Good day, and welcome to the Southwest Airlines' Third Quarter 2011 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.

Thank you, Tom. Good morning, everyone. Welcome to our third quarter 2011 conference call. Joining me on the call today is Gary Kelly, Southwest Chairman, President and Chief Executive Officer; Bob Jordan, Executive Vice President and Chief Commercial Officer and President of AirTran Airways; and Laura Wright, Senior Vice President, Finance and Chief Financial Officer. Today's call will begin with opening comments from Gary, followed by Laura providing a review of our third quarter results and current outlook, and then Bob will discuss our progress on the AirTran integration. This morning's release includes Southwest's third quarter 2011 consolidated results, which include AirTran's results for the full quarter. Southwest year-to-date 2011 consolidated results include AirTran's results since the May 2 acquisition date. Prior-year results do not include AirTran. However, in order to provide what we believe to be a more meaningful year-over-year comparison on today's call, we will also be discussing specified results on a combined basis. Combined results is the sum of Southwest and AirTran standalone results for all periods prior to the acquisition without any retrospect application of purchase accounting. In addition, outlook commentary will be provided on a combined basis as compared to combined prior-year results, unless otherwise noted. We provided supplemental financial information on a combined basis for year-to-date 2011 and for prior-year results in this morning's press release, along with related reconciliations. Before we get started, 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. This call will also include references to results, excluding special items or non-GAAP results. 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.

Well, thank you very much, Marcy, and thanks, everyone, for joining us this morning. We had $122 million third quarter profit, excluding special items. That's $0.15 a share, $0.01 better than the Wall Street estimates. And of course, that's very satisfactory. However, the results are 37% below last year's third quarter, and that's not satisfactory. But I am very proud of our people. The challenges to earnings are cost related, and especially fuel cost, they were up 33.8% on a per gallon basis compared to last year. And were it not for that, our earnings would've been outstanding, excluding items. Our people deserve a lot of praise because we had a stellar revenue performance. We had record load factors, record yields, record revenues. We had a All-New Rapid Rewards program that was a very significant contributor, and we also had much improved operations performance. All of that was accompanied by very strong customer satisfaction ratings. Of course, our GAAP results include a markdown on a minor portion of our fuel hedge portfolio, and that's because of the swoon that occurred in energy prices following the U.S. government debt crisis in August. Since the end of the quarter, by the way, prices have increased, and that markdown has essentially reversed itself. So the accounting is complex. It is overly complex. In my opinion, it's confusing. So we, along with Wall Street, count all of our portfolio when the hedges actually settle. So speaking of hedging, we have reduced our hedging portfolio over the next several months to, I would call, actively manage what we believe will be a lower-price environment. We have significant hedges in place for second half 2012 all the way through 2014 and somewhat into 2015. And that, of course, is to protect against a surge in prices.…

Thank you, Gary, and good morning or afternoon for some of you. Including net unfavorable special items totaling $262 million, we reported a GAAP third quarter net loss of $140 million. Excluding special items, we reported earnings of $122 million or $0.15 per diluted share. This exceeded Wall Street's expectations by $0.01. The special items this quarter primarily consisted of a $239 million net related to noncash hedging losses primarily related to reduction in the quarter-end valuation of our 2012 through 2015 hedged portfolio. At the end of the third quarter, future period hedges that were deemed ineffective or not eligible for hedge accounting resulted in a $227 million net markdown that is recorded in other gains and losses. This markdown is a noncash unrealized item in our third quarter. We believe it's more meaningful to report our economic quarterly results accounting for all of our hedges consistently over time. Our economic earnings, or earnings excluding special items, do not exclude the impact of fuel hedging. They reflect what we actually paid for each period fuel consumption, inclusive of the realized hedging gains or losses on that period hedges. With the current market volatility, the valuation of our hedged portfolio continues to fluctuate. At September 30, the market value of our hedged portfolio was a liability of approximately $662 million. As Gary mentioned, with the rise in fuel prices since the end of the quarter, our portfolio value just as of Monday this week was a liability of approximately $314 million, so we had a $350 million recapture value in 17 days. Other third quarter special items included $14 million net of taxes in AirTran integration costs, primarily for consulting fees and facility transition costs, as well as $9 million in net impairment costs related to our decision to discontinue…

