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Executives

Marcy Brand

Gary C. Kelly - Chairman, Chief Executive Officer, President and Chairman of Executive Committee

Tammy Romo - Chief Financial Officer and Senior Vice President of Finance

Michael G. Van De Ven - Chief Operating Officer and Executive Vice President

Laura H. Wright - Former Chief Financial Officer, Chief Accounting Officer and Senior Vice President of Finance

Linda B. Rutherford - Vice President of Public Relations & Community Affairs

Robert E. Jordan - Chief Commercial Officer, Executive Vice President and President of AirTran Airways

Analysts

Scott Tan - JP Morgan Chase & Co, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Michael Linenberg - Deutsche Bank AG, Research Division

John D. Godyn - Morgan Stanley, Research Division

Thomas Kim - Goldman Sachs Group Inc., Research Division

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Raymond Neidl - Maxim Group LLC, Research Division

Kevin Crissey - UBS Investment Bank, Research Division

David E. Fintzen - Barclays Capital, Research Division

Southwest Airlines (LUV) Q3 2012 Earnings Call October 18, 2012 12:30 PM ET

Operator

Welcome to the Southwest Airlines Third Quarter 2012 Conference Call. My name is Tom, and I will be moderating today's call. This call is being recorded, and a replay will be available on southwest.com in the Investor Relations section. At this time, I'd like to turn the call over to Ms. Marcy Brand, Director of Investor Relations. Please go ahead, ma'am.

Marcy Brand

Thank you, Tom. Good morning, everyone, and welcome to today's call. Joining me on the call today is Gary Kelly, Southwest's Chairman, President and CEO; Tammy Romo, Senior Vice President, Finance, and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer and President of AirTran Airways; and Mike Van De Ven, Executive Vice President and COO.

Today's call will begin with opening comments from Gary, followed by Tammy providing a review of our third quarter results and current outlook. We will move to the Q&A portion of the call following Tammy's remarks. And Gary, Tammy, Bob and Mike will be available to take your questions.

As a quick reminder, 2011 year-to-date consolidated results include AirTran beginning May 2, the date of the acquisition. In order to provide what we believe to be a more meaningful year-over-year comparison on today's call, when referring to year-to-date 2012 results compared to 2011, we may provide commentary on a combined basis as defined in this morning's press release.

Please be advised that today's call will include forward-looking statements. Because these statements are based on the company's current intent, expectations, and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially.

As this call will include references to non-GAAP results such as combined results and results excluding special items, please reference this morning's press release in the Investor Relations section of southwest.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results.

And now I'll turn the call over to Gary for opening remarks.

Gary C. Kelly

Thank you, Marcy, and thanks, everyone, for joining us today for our Third Quarter Earnings Call.

Third quarter earnings were $97 million or $0.13 a share, which was slightly ahead of the First Call consensus. We had a lot of activity in the quarter. We made a lot of progress. And clearly I'm not satisfied with our earnings results at these levels, but always pleased to have a profit.

I do want to thank all of our Southwest people for their hard work and their results. Again, we made very solid progress on our strategic initiatives that are underway. We had excellent operations for the quarter and outstanding customer service.

Just several notable events. We completed the 717 lease and sublease deal with Delta. We've converted 9 of the AirTran 737s into Southwest at this point. We opened or converted 5 airports at our 2 Southwest airlines. And at the same time, AirTran shut down operations at 6 airports, and that brings to 16 since a year ago.

We're continuing our 737-700 retrofit of our interiors and we now have 147 of the -700s with 143 seats that have been converted. And in addition to that, of course, the AirTran 9 aircraft that are converted are also in the 143-seat configuration. So that work is continuing and will continue through the first half next year until we get all of the 700s done.

We made significant progress on a host of technology efforts, and several of those are scheduled for implementation next year, which I'm very excited about.

Our third quarter revenues and earnings were -- again, as I said, they were solid but below our plan and below our return target. There were definite signs of demand weakness. And especially in September, that month was down on a unit basis about 2% to 3%. And of course, our results mirrored what was going on with the rest of the industry.

The good news that we reported this morning is that October so far is back on track. Its unit revenues are up about 4%. And sustaining our revenue momentum, of course, is absolutely critical.

So we have 3 or 4 key revenue initiatives that are planned for 2013 to sustain our revenue momentum. First of all is the continued rollout of our seating reconfiguration of the 700s or known as Evolve. Second is the connection of the Southwest and the AirTran networks, which is scheduled for early next year. And really related to that is the ongoing optimization of the combined airlines' networks, and we're doing that with every single schedule that we publish. And then fourthly is the introduction of a new -- at least the first phase of a new revenue management system. But I would say that in addition to those 4 planned activities, we're also evaluating opportunities for additional revenue drivers in 2013.

On the cost front, the investments that are reflected in our operating costs to modernize the fleet, I think, will pay very handsome dividends, but those costs will begin to ease next year. And ultimately, with respect to our operating cost, at least excluding fuel, our goal is to reduce our unit costs from current levels. I don't think that's necessarily likely for the full year 2013, but that is our goal.

And for several reasons, we'll be pursuing aggressive cost control efforts for all of 2013, with the goal of paring at least $100 million from our corporate overhead. There's no real fat at Southwest, but clearly I think there are some opportunities for us to streamline and to focus.

I am very pleased with the performance of our All-New Rapid Rewards program. And of course, it is 1 of our 5 strategic initiatives and the very first one to be delivered. Partner sales alone generated another $50 million in revenues in the third quarter, and we're on pace to do $200 million or more for the year.

In addition, since last year, there's a build in our air traffic liability of over $400 million and those are cash sales that are in effect locked up until the member takes a trip. And that is -- of course, those monies have not flown to revenues yet and that's in addition to the several hundred million dollars that we are counting on in revenues this year from our All-New Rapid Rewards program. But all of those are contributing to very, very strong cash flow at Southwest Airlines.

Year-to-date, operating cash flow was $1.8 billion. That was well in excess of our capital spending. That's allowed us to boost the dividend and return $325 million to shareholders in the form of share repurchases. And on top of that, we reduced our debt by $517 million this year, along with the effective reduction in our balance sheet leverage to about 40%. So we're going to continue this financial discipline and we're going to do everything that we consider necessary to hit our 15% return on capital target. And certainly that's going to be our goal for next year.

We are falling short of our goals for this year. And again, we're evaluating revenue and cost ideas to augment what is already, I think, an excellent strategic plan. We've got many exciting opportunities. I'm delighted with our progress on our initiatives. Until we hit our targets, we just can't be satisfied with the results.

And so I'd like to welcome Tammy Romo as our Chief Financial Officer. And of course, Tammy is known to many of you on the line and a 21-year Southwest veteran and been a Senior Vice President for a number of years and a number of roles. So Tammy, welcome, real proud of you. And I will just turn the call over to you.

Tammy Romo

All right. Well, thank you, Gary. And thank you, everyone, for joining us today.

As Gary mentioned, our third quarter net income, excluding special items, was $97 million or $0.13 per diluted share, which exceeded a consensus estimate of $0.12. Record passenger revenues, high fuel prices and non-fuel cost pressures, which were driven largely by our investment spend on our fleet initiatives, were all significant catalysts to our third quarter results. Revenues were subject to challenging year-over-year comparisons due to holiday mismatch this year and, of course, last year's ticket tax benefit and a weak revenue yield environment. Despite the difficult comparisons and slight decline in capacity, our passenger revenues in the quarter were a record performance. Our load factor and unit revenues were also third quarter records.

