阿拉斯加航空 (ALK) 2002 Q2 法說會逐字稿

Good afternoon.

I will be your conference facilitator today.

At this time I would like to welcome everyone to the Alaska Air Group Second Quarter Conference Call.

After the speakers remarks there will be a question and answer session.

If you like to ask a question at this time, please press star and then one on the telephone keypad.

Now I would like to introduce Mr. John Kelly, President and Chief Executive Officer of Alaska Air Group, and Mr. Brad Tilden, Chief Financial Officer of Alaska Air Group.

Gentlemen, you may begin.

Hi, everyone.

I before we get started I would like to mention we have a number of folks in the room.

Bill Ayer, the CEO of Alaska Airlines, Jeff Pinneo, CEO of Horizon, and John Kelly, our Chairman and CEO.

We would like to remind you this call may contain forward-looking statements.

You can refer to our 10-K on additional risk factors affecting our business.

As I am sure you have seen before we reported a net loss of 4 and a half million dollars, versus a net income of 3.9 million or 15 cents per share last year.

Operating revenues were 574.1 million.

Operating expenses were 589.9 million up 2% from last year.

Operating loss of 6.9 million.

Looking at results by company, Alaska Airlines had a pretax log of 2.7 million, 11.4 million lower than the 8 million than the pretax profit they had last year.

And expenses were up by 4.2%.

And revenues increased by 5.6 million or 1.2%.

Horizon's revenues declined by 10.8 million or 9.5 - and operating costs declined by 6 and a half percent.

Separately, we announced today we will be changing our accounting policies regarding to the accounting for leased aircraft.

These changes are being implemented following by an independent auditors.

I will talk about it later in the call.

At this point I would like to turn the call over to John Kelly, Chairman and CEO.

Thanks, Brad.

All things considered we are pleased with our relative results.

Notice I say relative results because we are never pleased with a loss.

But given other industry results we certainly can't complain with a 4.5 million dollar loss for the quarter.

For comparison, industry revenues for the quarter are down almost 20%, and Alaska, our revenues were essentially flat.

Quite a differential.

On the cost side we are at the beginning of a long-term plan.

But we are seeing encouraging signs that we will talk about as we go through the call.

Last quarter I talked about our return to 100% of our pre-9/11 schedule as of February 10th.

Now we have been able to build on to that with some very successful growth as both Alaska and Horizon.

Alaska capacity was up 5.2 and RPMs were up 2.5%.

For example, in June, our system average load factor was 71.3%, but Seattle, Denver came in at 81.5.

And Seattle Boston did even better at 85.9.

That is just simply amazing.

We will have Bill get into specifics on the other new markets in just a few minutes.

Very, very encouraging.

At Horizon capacity was up 5.5%, and RPMs were up 4.6%.

Like Alaska, they did well in the startup markets.

They have seen excellent results in San Jose and Tucson markets.

We are also pleased that Alaska and Horizon were able to record a pretax profit for the month of June.

Alaska received a 15 million pretax profit.

Unfortunately, of course, the profits from our summer season won't be able to get us up to a net profit for the year.

But at least we are making steady progress as we move through these busy summer months.

Like most carriers the biggest problem for our two companies continues to be yield.

There simply aren't as many passengers buying full coach tickets.

I must say, Alaska's numbers continue to be less depressed than the industry average.

We saw yield declines of 2.7%, compared to industry average of 10.4% and as I said earlier, with our growth, our passenger revenue is essentially flat while the industry saw a 19.8% decline.

Horizon with its shorter (indiscernible) markets had a more pronounced decline with 11.7% lower in yield and 7.7% lower in passenger revenue than last year's second quarter.

The good news at Horizon though was their significantly lower cost per available seat mile down 11.3% from the prior year.

That's a big change in their (indiscernible).

Actually I was encouraged to see the cost for both carriers anymore in (indiscernible) indicating we are having good success setting plans and managing to them.

As we move forward we will continue to do all possible at boast carriers to manage cost.

We set up specific targets tired to each carrier's growth plan.

Brad mentioned the changes to our accounting policies.

I would like to note these changes had a negligible impact on the operating expenses for the quarter.

They don't even change the earnings per share number.

But I will let Brad get into it.

Before I turn it over to the two CEOs, I would like to note we ended the quarter with a strong cash position, again 707 million, that's up 87 million from the last quarter.

Increase includes financing of 25.5 million, and tax refund of 22 million.

Now to go through the details of both of the two companies, let me start with Bill Ayer, Alaska's CEO.