Well, thank you, Laura. And thanks, everyone, for joining us. We continue making great progress on integration planning, and I'm really pleased to give you a status report today. But I want to start by thanking the people of both Southwest and AirTran that continue working on integration on a daily basis. They're doing a superb job, and I'm very proud of them. I also want to thank the people of AirTran for not losing focus despite all of the changes that are going on around them. Since May, they have continued to turn in excellent operational results, including industry-leading baggage handling, and I am just very proud of them. I'll start with an update on our station transitions and in-sourcing. Since May, we have completed 17 station transitions. That means that we have now co-located our gates, ticket counters, offices and operational areas in these airports and are basically now operating side by side. And we have some important conversions coming up in November with Orlando, Boston and Baltimore. In 9 of the stations so far, we have also taken the added step of in-sourcing. In-sourcing means that Southwest employees are now providing the ground handling and ramp services for AirTran flights. And despite the complexity of all that, I'm really happy with the station transitions and the in-sourcing because they are both going very smoothly. On the labor front. Our pilot unions, SWAPA and ALPA, restate tentative agreement on seniority list integration, and that has now been put to a ratification vote, and that vote concludes on November 7. This is a major accomplishment. Integrating labor groups is not easy, and both SWAPA and ALPA showed tremendous persistence in reaching a tentative agreement. I believe this agreement is fair and equitable for both sides. And ratifying a negotiated…

[Operator Instructions] We'll now begin our first question from Michael Linenberg with Deutsche Bank.

I guess, Laura, with respect to your fuel hedge, I think in the press release, I think you said something about 450 some odd million that was on deposit with the counterparties related to the fuel hedging. And then I think you talked about the movement in fuel over the last 17 days and how that liability changed. I think you said something recapturing several hundred million. And the numbers, they seem pretty far apart. Can you just reconcile the differences there? And then maybe it's a function of also the fact that you've changed your hedge position over the last several months?

Mike, let me make sure I understand your question. You want me to reconcile the June 30 mark-to-market to the one that I referred to?

Yes. It just -- it seemed like with the movement in fuel, that you would have actually gotten back more cash from your counterparties than -- I thought it was just over $100 million was the change over the last couple of weeks. But it seemed like that with the movement, it would have been greater than that. But I may be doing my math wrong here.

I think you're right. The cash flow as of yesterday was -- I think I said $304 million compared to, say, $458 million or $459 million. So it's down about $150 million. We have a lot -- we have more than one counterparty. We have several parties that are in profit or asset or liability situation. So it is a little more complex than just looking at the market value. The other thing that we have, Mike, as you know, is we have an aircraft collateral facility that we can use, too. And if you look at where we are, we didn't choose to use the aircraft facility at September 30 just because of some of the economics. With the earnings that we're realizing on our cash holdings aren't very high, it made more sense to post cash. Then there...

Okay. So at this point, there's no aircraft being used as pledge against some of the fuel hedge positions?

That's correct.

Okay, perfect. And then...

But we have the ability if we'd like to.

Okay, great. And then just my second question. Gary, I believe you had mentioned -- you had talked about how the unit revenue performance at AirTran was very good during the quarter. I think you indicated that it had exceeded Southwest. And I realized there's obviously different mix and gauge and the markets there or length of haul. There's a lot of considerations here. And I was just curious that over the last several months, to some extent, you've been able to run a little bit of a laboratory experiment here, and I was watching the recent fare sale that you did where the base fares for AirTran and Southwest were similar in some of the markets that they fly head-to-head. And I'm just curious on, because they do offer different products, what you've seen, what sort of uptake from, say, someone who's flying in the front of the cabin versus someone who maybe chooses Southwest over AirTran in like the Baltimore, Orlando market because they can fly -- they don't have to pay for bags. What sort of data and maybe what best practices that you're -- and I realize it's still early, but maybe some of initial read on people sort of moving between the 2 carriers in the same market?

Well, Mike, I'm going to let Bob pitch in here. He has some insights he wants to offer. I don't -- to be perfectly honest with you, I don't know that I have that much granularity into AirTran's business yet where I have that kind of a feel. The macro trends at Southwest and AirTran over the last 4 to 5 years have just unfolded differently. We were really accelerating our revenue growth dramatically in 2008, '09, '10, and we've sustained that in '11. And they've been less robust. So they've had somewhat easier comps. Their capacity is probably up a little bit year-over-year, if you just look at them as an entity. So I don't think you've seen a lot of schedule changes and probably any schedule changes that Southwest has done with the AirTran entity. That's probably fourth quarter and late -- if I remember right, in fact, I think it was a November 21 schedule that they had in place when we closed on May 2. So really, Southwest has had an impact on the schedule post-November 21, so really no impact yet. But I think that they had some concerns early after May 2 about the sustainability of their frequent flyer membership and business travel. And if you remember back in August, we expressed some reservations ourselves about what was going on with business travel. I think both airlines now in October, looking back over this same time period, I think we would both conclude that business travel has been very, very steady. I think long story short, what we were -- so I'll just repeat what I said earlier, what we were handed from the AirTran leadership was a very solid business. We've seen the AirTran employees respond enthusiastically to the notion of being emerged into Southwest Airlines. We've seen their operating performance sustained, if not improved. So we feel really good about that, that separate operating entity. But Mike, I'm sorry, any more depth there? I don't know what I could just offer. Bob, is there anything you would add?