We've implemented 5 systemwide fare increases this year, which have been revenue positive. However, we've had to work hard to stimulate demand in this weak yield environment. Despite continued economic weakness, we were able to maintain close-in bookings at about 20% and our business mix at 35% to 40%, both flat year-over-year. Yield sales were down in both cases as we lowered some lock-up fares in response to the weaker demand and more aggressive fair competition.

On a unit basis, our passenger revenues grew 1% year-over-year and total unit revenues grew about 0.5 percentage point. While July and August had difficult year-over-year comparisons, September was particularly challenging due to the weak yield environment.

We continue to significantly improve AirTran's year-over-year revenue performance. However, on a nominal unit basis, we still have significant synergy opportunities yet to be realized on AirTran's network and look forward to combining our networks early next year.

We are encouraged about traffic and revenue trends thus far in October. Some passenger unit revenues, as Gary mentioned, month-to-date in October are up approximately 4% compared to the same period last year. However, you should note that October last year was the softest month of the quarter. So at this point, we do expect our PRASM comparisons to be more difficult as we progress through the quarter.

Before I move to our cost performance, I want to quickly cover the revenue contribution from some of our initiatives.

Business Select revenues were approximately $21 million. We recognized $50 million in incremental passenger revenues from our Rapid Rewards program. And as Gary mentioned, we're just very pleased with the Rapid Rewards program. We continue to produce increased membership, increased partner point sales and increased trips flown by members, and that's at a higher premium.

Our Wright Amendment revenues increased 18% year-over-year to $75 million at third quarter, with year-to-date revenues totaling $210 million. We are very pleased by the early results of our 800s and Evolve seating, and both fleet initiatives were meaningful contributors to our third quarter revenue results. Through the third quarter, we have 147 Evolve -700s in our fleet and we expect to retrofit another 100 during the fourth quarter.

While our freight and other revenues declined year-over-year and third quarter, we currently expect fourth quarter freight and other revenues to increase slightly year-over-year based on favorable trends and freight volumes, EarlyBird revenues and charters. EarlyBird revenues in third quarter were $41 million. And we also recognized $75 million in third quarter from other fees.

Turning to fuel. Our third quarter 2012 economic fuel price per gallon of $3.16, which was lower than our most recent guidance, that was due partially to easing jet differentials and that was due to the less dramatic hurricane season than what we had expected and more favorable inventory benefit from carrying a lower-price fuel in a rising market.

Our hedging premiums, which are included below the line and other expenses, were $15 million and that compares to $36 million last year. Based on market prices as of Monday this week, our fourth quarter 2012 economic fuel price is forecasted to be in the $3.45 per gallon range. The significant increase in our fourth quarter jet fuel forecast is primarily driven by lower-than-normal refined product inventories worldwide. While Brent crude oil has risen to near $115 per barrel, refined product prices have climbed even higher. In addition, we are not forecasting the same level of benefit in fourth quarter, as we realized in third quarter, from using lower-priced inventory while prices were rising. Our net premium comps for fourth quarter '12 will be approximately $3 million, down from $14 million in fourth quarter of last year.

The increase in our third quarter unit costs, excluding fuel profit-sharing and special items, was right in line with our guidance. As expected, investment in our fleet initiatives was a good portion of our third quarter cost inflation relative to the modest increase experienced the first half of this year. Other operating expense also included some inflation associated with unique timing, such as advertising spend that was deferred from the first half of the year to the back half.

All told, these items contributed 1 to 2 points of the third quarter non-fuel unit cost increase. The remainder of the cost inflation related to rate increases in both our labor and airport costs. We expect similar year-over-year cost trends in fourth quarter, with a 2- to 3-point unit cost impact estimated from our fleet initiatives and shift in advertise spend. As a result, we currently expect fourth quarter non-fuel unit cost, excluding special items and profit sharing, to increase year-over-year similar to the 6% increase experienced in third quarter.

While the increases in the back half of this year are the results of a combination of investments and unique timing, we are not satisfied with our current level of cost inflation and we intend to be aggressive in addressing these trends. While I'm not ready quite yet to provide 2013 cost guidance, we expect year-over-year cost pressures, excluding fuel, profit sharing and special items, to ease dramatically in 2013, trending towards flat year-over-year in the back half.

On the non-operating cost side, our net interest expense declined year-over-year for the lower interest rates. We expect a similar year-over-year decrease in fourth quarter. And as noted in fuel discussion, our 2012 fuel hedging premium expense recorded in other gains/losses is expected to be down approximately $11 million, as compared to fourth quarter '11.

Gary touched on most of the balance sheet, so I'll go through this very quickly: Cash and short-term investments at September 30 was $3.2 billion and cash flow from operations was a very strong $1.8 billion for the first 9 months of this year. And our CapEx was $949 million, and that generated free cash flow of nearly $900 million.

For our full year 2012, we anticipate a cap spending of approximately $1.3 billion. And for 2013, we currently expect $1.1 billion to $1.2 billion in capital spend.

We repurchased $325 million of stock this year, which totals $550 million or 65 million shares under our $1 billion total stock repurchase authorization. And we distributed $22 million of dividends to our shareholders.

And as Gary mentioned, our leverage is currently in the low 40% range. We have about $40 million of debt payments for the remainder of this year and for 2013, our scheduled debt maturities are less than $200 million.

Overall, we remain investment-grade with strong liquidity, modest debt and a focus on preserving our financial strength and enhancing shareholder value.

On the fleet and capacity side, we -- just to give you a quick update here: We have 8 -- we have had 8 of our 34 planned -800 deliveries remaining this year. Net of Classic retirements, we are still planning to end the year down a few units versus last year.

Fourth quarter and full year 2012 available seat miles are expected to be flat year-over-year. For 2013, we are planning for a modest year-over-year ASM growth with relatively flat fleet.

As we manage the multiple moving parts of our fleet, including integrating AirTran's fleet, we have various ways we can replace the load we need to support our schedules without wavering from our commitment to keep our flight relatively constant until we are meeting our financial targets.

First quarter 2013 ASMs are relatively flat to slightly down year-over-year. Our flight schedules currently run through April 12. We will be publishing an April extension of our flight schedules on Monday. That schedule will be a continuation of our efforts to manage the Southwest and AirTran networks in preparation for connecting the networks early next year. We will be publishing the connecting itineraries once the capabilities are ready to be implemented.

Our AirTran synergies are expected to significantly benefit from a more optimal network once connected. Thus far this year, we realized $110 million in net synergies largely from cost synergies, but revenue contributions should significantly increase as we connect the networks early next year, which supports our plan to achieve $400 million in net pretax synergies.

Overall, I am pleased with third quarter revenue results and encouraged about October revenue trends thus far. With ever-rising fuel costs, we must in real continue to work diligently to control our cost normalized for near-term fleet investments. As Gary mentioned, we have significant revenue opportunities on the horizon for 2013 which align very well with our strategic discipline to produce a 15% return on invested capital. With exciting opportunities ahead, our Southwest warriors continue to make great progress on our initiatives, and I want to thank them for their outstanding efforts.