Let me start by giving you traffic and revenue numbers for the industry.

I will give you numbers for the quarter, but I have the monthly build up of the numbers if any of you would like it.

First in terms of traffic, we had our sixth consecutive month of year over year traffic growth.

RPMs increased 2.5%.

We have had year over year capacity growth when we resumed the pre-9/11 schedule -

Our yields have been much less impacted in than the rest of the industry.

Yield was off 2.7%, versus industry off 10.4.

And we have had better (indiscernible) performance for the quarter, that was down.

With our growth we have experienced much better passenger revenue performance up just fractionally for the quarter, three-tenths of a percent.

Our market share performance remains solid due to strong customer loyalty.

And our route system with the state of Alaska operation and greater reliance on leisure versus business destinations has been less impacted by the economy.

Overall RPMs were up 2.5%.

We continue to see softness in southern California and the bay area with traffic declines of 6.2% and 8.5% respectively.

John mentioned some of the good results we saw in June in the Seattle Denver and Seattle Boston markets.

In the second quarter our Seattle to Washington Reagan flights operated at 79.0% load factor.

Seattle Dulles was lower at 66.7.

Seattle Boston had a load factor of 75.2 for the quarter.

And Denver had load for 75.1.

So that is very good indicator for the future because they started in April.

Looking ahead the advanced bookings for July look pretty good.

We expect passenger traffic to be up year over year.

But traffic will be down just slightly due to the capacity increase.

August and September appear just somewhat softer than a year ago in terms of load factor build.

We believe that that relative softness is due to more aggressive fair discounting in California last year versus this year, as well as the slower economy.

Advanced bookings for the fall look okay so far.

But with today's closer bookings, future loads are more difficult to predict.

We are looking at promotional alternatives for the slower fourth quarter.

We implemented a new yield management system at the end of April.

We are seeing positive results from the number of expanded booking classes going from 9 to 15.

And total passenger revenue was do you know just fractionally for the quarter.

We saw some yield gains in the upper inventory buckets.

And I think we are getting better control of inventory with the new system.

Freight and mail revenues decreased 1.4 million or about 6 and a half percent compared to last year.

And the decrease there was due to lower volumes, caused primarily by security restrictions implemented after September 11th as well as yield declines.

Early in the quarter we received relief from some restrictions to carry freight and mail in the state of Alaska.

Mail volume was up 8.2%.

And while freight volume was down, we saw a small increase in June, which was the first year over year freight increase we have seen since September.

We expect to see continued recovery for freight for the remainer of the year.

Other revenues was up 53% due to good growth in the mileage plan partners.

Operations ran well in the second quarter.

And it is continuing until the end 69 summer.

Average completion rate for the quarter was flat year over year at 98%, and percentage of flights arriving within 15 minutes of their scheduled time improved significantly.

We had an time arrival rate for the quarter of 80.9%, compares to 73.4%, giving us a 7.5 improvement in on time arrivals.

Relative standing within the industry is improved a little.

We ranked sixth in April, and eighth in May on the DOT on time report.

Those are the two months that have been reported so far.

That compares to tenth last year.

We are also pleased to once again be voted the best domestic leisure carrier by a survey.

Our growth plans for 2002 have not changed much.

Our current estimates of [ASM] growth remain the same this year.

Somewhere between 8 and 9%.

But there are slight variations by quarter.

For the third quarter we expect to grow 10%.

That's the same guidance we gave the last call.

For the fourth quarter, somewhere between 17 and 18%.

I think we said 18 to 19% on the last call.

For the full year it is unchanged.

Note our full year growth would be roughly 3% if we adjusted the 2001 baseline for the scheduled reductions we made subsequent to September 11th.

We are still working on the plan for 2003.

But the current draft shows an 8% capacity growth.

Under the current delivery schedule we will take delivery of one 737-900.

Three three seven three seven seven hundreds, and three 737-900 in the early part of 2004.

We are also finalizing leases, on five thirty-seven hundreds, for delivery in 2003, and reviewing a number of other alternatives in 2003 and 2004 to accommodate a plan growth while maintaining the flexibility we need.

We currently expect to retire one MB80, four more - we plan to grow our fleet from 102, into 115 by the end of 2004.

On the cost side our [KASM] decreased by one percent.

This was helped by fuel prices as fuel were 9.9 million dollars lower than last year.

Excluding fuel our unit cost increased by 2.2%.

And it was lower than the guidance in the latest 8-K.