Well, I would just echo some of the same things. Of course, we're watching what's happening with their business and their traffic, and there's no erosion in their business that we can detect. In fact, the business looks pretty strong, just like Southwest, as Gary indicated. There's no erosion of particular passenger groups or elites, which is very meaningful. In other words, we are not losing their frequent flyers or losing their elite frequent flyers. There's no reluctance to move to Southwest. In fact, the data and the anecdotes both would tell you that people are eager -- able to travel on Southwest -- current AirTran passengers are eager to travel on Southwest Airlines and be able to travel on Southwest. And the first schedules where we've made meaningful changes in overlap markets that would really test that theory are still to come. So those are schedules for early summer, late summer. But so far, there's -- we've not detected any erosion in business performance or any reluctance in terms of passengers -- their customers to convert to Southwest Airlines.

We'll take our next question from Hunter Keay with Wolfe Trahan.

I guess kind of a follow-up to Mike's question, maybe a little more of philosophical level. Now that -- maybe this is a question for Bob. Now that you've gotten to look to see how AirTran's bag fees can actually benefit that operation, they still outperformed on PRASM with bag fees largely in place. Has it given you maybe pause to the strategy? Because when I look at taking out $200 million of AirTran revenue, and AirTran made $39 million last year, it just seems like such a big dis-synergy. Have you maybe thought about the strategy a little bit differently given now that you've got to just sort of peel the onion to see how it works within AirTran's business?

No. I think if you look overall, of course, you've got to look at PRASM, PRASM and fees, and then RASM. And so it's all of the components. I think just overall, we have tended to outperform them fairly significantly on a PRASM basis. We've been fairly even on a RASM basis with fee. So I think we have a lot of opportunity there to just shift the components of revenue. Second, a lot of this, of course, is about connecting the networks and driving additional traffic across the combined network that you just couldn't do today. So whether that's boosting load factors or that's moving folks up the revenue management process and chain, so to speak, there's a lot of revenue potential there. So I don't have concerns in terms of moving -- in terms of covering bag fee revenue with other revenue components.

And again, when you say outperform, their year-over-year growth is superior in the third quarter, perhaps in large part because they underperformed a year ago or 2 years ago. But if you look, they lag Southwest margins, which sort of sums all of this stuff up. And the -- we see tangible opportunities to improve the AirTran route network, number one; the mix of nonstop passengers, number two. And again, it's our belief that the totality of the Southwest brand will also be a superior revenue producer as well.

And Hunter, as you know, our revenue synergies have always included the elimination of those fees. So that's always been a part of our assumptions with our synergies.

Right. A lot of answers. But the last thing I would add is that the -- it's a little harder to prove from an analytic perspective. But I think part of -- I think you're already seeing it. So the lending of the Southwest brand to AirTran, for example, we have some distribution between the 2 websites in place already, not connectivity, but you can get to AirTran flights off of Southwest Airlines. There are things going on that I think are providing an up draft to AirTran's performance already because of their connection to the Southwest brand. So some of what you're seeing, I believe, is due in part to the fact that we're pulling the 2 brands together.

Okay. And I guess just briefly in capacity, with 33 aircrafts coming in, obviously, you've already engaged. What is the sort of the most you can school up? Or I guess maybe upsize is what I'm wondering more so. How much can you sort of grow if you really want to next year? And what sort of triggers are you looking for to actually maybe defer some of the retirements?

Well, that would have to be or probably the technique. If we ask Laura to go get us airplanes, I suppose she could do that. It would just come at a cost. So let's just assume that, that is a modest number, half a dozen airplanes potential there. And then the other alternative would be to slowdown the retirements and what kind of flexibility I think we have there.

We have a ton of flexibility with the 33 retirements we own, a good portion of them. And certainly, on the one that are leased, I don't anticipate any of the last ones would have any problems, wouldn't add with us extending, and so we have a lot of flexibility. It's just -- I think the fair question is the lead time and what would be the signs that force us to think about that option. But lots of flexibility.

And I guess part of the retirement plan is set by trying to avoid major maintenance efforts. So we would have to undertake those maintenance efforts and make that decision to keep those airplanes. But long story short, we have a lot of flexibility.

