Thanks a lot guys.

Operator

Thank you (Operator instructions). Your next question is from Kevin Crissey of UBS. Please go ahead.

Kevin Crissey – UBS

Good morning guys. Can you just say whether Boeing had an involvement in the letter of credit at all?

Arne Haak

Kevin, it’s Arne. As I said, first of all the LC was issued by a major bank. The credit of the issuing bank, you know what we can say about the agreement, I talked with Mike about the front what we can and we can’t say, the credit of the issuing bank is acceptable to our credit card processor and the LC facility is secured by a pool of our assets and the repayment obligation lies with us. So, that’s really what we are going to say about our letter of credit facility and we think it is a very important piece of how we manage our liquidity going forward.

Kevin Crissey – UBS

Okay, you talked about the pay cuts, how about the total employment on the labor front, what are your opportunities or challenges for reducing it, if you are going to be down around 10% if you were able to get there, would there be actually a number of people, less people employed?

Bob Fornaro

Good question. Two or three weeks ago we announced some larger write-offs because the flight attendants and pilot groups are again very, very large groups and we announced 180 pilots, 300 flight attendants and many of those crew members will leave under various (inaudible) but I think by the time we get to the end of the year, we will see our overall say full-time equivalents be lower in December of ’08 than they were in December of ’07. In fact we may hit our low FTE per airplane in December of ’08. That is something that we have been locking, we had a reduction in force in management back in March, certain adjustments can be done to attrition. So, we think out total of say headcount will drop proportionally or maybe even more than the actual amount of capacity. We have been going through a period of time where we have basically have been adding an airplane and a half constantly, now we are going into a no-growth period of time and it gives us an opportunity to really slow down our cost management. So, I think that at least in terms of heads we will become more efficient by the end of the year.

Arne Haak

Kevin, this is Arne, I guess the rough order of magnitude math that Bob laid out is that every aircraft is 60people in AirTran and ideally we think there are going to be opportunities. We don’t have to solve everything by getting rid of airplanes. We think pay cuts may be one way for us to adapt and leave us some flexibility. But if we aren’t successful on that front it will just mean that we will have to do more on the aircraft side and that will result in more terminations. So, our deal is rather than have to go deeper on the cut with capacity we would rather have some short-term pain for all of us, and that we endure that pain for six months and then we kind of reassess where we stand, where the industry stands where oil is as opposed to having to make a deeper cut if we did not do anything on the pay cut front.

Kevin Crissey – UBS

Thanks guys.

Operator

Thank you. Your final question is from Bob McAdoo with Avondale Partners. Please go ahead.

Bob McAdoo – Avondale Partners

A couple of questions about capacity. How much of these capacity changes that you have got have actually been loaded in the machine now and you say you are going to cut completely off the system, a couple of mortgages and close down a couple of cities, when will those – is it true and when would those be announced?

Kevin Healy

The city suspended service are closer than they have been announced . So far we have don’t see what Newburgh which occurred shortly and Daytona Beach, what’s happened about a month or so, a good amount of capacity is in there. You will see another this week in the scheduled date borne out in September.

Bob McAdoo – Avondale Partners

I thought Bob said there was another suspension or two coming?

Kevin Healy

We are evaluating all cities in going route by route. We didn’t specify the number of cities but it is likely that there will be additional closures which will be borne out in the next month or so.

Bob McAdoo – Avondale Partners

Okay, thanks. That’s all I have got.

Operator

Thank you. I would like to hand the floor over to Robert Fornaro for closing remarks.

Bob Fornaro

Once again I would like to thank everybody for being on our call this morning. High energy prices are a challenge for all carriers and our fuel prices may well abate further we are not counting on that. It’s our intention to match our capacity to today’s economic environment and record high oil prices recognizing that fuel prices will remain volatile well in the future. So, very simply our goal is to adapt quickly, run a quality airline and maintain an industry leading non-fuel cost structure.

Thank you for your time this morning and we’ll talk to you in a few months.

Operator

Thank you. This does conclude today’s AirTran holding conference call. You may now disconnect your lines and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. U.S.ERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!