And with that, Tom, we are ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We will now begin with our first question from Jamie Baker with JPMorgan.

Scott Tan - JP Morgan Chase & Co, Research Division

This is actually Scott Tan on behalf of Jamie. Last week, you filed what looked to us to be your deepest winter sale in perhaps 3 to 4 years, but you also pushed through an across-the-board fare increase. I know you provided October demand commentary, but we're still having trouble reconciling what seems to be contradictory pricing actions. Does this speak to friction perhaps between the finance department and the marketing department? Perhaps the former is pushing for higher fares, and the latter for lower? Or do you think these decisions come from the same place? Any color would be appreciated.

Gary C. Kelly

That's what -- no, there's no friction. Although, I would welcome that. They're very friendly with each other, actually. No, these are decisions that are owned by our commercial group, and in particularly our marketing and revenue management organizations, so let me be clear on that. We have sales that are seasonal and they're annual and so I don't think you should read anything into that, other than sometimes the sales are more or less aggressive. And that is a function of where we see demand in our business. So there's nothing, nothing at all, unusual about the sale this time of year. Fare increases, of course, are always held close to the vest. We don't telegraph those, we don't tell you what's coming next. We look for fare increases on the whole fare structure, in particular when costs are rising, and that's exactly what we reported to you, of course. And what's your -- I'm sure you already know. Jet fuel prices are up sharply over the last 30 to 60 days, and as I said in the press release, I'm disappointed with that. But no, we're evaluating opportunities to raise fares. And on top of that, we are managing our seasonality and our business with fare sales. And so if you were sensing that the sale is a little deeper this year, I don't know if I have a comment on that, other than to admit to you all the very obvious which is we did see weakness, especially in September. And as we reported, we continue to be very concerned about the economy. And so the good news is that we seem to be back on track in October, but I'm not willing to make any predictions about December or January quite yet.

Scott Tan - JP Morgan Chase & Co, Research Division

I was just curious because I recently saw the Southwest's big deal, 40% off, so that was in relation to the question. But as a follow-up, Gary, and this is more for Tammy, you mentioned that costs will ease in 2013. Did you say flat CASM x fuel for 2013, or just the back half of 2013?

Tammy Romo

No, not for the full year 2013. I would -- we -- again, we haven't given guidance. I would expect we would likely be up still for 2013 because again, if you include the investments that we're making in our fleet initiatives. But yes, I did -- what I did say was that we do expect the cost pressures to ease dramatically and we would be trending to flat by the second half of the year.

Gary C. Kelly

Hey, Scott, I'm glad that you noticed it was 40% off and I hope you got out there and bought a whole bunch of Southwest tickets.

Operator

And we'll take our next question from Glenn Engel with Bank of America Merrill Lynch.

Glenn D. Engel - BofA Merrill Lynch, Research Division

A couple of questions. One, depreciation jumped up a lot from the June-to-September quarter. Does that have to do with buying planes, or just older planes having higher depreciation levels?

Tammy Romo

Yes, Glenn, on depreciation, we've been, of course, adjusting our fleet plans, but the quarter did include expense for the revised salvage buy-ins associated with the accelerated retirement of our Classic fleet.

Glenn D. Engel - BofA Merrill Lynch, Research Division

So that's -- was -- that's the base level to start from, fourth quarter as well?

Tammy Romo

Yes, that's correct.

Glenn D. Engel - BofA Merrill Lynch, Research Division

You were -- talked about your other revenue being down despite the fact that your Rapid Rewards and revenues were up. So what is driving down other non-passenger revenues?

Tammy Romo

We had lower fees and -- versus a year-ago level. We had a reduction in, of course, some of the AirTran ancillary revenues as we're moving those airplanes over to Southwest. And I guess that's probably the majority of it.

Gary C. Kelly

All of the increase in the Rapid Rewards is in passenger revenues.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And the $110 million of pretax synergies, you had -- you said, was on the cost side and your unit costs were up 6%. How come we just don't seem to see that number anywhere?

Tammy Romo

I think those are just being again offset by inflation. So you just mentioned we have some. And our depreciation expense, our airport costs are up. And so we are seeing some inflationary pressures throughout all of our cost items, but we -- when you track where AirTran was versus where we are today, we are seeing lower costs. I think we're seeing also some pressure at our maintenance area which we're seeing -- we have increased rates on our 700 engines. So it kind of varies throughout our cost structure. But back to what we said earlier, we're not happy with the inflation that we are seeing in our cost trends, which is going to be a significant focus for us in 2013.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And finally, you -- I was a little confused. The full-fare mix, I think last year it was 17% in the third quarter. And I think it was 17% in this second -- the quarter that just ended. What number did you say it was in the third quarter of this year?

Tammy Romo

Glenn, I'm going to point you back to -- I think what I mentioned earlier was the 20% close-in passengers I mentioned during my remarks, with more welcome [ph] discounting needed to stimulate traffic in this tough yield environment. The full-fare percentages we provided historically really just aren't that meaningful, so we -- so I'll point you more to just kind of walk-up mix, which is 20%, and that this right in line with last year.

Glenn D. Engel - BofA Merrill Lynch, Research Division

And with that lock-up mix so much lower than it was 10 years ago and been generally trending down, it's just -- is that a sign that you've been -- the full-fare hikes that you've been doing have gone too far?

Tammy Romo

Well, this -- while our fare increases -- we have pushed fares. As you know, we had 5, 8 increases this year. And actually last year I think we had about 8. But while -- this year's fare increases, they have been revenue positive, so that's number one. But I definitely would acknowledge that the impact to our revenues has been less dramatic relative to historical results, which is why we have our fare sale that we offer today. So we are having to offer more discounts to our close-in passengers, as well.

Gary C. Kelly

But I think you have to look at the overall revenue number and it is definitely a component obviously driving our revenues. But our revenues, even with a higher mix of "full-fares" years ago, our unit revenues are up in huge numbers. In 5 years time, we're up 40%. So it's -- the other thing that is very different, Glenn, is that from the days that you and I worked together in the 1990s, we were all shorthaul. And the mix in shorthaul markets today, as compared to then compares better, but the full-fares never reached that kind of historic level in longhaul markets. So there's a number of reasons for the change. But the -- I think my deaf argument to you is we've got to manage our total revenues period from whatever array of techniques that we use, and it's just a different airline today than it was 10 or 20 years ago.

Operator

We'll take our next question from Michael Linenberg with Deutsche Bank.

Michael Linenberg - Deutsche Bank AG, Research Division

Everyone, I just -- 2 questions here. I want to go back to -- I think you had mentioned, Tammy or Gary, on the other revenue maybe being down a little bit as some of the ancillary shifts away. When you convert an AirTran airplane to a Southwest plane or a station from AirTran to Southwest, I'm sure that there's some puts and takes there. I mean, one is that the airplane goes online into the Southwest network, but then you lose the baggage revenue, the first-class revenue. I mean, what are you seeing when -- with the pluses and minuses? What are some of the things that you have seen as you've gone through that conversion?