We'll take our next question from Bob McAdoo with Avondale Partners.

There's a sentence in the press release, "We expect to have the capability to connect the networks of both airlines in the first half of 2012." What does that mean? What's a -- when you start doing that, what's a customer going to see as you start to connect these? What are they going to experience? What does that mean?

So Bob, I think if it were -- if AirTran or a different airline, we would just say co-chair, I don't -- co-chair means certain things to certain people. But we'll be in a position in the first half next year where we can operationally co-chair between the 2 airlines. So as you well understand, they've got their own reservation systems and operation systems, et cetera. So we'll be able to publish in a co-chair-like fashion common itineraries where you have a Southwest leg and an AirTran leg. We'll have it published with the Southwest code. If you went to AirTran.com, they would also have it published in an AirTran code. And we would exchange -- just the classic thing, we would exchange passengers. We would exchange bags, single itinerary, one fare, pretty straightforward stuff. We don't have classic co-chair technology in our system. Importantly, neither does AirTran. And so that's why we are leading you that way, that we're constructing that technology to enable the exchange of passengers and bags, and therefore, expect that to be in place by first half next year.

So maybe it'll operate kind of from the point of view what the customer experiences, kind of like you used to have where you go from, in my case, Kansas City to Chicago to New York, but the second leg was on ATA. That kind of an experience?

It is that exactly. And different -- because AirTran is -- they're not ATA. The technology that we used with ATA is not necessarily usable again with AirTran. But in any event, with our current reservations technology and theirs, that has to be built, and that construction is underway.

And that'll be sometime in the first half?

We're not giving you a definitive date because we're not confident enough to give you a pinpoint date yet. We want it sooner than later. And yes, sir, it should be first half.

Bob, the only thing I was going to add is the advantage we have with AirTran versus ATA is AirTran and Southwest are one. And so from a scheduling and their network and our network, we're going to be able to build better connections and pricing. So I think it'll even be superior to what we could do with ATA.

And I would assume at that point, if you decided -- I mean there's nothing that keeps you from deciding to hook a few more cities into Atlanta that maybe aren't into Atlanta or do some of those kinds of things as you move into the latter part of the first half as well?

Yes, we'll -- that's somewhat unrelated to the question, but it's at least indirectly related. But absolutely. So I think Bob may have pointed this out with his AirTran report, but AirTran does not currently serve Austin, Texas. And so one of the first cities that we're opening with Southwest Atlanta service is a nonstop to Atlanta. So we'll have 2 daily roundtrips in that market on February 12.

And then -- so then this new "connecting capability" would allow you to put obviously to sale Austin to a number of cities that you can't get to now in Southwest?

Well, yes, I think that's fair. Yes, that's fair.

We'll take our next question from Gary Chase with Barclays Capital.

I was racking my brain to try to see if I could ask a question that would get Laura to say ticket tax lapsed again.

That was pretty bad.

I just couldn't figure it out. What I wanted to ask was just a couple of things about business travel. Laura, you give us that 17% full-fare mix. I'm wondering if that was adjusted for AirTran, which I don't think there was any airline in the country that had a full-fare mix as high as yours, if you look back. So is that adjusted for AirTran? And if not, could you maybe give us a little flavor for what that might look like, say, heritage, Southwest to Southwest?

It was Southwest only, Gary. And I don't know if I have [indiscernible]. AirTran's full-fare mix for their network is very different than ours. And it's about 3% in the quarter. So I don't know that I can do the math in my head to tell you what the combined is. But if you want to look at it on a relative basis, that's where we were.

You're right, that was Southwest itself compared to Southwest itself, yes.

And what do you think is driving that? Is it the change in the way that you're pricing that has caused some trade-down out of that? I mean, if you look way back, you were in the 30s. Ops hasn't been at those levels for quite some time? Or is it more about the drive you've had to get loads up and do a better job of filling the lower-fare buckets?

I think it's many things, Gary. I mean Gary, and Gary can join in, too. But certainly, if you go back in history, we just had a load factor in the mid-60s. We're in 80. And so you know that the incremental traffic is being driven by the discretionary travelers. So some of that's arithmetic. Certainly, we've raised fares a lot. And even in the old days, when you raise fares, you do see -- we've always seen full-fare go down. So that's not surprising with the number of fare increases we've had. And then finally, bookings, we have a lot of evidence that shows a lot of business travelers book in advance today. So not everybody buys a full-fare last-minute ticket. So I think there's a lot of pieces, but what we still would like to do is check business travelers from a lot of other perspective, our corporate sales, just looking at the type of bookings. And we come back before Friday. So all of those other indications show that business travel has been pretty stable, but we're probably seeing a shift of more of it into non-walk-up tickets.