We had small but positive variances in a number of different parts of our business indicating we have had some success in managing our costs.

At this point I am going to ask Brad to take you through some specific line items, and talk about the work we are doing to reduce the [KASM] over the next three years.

Thanks, Bill.

I will start off looking at the expense of P and L for Alaska Airlines.

5.6 was due to increases in medical insurance and workers' compensation, and 3.7 was due to pension cost increases.

FTEs was flat, but capacity grew at 5%.

Our front line managers and supervisors continue do a terrific job of managing their areas and we are appreciative of that.

Looking forward we are looking wage and benefit increases will be up 9.5% for the third quarter, and up about 6.5% for the fourth quarter.

Aircraft maintenance costs increased 3.9 million dollars, or 12.1%.

We are going to see an increase in this area in the next couple of quarters as we continue to see more checks being done year over year.

We are projecting maintenance costs will be up almost 12% over the quarter, and 17% in the fourth quarter.

Aircraft rent was down 3.2 million or 9.1%, due to substantially lower lease rate for the four MD 80s, which we recently extended.

Depreciation was higher by 3 and a half million, or 14% as we have more owned 737900.

Travel agent commissions decreased 4 million or 22% due to commission cap we instituted November of last year.

We are beginning to see benefit from the elimination of base travel elimination we saw for this year.

For this quarter travel agency sales excluding on line sales, accounted for 51% of total sales, versus 57 in second quarter of 2001.

That went from 80% to 50% today.

Landing fees were up 5.1 million dollars, 22%, due to higher rates due to airport construction projects, and increased security and other costs resulting from the events of September 11th.

We have seen increases in all of the last couple of years, at all major airports and we expect it to continue.

Other operating costs up one and a half million dollars.

But we are happy with our progress here.

This total includes insurance which increased 7.5 million dollars over last year.

But that insurance was offset by decreases in more controllable areas such as legal expense, travel, and entertainment costs.

Looking at non-operating items.

Interest expense was a million dollar higher than last year.

Other non-operating net we had fuel hedging gains - 4.4 million related to Alaska in the second quarter.

This income is essentially the ineffective portion of our fuel hedge positions as of June 30th.

We are still 40% hedged for the third and first quarter's of this year with all of these being at 22 dollars a barrel.

I would like to talk a little more about the change in our accounting practices that we mentioned earlier.

In conjunction with that we will be restating our financial statements for the fiscal year ending December 31st, 2000, 2001, and the quarter ending March 31st, 2002.

It is important to note in this day and age in the aggregate these changes are positive and they will increase our shareholders equity by 29 million dollars.

This means profit and loss statements will be higher by 29 million dollars when restated.

With respect to leased aircraft return cost.

We would like to think of this in two different categories.

The company has had a long standing practice of capitalizing air frame and overhauls, and amortizing them over the life of the overhaul.

This policy isn't in question.

On the other hand, the company accrued for the cost of returning leased aircraft on a straight line basis over the life of the lease.

And the cost we accrued for included cash payments we expect to make, and the net look values of overhauls we would expect to be on our books at least return.

We felt this was an appropriate gap at the time, and we felt it was conservative and did a great job of allocating the cost of aircraft during the periods when the aircraft makes revenue for us.

From now on we will amortize the overall cost over the remaining lease term.

We will do this even when the remaining lease term could be short between when the overhaul is done and the plane goes back to lessor.

We will not need the lease term provision.

The company results have been restated to reduce the net worth overhauls.

The effective ever this change if you think about this economically will be to decrease the cost of operating an airplane early in the life of the lease.

This new method will decrease the cost of our cost, and increase equity, and have a modest impact on the prior period results as we state them.

We are moving from a conservative method to one that is less conservative.

We did this after discussions with the new accounting firm and deliberation.

We put in a brief paper in the investor information on our website to help you better understand the change.

If you are interested in more background we would encourage you to look at that document.

It is at www.alaskaair.com.

Go under the investor section.

You will see the document.

If you have any questions after reading that, please feel free to give us a ring and we will talk you through it.

This is an area where we have had significant disclosure in the past financial statements.

This will change as a bit as we move forward.

While we made the change we decided to change the historical policy to expense the cost of internally developed software as it was incurred.

Under the new policy the expenses will be capitalized and amortized over the software's expected life.

This will put 12 million dollars of software on our book as assets.

That compare to the 3 billion.

Looking forward, cost guidance our current projections for unit costs for the remainder of the year are as follows: Third quarter, 8.2 cents, down two and a half percent from the prior year.