Gary C. Kelly

Well, Tammy, I'm going to take a swing at that. The -- Mike, I think first of all when we bought AirTran, Southwest outperformed AirTran on a unit revenue basis. Since we've owned AirTran at least through the latter half of last year, we made significant improvements in their RASM and that was mostly with revenue management. So we just took a little bit different approach with their fare structure. In other words, that worked fine late last year. Seasonally, it probably wasn't as effective, that Southwest technique, if you will, in the first quarter of this year. And we made some adjustments with pricing primarily since the first of the year. The -- with the -- with their product and their array of fares and fees, as it stands today, they are no better than Southwest Airlines without fees. In fact, Southwest Airlines performs better. What is happening, though, as AirTran continues to make what are really dramatic changes, and I think Tammy reported this, their capacity was down over 15% year-over-year in the third quarter. And I mentioned this, too: They closed 6 airports, they've closed 16 over the past 4 quarters. And their feed into and out of Atlanta is not as productive as it was before we started tinkering. On the other hand, their mix of nonstop traffic is up significantly. So within AirTran, we're kind of going through quite a bit of churn. And I think we'll all have a much better AirTran network next year as we continue to tune it. But I think the bottom line answer to your question is we're seeing what we expected, which is we have a better opportunity to produce unit revenues on the Southwest brand than what we have on the AirTran brand. But in fairness the AirTran, we're making a lot of changes, or better, self-optimizing it here in this interim period, so -- but yes, certainly, we want to get it over to Southwest just as fast as we can.

Michael Linenberg - Deutsche Bank AG, Research Division

Okay, good. And then just my second question. When I look at your hedge book, if I look back on it on a quarter or 2, it seems like you were over 50% of 2013. You had a hedge position on it. I think, now, it's pulled back a bit. It looks like it's below 15%, and you've backed away in the fourth quarter. And I'm curious, over the last quarter or so, was it -- was there maybe a shift in sort of your thinking where energy was moving? Or when we saw that sizable falloff in fuel, you may have backed away from some of your positions so you won't have such a large draw on your cash position. I mean, what drove that sort of re-tinkering of the hedge book?

Gary C. Kelly

Well, Tammy is just getting involved in these, so I'm probably the common denominator of -- been doing the way we are, so I'll go ahead and answer this one too and maybe Tammy can chime in. But we have a hedge built in 2008 that affects 2012 and '13. Those hedge prices were relatively high so we have worked that hedge down. And in fact, Mike, I would think about it like a put: So we have higher put exposure with the hedge position 3 or 6 months ago than we would like because we are concerned that prices will come off and they will create hedging losses. So with that, we worked very aggressively to manage that hedge to a lower position. The coverage that we have in place now for 2013, I believe, is 15%. And it -- and that is a view that prices aren't going to go up significantly in that time period from where we are today. If they do, we've got very good hedge coverage in place for -- it's a portfolio management, if you will. So we've got good coverage in '14, good coverage in '15 and minimal downside exposure now for '13, I think, is the way to best explain that. If we have opportunities to boost our hedge in 2013, well, then we're prime to do that, mindful that we don't want to spend a whole lot of money on hedging premiums. So actually, I think we're in the best shape we've been in a while with our hedging. Especially if you look in the back -- in the rearview mirror and see what prices is now, it's just been a horrendous time to try to do any meaningful fuel hedging. So I think our folks have done a great job there.

Operator

And we'll take our next question from John Godyn with Morgan Stanley.

John D. Godyn - Morgan Stanley, Research Division

Gary, as somebody who's seen a number of cycles, can you just talk about your thoughts on the demand trends the industry is facing today compared to what you remember it feeling like in other sluggish GDP environments? How do we know whether the weakness we saw in September was a blip within sort of a solid trend, or whether the strength you're seeing in October is a blip and demand trends overall are turning worse?

Gary C. Kelly

I think really, this period since '08 is unlike anything we've ever seen. And the oil markets, it -- I mean, it's really the same story for the economy, for travel demand and for the oil markets. They're extremely volatile. And I think the bottom line answer to your question is I don't think we can be sure that September is just a blip. It -- September's performance is inconsistent with what we saw in June. On the other hand, we did have some interesting comps in July and August, but we were also off our plan in those 2 months a little bit as well. But I looked back at our earnings plan for the year again this morning, we were ahead of plan as of June. And now all of a sudden, 3 months later, we find ourselves pretty significantly behind plan for the year, so that's how fast things have turned on us and why it makes it really tough to predict from here. But we all know the political uncertainty. We all know the fiscal issues that the country faces and the debt, and the elections are upon us. And I don't think any of us can predict exactly where the economy is going to go from here. I think all the economic signals, as we see them, are very mixed. And as I look at our trends compared to everybody else, I don't see any difference in trends. So it's nothing unique to Southwest.

John D. Godyn - Morgan Stanley, Research Division

Okay. And you mentioned the election. Are you a believer in this idea that it's weighing on close-in demand right now and there could be sort of a pop post election if we get more certainty? Do you believe that?

Gary C. Kelly

Well, I -- here's what I do believe. I think empirically, capital goods, orders, business investment, those kinds of broad economic metrics are definitely in decline in 2012. And as we know out of 2008, those were really the drivers in the recovery. Consumer spending, as we look at that separately, as long as our marketing folks have the right price point and the right sale effort, I think we get "all you can eat" when it comes to consumers there. So we have record load factors, very strong demand on that front, but it's the business travel that seems to be the softer piece. And I think by extension, yes, one could speculate or hypothesize that that's what's causing it. And Ian (sic) [John], we don't know, but it is somewhat of a mystery here to see September be as weak as it was and October to look pretty normal. Tammy did make the point, and I'm mindful of that, that our October a year ago wasn't so strong. But at least sequentially relative to, I think, prior-month this year, October looks pretty darn good. So we're not trying to qualify October too much. I think it's just an admission that we can't predict from here where things are going to go.

John D. Godyn - Morgan Stanley, Research Division

Okay. And just a quick knit on the 4% October number. Is that the right expectation we should have for the end of the month if demand trends don't really change? Was there something in the comps that's naturally going to bias that number? You mentioned that comps get tougher throughout the quarter, but would that bias the month's number?

Tammy Romo

There's nothing in particular for October assuming a stable revenue environment. So no, it really -- it was really more directed to actually progress through the month. And particularly if you just note December, the -- there is a mismatch in how the holidays fall this year versus last, so I do think it will make the comps more difficult in December.

Operator

And we'll go next to Thomas Kim with Goldman Sachs.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Can I ask you to elaborate on the new revenue drivers being explored? And if it's too early or premature to go into that now, could you give us some color as to when we might be able to expect further news on that front?

Gary C. Kelly

I knew if I teased you that you would ask. And no, I don't feel comfortable sharing our thinking because they're not committed initiatives yet. But I did want to admit what I think is the obvious, which is we're off plan. We do have some concerns about the economy and higher fuel prices and I don't think we want to just continue on with business as usual. So we will be looking for ways to augment our current strategies, which I'm very enthused about already, but we're looking for ways to augment those and have not made any decisions yet admittedly. But it would -- were they thought towards something that could impact 2013? That's on the revenue front. I think I can be a little bit more committed with you on costs. And in our corporate overhead in particular, we are working on cutting our overhead budgets, and again as I mentioned, we'll be looking for at least $100 million from that perspective. And the balance here is that the company is working very hard. And our people are very dedicated, helping Southwest Airlines manage through a very challenging transition, transformation. And it would be unwise to starve the company from necessary resources to make those investments pay off. So it's going to take us 2 years worth of work, as an example, to bring in international service from a technology perspective. We've got to have the resources to make that happen. So I just want to make sure that we're focused and that we're not committed to do things that don't add value. And I feel very confident that we can trim our costs there. Tammy's already mentioned that some of the investments, of course, will play out here naturally. Like the Evolve seating, we'll be done with that in the first half of next year, so that will provide some cost relief. And we do have a bit of a bubble this year with transitioning our AirTran 700s on to our engine maintenance contract. So that -- those costs will also ease in the future years. So I think we're very well set up to manage our costs overall much more efficiently 2013 and beyond.