The only things -- while Laura was talking, I was trying to think here, and the only things that I might add, I don't think I can add much to what she's already nailed here, but we used to be a short-haul network. And the short-haul routes were business routes. Now we have a lot of long-haul routes with low frequency. And in some ways, one could argue that they're more leisure oriented. We might debate that a bit. But in any event, we definitely see a different full-fare mix on longs compared to the shorts. I think the most compelling point Laura has already made, which is the absolute number of full-fare passengers is closer to what you've seen historically. It's just that we've got significantly higher load factors today. And certainly, over the last 5 years, those have been driven more by connecting passengers being added on. The other thing that's happened is we have added more precision, you might say, in our revenue management and more fare points. And so there are relatively nondiscounted discount fares, if you know what I mean. So they may be less than a full-fare, but they are higher than what you might have in your mind as a 3-week advance fares. So that's different today versus years ago, too. But in fact, we sort of chuckled about this. We're probably the only airline that talks about full-fare mix. And we sort of question the importance of it. We pay attention to it, but we look at our business in a lot different ways other than just fretting over the full-fare mix.

And just to go from 12 to 13 RASM growth in September to mid-singles in October, is there just something that we don't -- I mean, when you said things were -- the strength continues, so something we don't understand about normal seasonality? Or was September just uniquely solid?

Well, I think that it may take us a while to funnel our knowledge to get to a more precise conclusion, too. But one thing, we've introduced some new techniques along the way, as you well know. You can see the result, if nothing else in our load factor, over the last 4 years. We have techniques that have been added on in the last 12 months that seem to be driving more business and available periods. So one way of saying that is if you're already full in July, this new technique that we're using to fill up airplanes may not add much. But in a softer month like September, we were pleasantly surprised at how good -- and that's why Laura specifically singled out Revenue Management, because over time, we can see the very significant benefits that some of the new techniques that they're using are bringing. October is just -- it has less opportunity, we think, to fill in some of those gaps. But it's all part of our argument to you that we're winning more share. Bags Fly Free is a fundamental component of that. We are smoothing out what we think as some of the seasonality in our business, and those are the primary drivers that we're finding. So we're having -- we think that now that we understand this better, we'll be able to set some better expectations internally, as well as with you all. But we're giving you a very fair outlook for October, obviously, we're 20 days into it, and know pretty much where we're going to be and feel like that is the explanation.

Yes. And October is our toughest comp as a quarter as well. But Gary's right, September was extremely strong. We're a bit off sequentially, but not terribly. So we think October is really a continuation of what we've seen in September.

And I'll just give a little commercial here for our Southwest revenue team overall. We've made dramatic progress in 4 to 5 years' time. But we know that we are lacking some tools that will bring more value. And we're very excited about constructing those, implementing those and just have a lot of confidence that they are going to bring very significant value over the next several years as we bring them online.

We'll take our next question from Kevin Crissey with UBS.

Decent time, and we'll go back over the end of that. You were talking about the tougher comp, Laura. I don't know if you've provided it. Maybe you have , and I've missed it. The monthly kind of RASM numbers and stuff, I just want to understand what capacity it looks like by month as we go forward here. And then maybe what you -- how those comps progress?

Yes. So for 4Q, October, I think, ASM is roughly about 4% on a combined basis. And we had our October last year, PRASM was up 12.5%. And then November and December, ASMs are going to be flat versus last year on a combined basis. Last November, PRASM was up 7%. In December, we were up 5%.

And those were all combined numbers?

I believe they were, yes.

Yes, absolutely.

So importantly, your comps? Okay.

Yes.

Okay, terrific. I thought that might be the case, but I wasn't sure. Maybe what -- you're talking about the impact of -- if you could talk about if there's any impact overall of maybe tighter credit conditions, how that might favor you or disadvantage you to the extent that the banking lending is more difficult over time?

From a competitive standpoint, Kevin, or...

Yes, just in general, what it means that you see German, French banks maybe doing less lending or what it maybe means structurally, if anything. Maybe it has no impact on you, guys.

Well, certainly, we've done a lot of -- we have a lot of good European bank partners, but we've had so many access -- so much access to capital typically used. But the U.S. public debt market has been the vast majority of the financing that we've done. So at this point, based on what we know, I'd say it's negligible.

And your financing requirements for next year are...

Are modest, if any at all. So that's...

And we'll take our next question from Bill Greene with Morgan Stanley.