And fourth quarter, 8.5 cents, down 1.7% from 2001.

That is affected by the lower flight schedules we had in the quarter of 2001.

As we have done in the past we will continue to update you with any changes in the projections through the 8-Ks we file each month.

From a long-term perspective we have started a company wide initiative to reduce our unit cost on a [KASM] exfuel basis.

We want to go from the eight five we think we will hit this year to 7.85 cents by 2005.

I would also note that 7.85 figure is an aggressive target and not a forecast.

We believe in achieving the target is crucial to the long-term growth and profitability.

Our unit cost increased significantly in the latter part of '99 and 2000.

Following our accident in January of 2000, we lowered the growth targets to make sure we were providing on the airline that the passengers have come to expect from us.

Some additional ideas in this area, the elimination of base travel agency commission will give us a head start.

It will give us a tenth of a cent [KASM] reduction.

We are hoping for another one for other ideas in the distribution arena.

We are going to move quickly to 100% electronic tickets.

We have an effort underway to make the website fully functional.

Any transaction that can be done in the reservation system can be done over the website.

Another unit cost reduction will be the expansion of 737900 flying.

Lower cost per [ASM] than other aircraft.

Increasing utilization.

And just lots of ideas.

We are in a big project planning to involve different parts of our company to see if we can make a dent in the cost structure as we move forward.

The analysis so far indicates we have significant opportunities and we are optimistic we will be able to achieve the target by 2005.

At this point I would like to turn the call over to Jeff Pinneo, CEO of Horizon air.

Good day everyone.

As we mentioned our passenger revenues were down 7.7 million dollars due to softness in business travel demands and lower yields.

But our declines in operating costs were nearly (indiscernible) the benefits we are beginning to reap from the fleet.

Our second quarter revenue mirrors the first quarter.

Business traffic levels in our two largest markets, Seattle to Portland and to Spokane were down 12% and 11%.

In Seattle to Portland market we worked to restore the value proposition of our product by introducing security express lines for passengers.

We added an innovative guarantee that pays out miles if a customer has to wait longer than five minutes in the security check line.

Positive note, we introduced four new routes.

Boise to San Diego, San Francisco to Denver, and Denver to Portland.

Boise to San Francisco has lagged that of our other new markets.

So accordingly we will be discontinuing that service on July 27th, and will introduce a third Portland Denver non-stop the following day.

The quarter ended strong for capacity and traffic.

Our revenue passenger miles threw 9.4% over the prior year.

Looking ahead to the summer we are projecting lower yields than last year.

Like Alaska we are seeing considerable demand softness for the fall but working for a range of promotional, and pricing efforts to stimulate demand in our market.

Operating costs continue to decline due to maintenance and fuel expense of the new fleet, lowered by 57% and 30% respectively.

Positive variance in these two categories alone total 13.2 million dollars for the quarter.

[ASM] basis, the fleet was 19% more fuel efficient and fuel prices were 18% lower.

Travel agency commissions were down 1 million dollars primarily due to lower revenue and higher percentage of Internet sales.

The effect of the cessation of commission to travel agencies will be more significant going forward.

Offsetting some savings was 3.1 million dollars in new war risk insurance due to 9/11 and one million in higher property taxes.

Taken as a whole total operating costs declined 7 million dollars or 6.5%.

Unit basis our [KASM] was lowered by 11.3% or 7.8% excluding fuel. 15.8 cents for the quarter.

These percent reductions track closely with the first quarter changes we reported earlier.

Looking forward, by quarter our estimates are as follows.

Q3, 15.7 cents.

And Q4, 17 cents, down 17%.

These are based on capacity growth of 17.5% in Q3, and 27% in Q4 where the base period included post-9/11 schedule reductions.

Full year capacity will grow 11%, yet were it not for the 9/11 effect on 2001, our capacity would have increased over 5% last year.

Operational front we continue to post significant improvements in all core promise categories that we define as on time, schedule reliability and baggage handling. 97.9% of our scheduled flights up from 96.6 during the same period last year.

Our on time arrival rate was 85.4%, 9.3%age point improvement.

And baggage claim rate dropped.

No changes to our fleet since the first quarter.

We continue to operate 62 aircraft, 43 of which are new generation turbo props, 14700 jets.

During the quarter, we secured commitments for financing for all new deliveries this year.

I would like to turn the call back to Brad who will update you on the group's balance sheet and capital commitment.