Thomas Kim - Goldman Sachs Group Inc., Research Division

Okay. Can I just one -- ask one more follow-up question with regard to the landing fees? I noticed that ticket's risen by 8% year-on-year. And when I compare that to the trips flown, which had declined, I just wanted to get a better understanding as to what might have driven that increase, if it was just inflationary pressure or if there's something else going on there.

Gary C. Kelly

That's -- that category, of course, includes airport rentals for space, in addition to the activity-driven landing fees. So it's the rentals piece of that that's gone up, significant construction projects that went into effect in Las Vegas and Sacramento, very, very expensive and, believe it or not, moved the needle almost all the degree that you see there. So it's not landing fees, it was the point.

Operator

And we'll go next to Jeff Kauffman with Sterne Agee.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Congratulations, Tammy.

Tammy Romo

Thank you.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

So I thought I'd ask you a question to celebrate. Just kind of looking at the current analyst guidance and for '13, the guidance you've given on the cost side, the CapEx side and kind of what you've given us, an idea on debt maturities. It looks like you got about $600 million or $700 million of potential cash flow that's not really relegated to debt paydown or CapEx or operating working capital. What are your thoughts -- to the extent there is excess cash, I know you've used a lot of it to retire debt this year. Is the thinking to build back up the cash stockpile? Or are there other places that potentially, if you had $600 million or $700 million of uncolored cash, that you might dedicate it?

Tammy Romo

Well, absolutely. I think we've -- we do our stock repurchase, increase in our recent -- increase in our dividend. We are very focused on enhancing shareholder value. As I mentioned earlier, we do have $1 billion stock repurchase authorization of which we -- to date, we've used $550 million of that. Now I wouldn't comment on what our plans are going forward, but certainly we do have authorization if indeed we determine that's appropriate. But we -- at the end of the day, just to answer your question, we're -- I guess the choices are to invest back in the business. And we've already told you that we are committed to flat fleet until we achieve our targets. And then to the extent there's excess cash, then we'll obviously explore ways to enhance shareholder value.

Jeffrey A. Kauffman - Sterne Agee & Leach Inc., Research Division

Okay. Is there a minimum cash threshold that you want to keep on the balance sheet? Or just because the investment account is so large, no need to worry about that?

Tammy Romo

Sure. I think we've been fluctuating around that $3 billion mark and that -- feels pretty comfortable with those type of levels. So really, no big deviation from where we are today.

Operator

And we'll take our next question from Helane Becker with Dahlman Rose.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

So I think earlier this week, Gary, there was a 717 that was hit by a catering truck. Can you just talk about the disposition of that aircraft and how, if it can't be fixed, you will make amends with Delta?

Gary C. Kelly

Okay, we'll ask Mike Van De Ven to answer that question.

Michael G. Van De Ven

So yes, Helane, this is Mike. Yes, so that -- there was some fuselage damage to the airplane and we will send it into a maintenance provider and will fix the airplane. It was not any significant structural damage to the airplane.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

And then my other question. Gary, can you prioritize the initiatives you have going at this point in terms of international reservation, international risk capability, the ability to do over-water flying for Southwest, how we should think about the next couple of years in terms of your getting from here to where you will be able to fly to Hawaii and Mexico and so on?

Gary C. Kelly

Well, Helane, with -- I'll just very quickly recap the initiatives and hopefully explain how they all tie together. First -- the first one that's already up and running is the frequent flyer program. AirTran, of course, is an integration initiative at this point, so that's the second. We've got the 737-800s and we're -- of course, we're well on our way in the implementation stage of that initiative. We've got, Tammy, I believe, 24 800s on the property at this point. And we're firmly committed to 78 over the next cumulative, over the next several years. So that's the third initiative. The fleet modernization is probably the biggest work effort but also the biggest potential value driver that we have, and I think you're familiar with that. And then finally is -- I'd sort of put it in a grouping of replacing our reservations technology and also enhancing our revenue management technology. They're somewhat different, but they're very intimately tied together also. Every 1 of those 5 initiatives, by the way, is worth somewhere in the neighborhood of $500 million or more, except for the 800s, it's the only one that falls below that and it's probably worth $150 million. What we don't know until we get it all built and implemented is whether there's some double counting. But there is a big portfolio of value that we have under construction that we're pursuing. The international probably falls into several categories. I think that international routes look very attractive from a profitability perspective. The -- of course, we need technology to enable that. But it'll also a straight line to integrating AirTran, meaning that AirTran has international service, we must bring up international capabilities within Southwest Airlines to finish the integration of AirTran. So it's very high priority. We're working with Amadeus. That project was launched many months ago, is right on track and is scheduled for completion in 2014. The other value that, that effort brings us is it is a first meaningful step towards the ultimate complete replacement of our reservations technology which we very much need to do. And obviously, want to get that first step completed for that reason also. Separate from that, we have a revenue management system that is going in next year, and we -- that -- I'm calling that phase 1. When we have a new reservation system, that will also bring added revenue management capabilities. And then, revenue management has other phases of their project that they'll be pursuing over time. So collectively, that whole replacement of reservations and revenue management is a very, very significant effort for us. And again, as I said, it brings the international capabilities with it and the international routes look like they will be handsome profit opportunities for us. All right, with respect to Hawaii and things like that, other than having Southwest Airlines capabilities in place, I don't really want to -- I don't want to give our competitors a sense of our priorities for opportunities like that. On the operation side, Mike Van De Ven and his operations team separately are doing everything that they need to do to have us properly certified for the various phases of international flying that we can do. Right now, he's working on proving flights for San Juan, as an example, which is not international technically, of course that's a U.S. territory. But all that work is underway and it is hard work, but the harder work, of course, is replacing our reservation system technology.

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

Just for Tammy: What's the share count we should use now after all your stock repurchases? Just [indiscernible].

Tammy Romo

In -- here? Sure, Helane. We -- well obviously, it depends on where our stock price. That's why -- but based on where the stock price is roughly today, on a diluted share basis, that's in the 745 million range, 745 million, 746 million range.

Gary C. Kelly

It is, of course, 740 million for the third quarter, so -- on the press release.

Operator

And we'll take our next question from Savi Syth with Raymond James.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

What was the Business Select as well as the pets and other fees this quarter?

Tammy Romo

Our Business Select, our revenues was $21 million. And our fee -- our pets, unaccompanied minors and excess bags were roughly $19 million, $20 million. And our EarlyBird revenues were $41 million.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Great. So I'm just wondering, with AirTran's fleet moving over to Southwest, do you -- I mean, should we expect the other revenues to be down year-over-year for a while, though, since you are losing some of the revenue from those?