Gary, there were some press reports recently about you suggesting there was a lot more revenue opportunity in Atlanta, I think, than you first perceived. I don't believe you changed the full synergy numbers. Correct me if that's wrong. But the other question is, is that how do you ensure that revenue opportunity you're addressing and you're seeing doesn't actually end up getting competed away? Because I think we see that time and time again. So how are you thinking about how you're going to preserve that value for Southwest?

So Bill, I'm glad you mentioned that. Yes, I'd object to the characterization in that article. So our best estimate, interestingly enough, has not changed. And so we think that we're pretty neutral on the cost side. We're seeing some successes, as Laura reported, on the cost side earlier. Our view of the revenue synergies is still a future. So we still have to realize those. But we are constantly updating our projections there and feel pretty comfortable that the net of it is a $400 million improvement to the combined -- you have to combine AirTran into Southwest to realize that improvement, but it would be coming from the AirTran component of the route structure. So yes, we're very comfortable with that. Just doing math, it would suggest that maybe the potential was higher than that, and that was the point I was trying to make about the reasonableness that we could achieve $400 million. The $400 million is ambitious, and it's something that we think is doable. So with respect to your second question, it was -- is it really talking about the risk and integration that we execute? Is that really the...

I guess that we just see time and time again, airlines end up competing away an awful lot of the revenue synergies or the total synergies that they sort of perceive, and so it gets hard to tell where they are. And look at the competitive industry, so I think we all sort of understand that. And I was just trying to figure out how you think about, well, this is how you're going to preserve it and not end up just competing it away. And maybe that's the answer to win share? I don't know.

Well, I think that -- how can I answer your question here. I think that it's really -- so if you'll forgive me for perhaps stating the obvious. Our earnings are not where they need to be. The rest of the industry, earnings have not been where they need to be forever. So as we look out onto the fourth quarter as an example, domestic capacity is coming down year-over-year. Capacity in our markets is coming down. And so if anything, I would argue to you that the competitive environment actually supports us pursuing our strategic goals here over the next several years. So we've committed to you all that we're determined to hit our strategic goals. We all understand that other things happen, whether it's higher fuel prices, more or less competition, but it seems to me that I could argue to you that the competitive environment is pretty good. We had a very strong route network on a combined basis. We have a number of opportunities to optimize the flight schedule, which gives us just a ton of flexibility. We're trying to build the airline such that we can grow it, but we'll only grow it if the profits and the returns are there. So that's -- I feel very confident about the synergies as long as we execute. So I don't think the macro environment will work against us in this scenario.

That makes sense. Gary, you were vocal on one other thing in some of the media, and that is just about all these proposals that keep coming back to tax airline tickets more. And I don't know if, look, it's not going through yet, but I look at this and I say, this is potentially -- could transform your business model in a much more significant way because if you put on ticket taxes of that magnitude, I don't know how the stimulation effect works anymore. So is that too aggressive of an interpretation of what's being proposed here? Or how do you think about these taxes?

Well, it is -- well, first of all, we at Southwest are very supportive of the trade association, the ATA's lead on this. We are already overtaxed. We are already overregulated, which comes in at an enormous cost. Every year, we get more regulations. And of course, we've had to redirect technology resources this year to comply with yet another DOT regulation, which is the so-called full-fare advertising rule. That's just one example. Then you layer on top of that taxes, which have nothing to do with aviation. Much of the proceeds of the taxes were proposed to go to the general fund to reduce the deficit. So if we weren't paying our fair share, I guess I might be more patriotic about that thought. The idea is to make America more competitive so that America can grow its economy, so that America can generate more jobs. The way that we do that in the airline business is we keep costs low. So we make more fares affordable for people so more people can afford to fly, which clearly is what you are asking about. Absolutely, Bill, if our costs go up, fares will be higher. More people will not fly, will not travel. There are 14 million jobs in travel and tourism. There is an enormous opportunity to grow it. And I guess the final argument I would make is that air travel in the United States is down compared to where it was a decade ago. Think of how many jobs there would be if it was growing like it should have over the past decade. So my focus is on creating jobs and certainly jobs at Southwest Airlines. Are you a little overly dramatic? I think, in relative terms, that the departure tax, Laura, I think is about $140 million a year impact to Southwest Airlines in terms of the cost increase. The tripling of the TSA fee would obviously be -- would be a lot more than that even. But in fairness, we're struggling with high fuel cost. I think, Laura, a fuel bill is probably up. If it was up $400 million in the third quarter, just say it's up x4, it's up $1.6 billion.

Yes, [indiscernible].