As John said we ended the quarter with strong cash position, seven hundred and seven million.

Total capital expenditure up to 470 million dollars.

This compares to 663 million dollars in 2001.

Of the 2002 amount the majority is represented by aircraft deliveries and we received financing commitments for all but one of those deliveries.

Adjusted debt to capitalization adjusted for operating leases is 73% as of June 30th.

Same as what it was at December 31st, and March 31st.

We believe this number continues to compare favorable to the rest of the industry.

This number has helped a minor amount, less than one percentage point by the accounting change we mentioned earlier.

Note, that's it for the balance sheet and capital structure.

I would like to turn it back over to John to address your questions.

If you would, operator, we will entertain questions.

I would like to remind everyone, press star and number one on your telephone keypad to ask a question.

Your first question comes from Helane Becker with Buckingham Research.

On the accounting change, I am not exactly sure why you are making the change.

I understand your accountants told you to do it this way.

Is there a precedent that other airlines are doing this way.

We had a lot of discussion before making this change.

Most airlines don't have this situation.

It starts with how does an airline account for an overhaul in the first place?

All of Alaska and southwest cause all to direct expenses as they incur them.

Southwest does not have a lot of leased aircrafts.

They don't have this issue to extent that Alaska does regarding leased aircrafts.

It feels like we are fairly unique in the industry in terms of comparability.

It is hard to say.

We did feel like there was a whole lot of support for our method.

We felt like GAAP was relatively unclear.

But to the extent the GAAP was there, we felt our method was appropriate under GAAP.

We felt it complied with kind of the matching principle of trying to match costs, allocate costs to the airplane's revenues.

But our accounts feel strongly and we came to agree that the new method is the appropriate application of GAAP.

Okay.

Other question is the numbers out there are pretty wide range for the third and fourth quarter.

Is there one end or the other that you feel more comfortable with?

It has been the story since 9/11.

We have close (indiscernible) visibility and not near the visibility going further out.

I think the industry has 60-something pretax per share for the third quarter.

It is in the ballpark, yeah.

As we get monthly results, if we see significant changes, we will note it.

Your next question comes from Dan MacKenzie with Salomon Smith Barney.

I am wondering if you can talk a little more about the United southwest competitive dynamic in your system?

With United schedule reductions they have been down - we have both been down in capacity up and down the west coast.

And in some markets they have been down a little more than we have.

What we have seen really is solid market share performance.

We had some particular gains, six months or so ago.

And we seem to be doing quite well on that front.

Southwest continuing obviously, fair leadership position they have up and down the coast.

That's part of where we are going with the cost work here to make sure we have a competitive cost structure to continue to offer the lowest fares in the marketplace and use the inventory system and the preference we have among loyal frequent flyers to sell up a bit.

But we need to get the costs down from where they are today.

I understand.

Wondering if you can give more color about we are seeing the market share gains on the United front.

I think the point that Bill is making in the existing markets, we have continued to do fine against them and it is situation normal.

The real key to what we have been able to accomplish is the new markets we have been able to go into.

Brand new revenue and to achieve those kinds of load factors is remarkable.

The redeployment off the west coast of few units to do the new things has been important for us.

We have been able to do it without seeing any degradation at all.

As we look forward what we need to evaluate is how fast is traffic coming back in our traditional north-south markets.

And how much capacity do we need to add back to accommodate demand while maintaining high market share we have.

And how much opportunity if we don't see demand rebuilding quickly, how much opportunity do we have to do new things with the deliveries coming.

That's the evaluation we are doing right now.

Okay.

Great.

Your next question comes from Peter Jacobs with Ragen Mackenzie.

Could you give us, Brad, an update where you see fuel prices currently?

I haven't actually seen an update in the last couple of days.

The last I saw we were in the low 80s.

But that's - (indiscernible).

Including the hedge?

Yes.

And secondly, with that 150 million dollar credit line that you drew down, it really doesn't seem that you need to be carrying that.

And so would there be any plans here over the next couple of quarters to just pay that down?

It is a question we have discussed a lot, Peter.

Kind of in this market environment how much liquidity is enough.

I think we will err on the side of more liquidity is better.

Lastly, just to help me get a better perspective on your higher insurance and security costs, could you run through those?

You gave a couple of numbers during your earlier discussion about incremental increases.

But could you kind of give it to us so we can understand basically what would have been a baseline that you were paying preSeptember 11 and where you are now.

At the air group level we are paying roughly 15 million dollars on an annual basis prior to 9/11.