Tammy Romo

Yes, yes, that would be going the other way. You're correct.

Savanthi Syth - Raymond James & Associates, Inc., Research Division

Okay. And then just one last question. On the fleet transition, how much of the kind of the fleet targeted savings have you realized so far? Or are you still on target for that $70 million for this year?

Tammy Romo

Yes, we are. We're on target on all of our fleet initiatives, the numbers that we provided to you previously, which by 2015 are well in excess of $0.5 billion. I think we actually gave you over $700 million. We're on track.

Operator

And we'll go next to Ray Neidl with the Maxim Group.

Raymond Neidl - Maxim Group LLC, Research Division

I just wanted to -- one specific question and a general question. To go back to the maintenance materials and repairs, which has been increasing in low double digits, what was it that happened there? And what we should look to -- what should we look for, going into next year?

Gary C. Kelly

I think there's -- and Tammy may want to -- and Mike is here, too, so how -- whatever you all would like the pitch in here. But there are 2 major drivers there, Ray. One is we renegotiated our engine maintenance contracts with GE, and part of that was to incorporate AirTran into the -- especially the -700 maintenance program. That resulted in a increase in our maintenance engine expense in 2012. The second driver in 2012 is this 737-700 seating retrofit that we're doing. So all of that, for accounting purposes, is being expensed so that's also an increase in the maintenance materials and repairs line. And Tammy may pick up a couple of more things here, but the main point that I wanted to leave you with is that you're seeing a bubble here in the maintenance materials and repairs line item. The retrofit will complete next year and so that spending will go away and the costs will begin to come down. Over time, the engine cost component will also begin to come down. So we have a bit of a bulge here in 2012, but our long-term outlook for maintenance materials and repairs spending is a trend-down and it looks very, very good. Part of this is the fleet modernization. Part of it is, in other words, retiring 717s, which are very maintenance intensive. And also part of it, of course, is retiring our Classic fleets, which are also pretty maintenance intensive.

Tammy Romo

Yes, Gary, the only thing I would add to that is, if you -- our -- without the Evolve charge here in the third quarter, the maintenance CASM increase was approximately 5% so it would have been significantly less.

Gary C. Kelly

So 5 points less. That's what I would...

Tammy Romo

Yes.

Raymond Neidl - Maxim Group LLC, Research Division

Okay, great. That's kind of what I thought. And the general question is -- your system -- I know you're being very conservative with the economy and so forth, but with the airline restructuring, what you're seeing in Dallas, what you're seeing with Hobby, with United, with -- and actions they are taking -- and most importantly in Denver, Frontier seems to be making a real comeback as their major hub there. How is that affecting your airline operations there?

Gary C. Kelly

Well, I guess -- I think you put that one in the category of a general question so I'm going to answer you generally. I think, competitively, we're matching it very well and seeing nice opportunities to pick up some business here at Southwest Airlines. So I think most of our challenges right now are internal, in other words, managing our own transformation, maintaining our own operations, our own customer service. But when it comes to opportunities for us to grow, I think the opportunities are going to be there. I think they're going to be there domestically. I think they're going to be there internationally and to include Hawaii and Alaska. Obviously, we're going to be disciplined about our growth until we can justify -- make the reinvestments to grow. But the opportunities are there. And I would certainly include the areas that you mentioned as opportunities for Southwest.

Operator

And we'll go next to Kevin Crissey with UBS.

Kevin Crissey - UBS Investment Bank, Research Division

Can you just go through the capacity by month, the capacity year-over-year by month? So October RASM is up 4 on what?

Tammy Romo

How is that...

Gary C. Kelly

We can do that.

Tammy Romo

Yes, we can do that. Yes, our October ASMs, they were, pretty much throughout the quarter, roughly flat. There was no -- you can just say seem pretty much flat each month here year-over-year.

Kevin Crissey - UBS Investment Bank, Research Division

And Gary, just going back to one of your points, and I may have discussed this at own [ph] to other calls and maybe it's adamant that I harp on. But I'm confused. You mentioned earlier about fare increases particularly when there's higher costs. And conceptually, I'm not sure I understand why that happens. I mean, I understand why you'd -- if you're having trouble making a profit, you set a new schedule. But I would think that the pricing would be just determined on the supply-and-demand on a market-by-market, day-by-day, flight-by-flight basis. And really, fuel prices going up or landing fees or any other factor shouldn't affect the pricing department's behavior. They should be maximizing the price from point a to point b. Why is that not the case?

Gary C. Kelly

Here, it is. That's the case. Kevin, you can't piece all that apart. I mean, the market is going to react to changes in raw material cost, so it's certainly going to be easier to pass-through price increases when demand is strong and there's pressure for the industry to increase prices. That's all. You have some market-driven exercise, no question.

Operator

And ladies and gentlemen, we have time for one more question during our analyst portion. We'll take our final question from David Fintzen with Barclays.

David E. Fintzen - Barclays Capital, Research Division

Actually, just segueing off of Kevin's question, just for Gary. I'm curious, just given some of the economic caution that you're expressing and then just going back to the 2013 capacity outlook, how should we think about how willing and able you are to start making adjustments there? Is that something where there's so much going on internally that it's going to be harder to make capacity adjustments as you need to?

Gary C. Kelly

Well, in -- don't let me read something into your question that you don't intend. You mean, to make downward adjustments to our capacity?

David E. Fintzen - Barclays Capital, Research Division

Well, I mean if you're starting to get more cautious because you've come under plan and you need to start to react to that in terms of the economy, do you lose flexibility when you've got a lot of initiatives going on internally?

Gary C. Kelly

Got you. No. Oh, not -- I'm not challenging the validity of your question, I think it's a very good question. No, no, I think we have plenty of flexibility to manage our capacity. Now, we're published. So we're published out through April, and I think we just reported that we're about to publish our next schedule which I guess will take us out through June, something like that. So it is -- once we publish the schedule, we would prefer not to go in and make material changes to that published schedule. But every schedule that we publish, though, we're thinking about what kind of capacity we want to produce. And I don't think we're telling you that our outlook for 2013 is pessimistic. That's an optimistic, someday [ph]. And I think the message is actually, we feel like we have a very good plan for 2013. What's built into the plan is already revenue improvements. We're talking about trying to augment what is already planned and committed for 2013. We're going to try to create a little insurance for ourselves here with some cost-control efforts. And then fuel is always a wild card, but we tend to be pretty good at hedging so we'll be looking for opportunities there, at least on price. You will notice that -- in the third quarter that we had a nice improvement in our fuel consumption by our operating departments. So I fully expect that's going to continue next year. So our goal is to hit our return target in 2013. So given that, we're not sitting here thinking that we need to make some significant adjustments downward to our capacity. But in the end, I think again, just want to admit that we're prepared to do whatever we need to do to keep the company healthy, to maintain our discipline, to hit our target. And -- but that's how we would think about capacity changes. And I think the main point that I think is responsive to your question is: Absolutely, we have flexibility to adjust our capacity.