So is $140 million not important therefore? I think they actually makes it more important because we're already struggling with such high fuel costs that could go even higher. And so yes, we have an impassioned argument to not only not add more taxes, but we need to relieve some of the burden on the industry so that we can have more people affording to fly.

And we'll go next to the Duane Pfennigwerth with Evercore Partners.

Most of my questions have been asked. Just wondering if you could put some numbers to the competitive environment. Specifically, as you look at the world, how do you see capacity down in the fourth quarter in your markets and relative to the third quarter?

Duane, give me just a minute and I'll get you that answer. Do you have another question?

Yes. I was going to take a stab if you had any early thoughts on 2012 ex-fuel costs. And then we've got potential cost synergies, potential cost dis-synergies? I assume we should still be assuming dis-synergies in 2012 from a cost perspective. So given flat capacity, where do you see sort of cost inflation next year?

Well, it's a little early. So we'll probably need to finish all of our planning for next year and making adjustments as we see that we need to. I think there'll be some cost inflation next year, but we're determined to keep it modest.

Yes. Okay. And I agree with Gary. Preliminary 2012, cost inflation in most categories. On the capacity front, Duane, in the fourth quarter, total seats in our direct markets are expected to be down a little over 2% in the fourth quarter. If you include indirect markets, down 1.6%. For the whole domestic markets, seats are down 2%. Compared to third quarter, seats were up almost 2% in our direct market in the 3Q. So there, it's a favorable comparison from 3Q to 4Q.

And ladies and gentlemen, we have time for one final question today. And that question does come from Glenn Engel with BoA Merrill Lynch.

Two questions, please. One, CapEx, can go over it again for 2011 and '12. And two, I'm pretty sure that, that year, that's coming to do in the next couple of quarters as pretty high costs. So how much will end up producing your interest expense when you pay those both off?

I'll answer the second question first. So the $400 million that comes due at the end of December was 10.5%. So that's $42 million, Glenn. And we get a full year of that next year. The $385 million that comes due on March 1, I can't remember if it was at a 6% rate. I'm trying to do it off of memory. So roughly, say, $24 million on a full year basis, but you've got 10 months of it. So we've got some significant benefit coming next year on our -- below the line expenses -- reductions there. And your first question, I've already forgotten.

CapEx.

'11 and '12.

Oh, yes, yes. So again, we're still preliminary on our 2012 plan. I think what I shared this morning was $1.3 billion to $1.4 billion is what we're currently expecting. That does include some capital costs associated with aircraft conversions on the AirTran fleet. But it's primarily the 28 new Boeing 737-800 deliveries, as well as progress payments on our 2013 and beyond payments.

And this year is about 900?

This year is in $800 million to $900 million range, yes.

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

Thank you, Tom. As always, Ryan and I are available after the call if you have any additional questions. Thank you again for joining us, and have a great day.

And ladies and gentlemen, we will now begin our media portion of today's call. I'd like to first introduce Ms. Ginger Hardage, Senior Vice President, Culture and Communications.

Right. Thanks, Tom, and thanks for everybody who's been on the call. We know you have lots of questions. So let's move right on to the media portion. And if you would remind everyone of the technique to line up for questions. Thank you.

[Operator Instructions] We'll now begin our first question from Terry Maxon with The Dallas Morning News.

Let me follow up on the question about co-chairing or about being able to interconnect. Will this include the ability for Southwest passengers to connect on the international flights of AirTran?

Yes, absolutely.

So certainly not from Dallas Love Field because I think there's restriction on international service connecting or otherwise out of Love Field. But any other Southwest city if you're connecting to AirTran to an international fight, you can do that whenever you get this worked out?

Gary, you can do Love Field as well. We just can't fly nonstop when the Wright Amendment is repealed or relaxed in 2014, but we can still have international itineraries at Love.

And we'll take our next question from Lori Ranson with Airline Business.

Yes. I was just wondering if you could elaborate a little bit on your evaluation of the Sky Interior. It sounds like you might consider retrofitting your fleet with the new interior?

Yes, ma'am. That is exactly correct. We are very enthused about the Sky Interior. It is -- we have a separate fleet type now in the 800. So we do have a unique interior that we have purchased for it. But it does allow us the opportunity to think about what elements of the Sky Interior we might want to consider for either prospective deliveries on the rest of our fleet, like the -- with the 700s, or even retrofitting. So we have made some decisions there and are just not ready to share those yet. But absolutely, that -- I would concede that, that has been a consideration.

And we'll go next to Andy Compart with Aviation Week.