Depending on exactly what our whole values turned out to be, and traffic turns out to be, we are in the low 50s now on an annual basis. 52 to 54 million dollars.

More than 25 million, something like that, is standard surcharges that every airline is paying right now.

A nickel for per whole value.

Going from 15 million to 50 million.

Maybe a little higher. 53, 54 is a better estimate.

What about in security costs and how has that been allocated and how has it been going with the TSA.

That is a more difficult question to answer.

We can pull information together.

The problem with security, it shows up everywhere.

We are paying for higher security in catering.

On the Alaska side it is 3 or 4 million dollars a year.

Higher security through airport costs.

It is difficult to know the full effect there.

I think what passenger screening, ultimately should be held at the 2000 level or basically at the 2000 level.

It should not be higher.

But I guess we would not want to leave anyone with the impression that security costs will be lower.

When we think about the impact through all of the different parts of our business that won't be the case.

That's all I have.

Your next question comes from Chris Kennedy with Credit Suisse First Boston.

Thank you.

What's your business/leisure fare mix?

You know we look at the buckets on that and what we have seen is a move - the good of the top three (indiscernible) comparison is complicated because we went to an expanded number of buckets.

If we look at the top three inventory buckets, we are seeing 14% travel occurring in the buckets versus 16% a year ago.

And if we expand to the top six buckets we are at 31% versus 37% a year ago.

Those are kind of the relative numbers.

And if you just talk business or leisure, I think it is difficult to say because a lot of business travelers out there that really disguise themselves as leisure travelers because they look in advance and they look like someone traveling on vacation.

When you look at the fare buckets and where we are at on yield that's the bottom line.

That's volume not revenue?

Correct.

And then, hate to beat a dead horse.

Market share gains.

I believe in previous quarters you have given what your share gains have been.

I can give you a couple of examples.

In the LA - this is for May I think.

Just May travel agency data.

And it is quite lows.

LA to Seattle we are down 2.7 points, united up 3.7.

LA to Portland we are up and united is down 2.1.

San Francisco kiss coto Portland, we are up one and a half, and they are down one and a half.

No particular trend.

But we have a high level of share and we are maintaining what we have had.

And we have done that as we said earlier by reducing some capacity selectively and reallocating airplanes to do new things and bring in new network revenue.

I would like to remind everyone if you would like to ask a question, press star and then the number one on your keypad.

Your next question comes from Glen [Ingle] with Goldman Sachs.

Good morning.

Congratulations.

You said you would share with us the monthly Alaska numbers because it seemed like the June month wasn't as strong as you first thought.

Yeah.

Are you looking for [RASM] or yield? [RASM] we had April was down 7.5.

Interstate was twelve eight.

May [RASM] was down 3.6.

June we were down 3 (indiscernible) versus industry 9.6.

When you look at new longer haul routes is the business constitution any more or less than the traditional system?

Yeah, it appears to be.

We haven't done an in-depth analysis of it.

It appears to be - the analysis we did going into it indicated that that would be the source of higher yields.

Certainly in the summertime we have got a lot of vacation travelers out there in all of the markets.

They are strong summer markets with seasonality.

You are saying the new markets have better business components than the traditional ones?

Yes.

Absolutely.

Finally the Horizon numbers, if I remember correctly last year you had some revenue from the manufacturer sort of inflating the number.

Can you say how the numbers would have looked excluding last year's gains?

Yeah.

Sure.

We have Rudy Smith, our Vice President of finance here.

Rudy.

I don't view that as inflating.

It was offsetting costs we had incurred that were real costs.

They were making whole what we should have had to start with.

Rudy, do you have it?

Five million last year a little more than this year, and year point on (indiscernible) covering cost until we would ordinarily - we have already incurred for fuel and other -

5 million last year, and a little less than that this year in offsets for the quarter.

About if you were looking at Horizon's ability to fill planes (indiscernible) they seem to be doing okay?

Better than that number looks.

Did you say with yield?

I am saying the [RASM] declined - I know you had extra costs with that.

And you deserve to get paid back.

But if you are looking at the revenue performance of Horizon, it is better than it seems to look.

Exactly.

Passenger is better than [RASM] performance.

At this time there are no further questions.

Gentlemen, are there any closing remarks.

Thank you for joining us with our second quarter results.

We look forward to later this fall and reporting on what we hope to be a good third quarter.

And we will talk to you later.

Thanks.

This concludes today's Alaska Air Group's second quarter 2002 conference call.

You may now disconnect.