David E. Fintzen - Barclays Capital, Research Division

And then just maybe a quick one for Tammy. You'd -- I don't know if I heard you correctly. I saw in the -- in sort of the progression of CASM x fuel x profit share next year, did you say it sort of tapers off towards flat towards the end of the year? Or is it -- is there a step down at some point when we start to overlap the Evolve and some of the other things that hit particularly towards the second half of the year? I'm just curious how that profile is in there to...

Laura H. Wright

Yes, okay, you know what, again, we're still working on our plan for next year, so we'll provide more specific guidance later. But it does -- there's probably more a step between the first half, I would expect, and the second half just given the timing of Evolve.

Operator

And at this time, I'd like to turn the call back over to Ms. Brand for any additional or closing remarks.

Marcy Brand

Thank you, Tom. And thanks, everyone, for joining us today. If you have any follow-up questions, of course, we will be available this afternoon. Thanks again. Have a great day.

Operator

Ladies and gentlemen, we will now begin our media portion of today's call. I'd like to first introduce Ms. Linda Rutherford, Vice President, Communications and Strategic Outreach.

Linda B. Rutherford

Good afternoon, everyone, and thank you for participating. We're going to go ahead and start with the media participants, so Tom, if you could give them instructions for how to dial up for questions?

Operator

Yes, ma'am. [Operator Instructions] We will now begin with our first question from Sheryl Jean with The Dallas Morning News.

Sheryl Jean

I have a clarification question first and then a follow-up. Did you say that your plan was to reduce unit costs and pursuit cost controls will start next year or in 2014?

Gary C. Kelly

Hi, Sheryl, this is Gary. Yes, we -- it's for next year, yes, for 2013. And I think what Tammy was describing was that, given the strategic initiatives and the construction projects, if you -- if -- as we refer to them, those investments. Given the -- given those things that are in play, they will match -- that investment will naturally begin to taper off in 2013 so that, by the time they get to 2014, you'll have some nice cost reductions. So that was her point. What I'm saying is that, in addition to that, we're going to be looking for some spending cuts that we can make that would be effective in 2013 from our budgets in excess of $100 million. That's what I said.

Sheryl Jean

Right, okay. And so do those options for cutting costs include layoffs, possible layoffs?

Gary C. Kelly

Well, that's always an option for a company. But to be clear, no, that's not what I'm contemplating at this point, not at all. Now we may sharply curtail our hiring and our total employment in corporate functions, if you will, may begin to fall as people -- as we have voluntary turnover within the company, so that may be one of our ideas. But at this point, I'm not suggesting that we're going to have layoffs or furloughs, no.

Sheryl Jean

Oh, well, there is a report out there that supposedly a letter went out from you to employees saying that there will be work force shrinkage next year. Is that not true, then?

Gary C. Kelly

No, it's false.

Sheryl Jean

Okay. And can you -- I also wanted to see if you could give some more detail on other cost-cutting opportunities that you might be pursuing in terms of -- if you could be specific?

Gary C. Kelly

I'm not ready to be specific. I think the array of things that we'll be considering would be getting supplier cost down, getting -- creating more efficiencies in our supply chain, looking for opportunities to stop doing things. There may be some projects that we have underway that we just don't feel add enough value and we can simply stop doing that. We can, through that mechanism, reduce the support that we need from outside contractors, outside consultants. There's a whole variety of techniques that we can use to reduce our cost. And again, to be clear on your memo question: It is our desire to control our hiring in such a way that we don't increase our total headcount. What that would lead to is a reduction in total headcount. So that may be what you -- I don't know what you have your hands on, but in terms of actually asking people to leave or layoffs or furloughs, no, we're not contemplating that.

Sheryl Jean

Okay. So you have...

Gary C. Kelly

But we have techniques to manage our total employment by simply not hiring as to replace people as they leave the company or as they retire or whatever, so...

Sheryl Jean

Do you have a specific target of what do you want the headcount to be at the end of next year versus what it is now?

Gary C. Kelly

I do, but I don't know that I'm ready to share that just because we haven't committed to it. But yes, we would like to -- the -- as a percentage of the total company, it's not going to be large, but as a percentage of our corporate overhead, it would be pretty meaningful number. But we haven't committed to it yet so I'd rather not share it.

Operator

And we'll go next to Andrea Ahles with the Fort Worth Star-Telegram.

Andrea Ahles

So you talked about looking at other revenue strategies or revenue possibilities for 2013, so I'm wondering if you are reconsidering Bags Fly Free.

Gary C. Kelly

Well, for now, of course, not. I don't think we would ever say no to anything, whether it's assigned seats or charging for bags, but we'll be looking for any and all good ideas to see what we can do to augment our current strategies.

Andrea Ahles

Can you give any more clarity on what sort of revenue issues at your time [ph]. Or have you started to put revenue initiatives where customers would be impact, where they would be seeing more fees? Or are these more like partnership types of things that you've done with your Rapid Rewards and generating more revenues through the frequent flier program?

Gary C. Kelly

I think, at this point, we're simply on a mission to see if we can come up with some ideas that we like, that we think will be effective, that will enhance the brand. And it's just premature to tier any more than that.

Operator

And we'll go next to Josh Freed with the Associated Press.

Joshua Freed

You all have a competitor over in Fort Worth that had some trouble last month. Did you see any looking-away from them to you? I mean, it seems like maybe there would've been some benefit for Southwest through all of that. Was there, and how much?

Gary C. Kelly

The honest answer is no, I don't know that I could detect that. And now I'm having trouble remembering what occurred in September versus October. But our September results, as you know, weren't so great so there's no meaningful evidence that we saw a benefit. But just common sense would tell you and me that we absolutely had to have some benefit. There had to be some people that were booking away, and there were a lot of canceled flights. I know for a fact that we picked up a lot of customers on that basis. But in any event, I would assume, whatever it was, it's temporary. And American is a good company and they'll get their act together and I'm sure they will continue to be a very formidable competitor for us.

Joshua Freed

All right. The most recent fare increase that we saw go through, that October 9 one, it simply got started by United and then it kind of started to go away and then you guys came back and revived it. Why the delay? I mean was there something special about this one that caused you to sort of think about it a little longer?

Gary C. Kelly

I don't feel comfortable really talking about our pricing decisions and except to say that we aspire to be the low-fare carrier in the United States. We're very careful about considering any increases in our fares, very thoughtful. And I don't think that that's really different from the last 41 years. We're in an environment where costs for the industry are going up and fuel prices, in particular over the last 30 to 60 days, are up very sharply. And right now, we're staring at record fuel prices for the fourth quarter. So that's our thinking, and -- but beyond that, tactically, I'm not comfortable in sharing anything.

Joshua Freed

All right. But last really quick question: Delta bought a refinery. Do you folks have any interest in either that or anything that is sort of similarly outside the box on the fuel supply side?

Gary C. Kelly

No. I think that again, over 4 decades, we looked at and thought about a lot of things. Fuel is such a major dependency for our transportation company. It's a lot of risk, it's not in our wheelhouse and it doesn't obviate the need for hedging. So our approach will continue to be just do the hedging as the mechanism to best protect ourselves on price. If we had a supply concern, I think that would be different. And that's a lot of what's going on there is a lot of refineries are being shut down on the East Coast. It actually is beneficial for Southwest Airlines, selfishly, for Delta to be bringing that supply to the East Coast. That just takes them -- yes, they'll be supplying themselves, but that means that we don't have to compete with Delta for supplies from the rest of the industry. So on balance, if that's what they want to do, we'll cheer them on. And I think, looking at other alternatives to crude oil will continue to be something that we'll want to monitor, but at this stage I just don't see anything in the near term that's commercially viable there. But we're always looking for good ideas.