Gary, I just want to clear up some sort of seeing the mixed signals regarding the 717 early September. Gary, you were at the Boyd Group conference, and you seem to suggest you might be able to get rid of some of them earlier than the leases expire by some discussions you were having with Boeing. But then you had Laura speak at the Dahlman Rose conference and it seemed to suggest that wasn't in the cards. So just trying to find out exactly what is the status with the 717? And is there any possibility of working out some deal before the leases start expiring?

Well, I will try to clear that up, and Laura is sitting right here beside me. If she disagrees, she can clear it up further. But no, I think it's very straightforward. We don't see a need to have a different airplane in our fleet like the 717 as compared to the 737. Said a different way, the 717 doesn't bring any unique capabilities for us that would justify having the ongoing complexity by having a second fleet type. So that's just a fact. Then the question becomes, well, what are we going to do about that? So I think that if we had an opportunity that was affordable for us to accelerate the retirement, if you will, of the 717s and replace them with 737s, that would be fantastic. And I think the point that Laura made was very pragmatic, which is, well, that's all true. But right now, we don't have an alternative, and they are under lease for quite some time. So the odds are you're going to see those airplanes operated by Southwest for quite some time. I don't see there's any confusion there at all. But if, in fact, if she and I do find an opportunity to retire them early, we'll give it a very good look because we would rather have the 737 just for the fleet commonality.

Yes, and I think there's 88 of them. So from a practical standpoint, it's just -- it will take a while to do that so.

Right.

And the leases are 2018 and 2024, right, their expiration?

That's correct.

But are you talking to Boeing right now? Is there any indication you might have an option to get rid before?

Absolutely. We're talking to Boeing about a whole variety of things, and that would be one. But there's nothing for us to report to you that says that we have any different plan right now other than what you know that we've inherited from AirTran. It's a good airplane. There's nothing wrong with the airplane. It's just as I said, it just doesn't bring anything beyond what a 737 could do for us, and especially in a higher fuel cost environment. A lot's changed this year compared to where we hope to be in 2010 with fuel prices, and that certainly has some bearing in the way we're thinking about utilizing the 717.

We'll take our next question from David Koenig with The Associated Press.

I have a question about demand, and I guess, fares. And Laura touched on this a little bit at on the analyst section of the call. But you've got this confusing situation now where you've both raised prices and have been running a fare sale this week. And how should we think about that? Does that mean that you're seeing enough demand to raise prices for the peak weeks but you're worried about demand for the rest of the fall and winter or what?

I don't think it's confusing. Every year, we raise fares. And we try to do that at a -- in a frequent pace and at a modest rate. And every year, we also have sales. So the -- so in other words, there's nothing inconsistent with that. We have an array of fares in our fare structure. We have some customers who are extremely price sensitive and will only fly at a certain fare level, and we want to get at least some of those folks on board our airplanes. And we use that fare sales as a technique. What is a little different, in fairness to your question, though, right now, is that we are -- it's probably a little out of our historic character to be launching a fare sale right now seasonally. And that is simply, and I think Laura tried to speak to this earlier, the bookings that we have in place are strong. But we've admitted that we're very cautious, and we just don't want to take any chances in this macroeconomic environment and would rather err on the side of getting more bookings than less. So it is a reflection of that nervousness, if you will, about the overall economy. Again, you look at our results, we had very strong revenue results in the third quarter. We are seeing a continuation of that thus far in October. Bookings look strong. So there's no sense that the economy is weakening by our business. We're just not taking any chances.

And we have time for one more question, and it is a follow-up question. We'll take our last question from Terry Maxon with The Dallas Morning News.

What is your comments or discussions with Boeing on the 737 MAX? Do you have any in your order book yet?

If we did, you would know it, pal. But we are -- no. So the straight answer is no. We don't have any orders yet. We are very desirous of the next-generation engine technology, and therefore, airplane technology. We are absolutely talking to Boeing about that. And we have been talking to Boeing, as you know, Terry, for the past 6 years. So we're right in the midst of -- because Boeing, of course, just made a decision late summer to go forward with the 737 MAX. And so we are just now being briefed on what it does, what it doesn't do, and it's just too early to give you an answer on either our evaluation of that or what we might do.

Are you concerned that you will be too far back in line to get the 737 MAX behind other customers?

No.

I absolutely not. I would expect that we -- again, this is a long, many years' discussion that we have had with Boeing Company. And I am sure that they will meet our needs with respect to delivery positions.

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

Well, great. Thank you, guys, for being on the call today. You know that if you need any additional follow-up, to call (214) 792-4847, and we will get back to you. Thanks so much for being on the call today. Thank you, Tom. And that concludes the call.

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