Operator

And we'll go next to Karen Jacobs with Reuters.

Karen Jacobs

Thanks for clarifying the word on the headcount plan. I had questions about that myself. I'll direct my question, it's kind of a question tied to labor as well. You might recall that the TWU, which represents the groups including ramp and flight agents at Southwest, said that -- filed for federal mediation. I guess it was a joint action with the company. But in their statement, they seemed to suggest that the company was taking a new approach to labor and some of the proposals that it had made in the -- on collective bargaining process, basically calling some of the changes that the company was proposing concessionary and unacceptable, including outsourcing jobs. So my question to you is, are you taking a new approach to labor?

Gary C. Kelly

I'm -- Mike Van De Ven is our Chief Operating Officer and leads our efforts in these areas. And I'm going to let Mike tell you what he thinks.

Michael G. Van De Ven

Well, Karen, it's not unusual for Southwest Airlines to go to mediation in our labor contracts. And we've done that several times in the past. And it's really just a way for us to work through very complex and difficult issues. We have exceptional ramp and ops employs. TWU covers a lot of our work force and generally have a really good relationship with them. We have -- our competitive position with respect to our labor costs have changed for Southwest Airlines as a result of bankruptcies through all the other carriers. What we're trying to do is make sure that we can protect our people's pay and our benefits and our job security and try to look for ways in the contract where we can get the right staffing of people at the right place at the right time so we can provide good service and grow our companies through those mechanisms. So those discussions are difficult, they are complex. They're new approaches to our labor contracts that we've had in the past and so I think that's what's caused a little bit of the frustration. We're not trying to outsource jobs. Actually, we'd like to have more part-time flexibility to bring part-time workers into Southwest Airlines and put them in places where we need them in terms of the demand. So I think it's just a natural progress that we're going to work through. And I wouldn't say that we're any -- have any other different approach than we've ever had. We want to make sure that we protect our people's jobs, that we pay them appropriately and that we have the most productive and efficient work force in the industry.

Karen Jacobs

If I can have a follow-up. I couldn't help but notice the other day that you brought on Mr. Babbitt to -- as Chief of Labor Relations. Is this a sign that you expect labor talks to become more contentious?

Michael G. Van De Ven

Yes, I don't think they're more contentious at all. I think that the fact of the matter is we have complex and difficult issues to deal with. To have somebody like Randy be available with his background and his experience and his approach to labor where it's very complementary -- he wants to work at -- with a -- in a partnership with labor unions, to go find answers and difficult solutions. To me, he is the right person at the right place at the right time. And we are so happy to have him join Southwest Airlines.

Operator

And we'll take our next question from Kelly Yamanouchi with the Atlanta Journal Constitution.

Kelly Yamanouchi

I'm interested in asking, when you connect the AirTran and the Southwest networks together next year, how large of an operation do you expect each of the carriers to have? And when exactly do you expect that to happen?

Gary C. Kelly

Kelly, those schedules are already published. So in other words, our intent is to launch the network connections early next year. And the schedules are already published out throughout April. So the -- it -- that is the size of the operation. Now so what it means, by connecting the schedules, and I think particularly in Atlanta is that you'll -- on top of the current customer schedules that are published, we'll have hundreds of new origin destination itineraries that will appear, that can be booked. So it won't change with our flight activity, but it will change the itineraries that customers can buy, and obviously we're very excited about that. But Bob Jordan, our AirTran President, is here. So Bob, is there anything -- any -- anything you'd like to add, please, sir?

Robert E. Jordan

Yes, Kelly, I would just say the same thing. We've got a lot of opportunity in Atlanta, Baltimore, Milwaukee, Orlando, a lot of places where we share a lot of service with AirTran. And so the customers there are going to see access to a much broader network, particularly on the AirTran side where they'll be able to access a very broad Southwest network. So you’ll see the same -- as Gary mentioned, you'll see the same flight activity on each carrier that's currently published, but you'll see a lot more itineraries on the shelves. So if you go to southwest.com our airtran.com, you will see a lot of things that you can buy that connect the carriers that are not there today, as published in the April schedule. So we're just really excited about that.

[Audio Gap]

Kelly Yamanouchi

be -- would be a significant, I guess, shift?

Robert E. Jordan

Not a shift in the schedules. So the schedule that AirTran has and the schedule that Southwest has will not -- they won't shift in terms of what you see published already. What will shift is you'll see connecting opportunities that are not published today. So you'll have an AirTran flight, for example, that today cannot connect to -- in Atlanta, as an example, or Baltimore or -- that cannot connect to Southwest. And once we turn co-fare [ph] on, it can. So you'll see a number of market opportunities and connecting opportunities that'll, of course, produce a lot of new travel itineraries for our customers and revenue opportunities for Southwest Airlines.

Operator

And we have time for one more question. We'll take our last question from Gen Yell [ph] with Flightglobal.

Unknown Attendee

Gary, this is Sim Le [ph] from Flightglobal. I just wanted to ask about the retirement of the 737s. I think that -- earlier on, that you mentioned that, that will likely contribute to helping you to bring down costs next year. Are you able to elaborate more on that?

Gary C. Kelly

We have -- I think at our peak, we had just over 200 so-called Classic 737s, and the model types that we had are the 737-300 and the 737-500. We've begun retiring those several years ago. I think, at this point, I'm just checking my numbers here, we've got 156 of the Classic fleet on hand. By the end of this decade, all 156 will be retired from the Southwest fleet. That is sooner than what we had previously planned by several years. And in fact, our desire is to retire them on an accelerated rate, and we may get them retired earlier than 2020, for that matter. Those aircraft, they're good, safe airplanes. They're not as fuel efficient as the current generation and they're more maintenance intensive than the current generation, so we just feel like, by retiring those and replacing them we'll have a more efficient, more reliable, more cost-effective aircraft, going forward.

Unknown Attendee

And just a follow-up to that. But you would still be rolling out the Evolve project on about 100, roughly. That's still going forward, right?

Gary C. Kelly

I'm going to let Tammy answer that. So there are 342 Southwest 700s, and those are the numbers that we've primarily been sharing with you. In addition to that, there are 52 AirTran 700s that will be reconfigured with the Evolve seating. And then, Tammy, I'll let you speak to the Classics.

Tammy Romo

Yes. On the Classics, we are actually still evaluating those. We do think it will make sense to do a good portion of those. I don't know that it would be 100. It could be something short of 100, but I do think that we will be putting the Evolve -- retrofitting the cabin, on a fairly good portion of the Evolve.

Gary C. Kelly

I said 342. It's 372. I stand corrected.

Operator

And at this time, I'd like to turn the call back over to Ms. Rutherford for any closing remarks.

Linda B. Rutherford

Thanks, Tom, appreciate it. Thank you, all, for being with us today. As always, if you have any follow-up questions, you can call the communications folks at (214) 792-4847 or visit the website www.swamedia.com. Thanks very much.

Operator

And this does conclude today's conference call. Thank you for joining. You may now disconnect.

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