阿拉斯加航空 (ALK) 2002 Q3 法說會逐字稿

Good afternoon.

My name is and I will be your conference facilitator.

At this time I would like to welcome everyone to the Alaska air group third quarter earnings result conference all.

Call lines have been placed on mute to prevent any background noise.

After the speaker's remarks there will be a question and answer period.

If you would like to ask a question during this time simply press star then the number 1 on your telephone keypad.

If you would like to withdraw your question press the pound key.

Thank you.

Mr. Tilden you may begin your conference.

Thank you very much, operator.

And good afternoon to everybody.

Good morning to those on the west coast.

It's great to be talk with you again.

Before we get started I would like to mention we with us a number of folks from our two companies or three companies.

John Kelly the Chairman and CEO of Alaska Air group.

Bill Ayer Alaska Airlines CEO and Jeff Pinneo the Horizon Air CEO.

We'd like to give you our normal reminder this call may include forward-looking statements and our actual results may differ materially.

Please refer to our 10 K for additional information on risk factors affecting our business.

As I am sure you have seen we've reported a net income of the quarter for $10.6 million versus net income of $25.3 million or 95 cents per share last year.

Our operating results in 2001 were effectedly the 9/11 terrorist attacks and by the related compensation we received under the air transportation safety and systems stablization act.

If you exclude this compensation which primarily relates to 01 but does have a small effect on 02 would we have reported a profit of $10.3 million versus a profit of $7.3 million or 27 cents per share last year.

Operating revenues were $620.1 million up 5 and a half% while operating expenses were $598 million up 3.7% from last year.

We had operating income of $23.6 million this year versus operating income of $12.8 million last year.

I'd also like to make a brief comment with respect to year over year comparisons going forward.

As many you of know Alaska's outperformed the industry on many revenue metrics since 9/11.

Look at the traffic and yield together our passenger revenues were flat while the industry was down almost 20%.

As we'll talk further in a moment our revenues were up 5.7% this quarter the industry down almost 8%.

Because of these trends we've experienced over the last twelve months our year over year comps are going to be become more difficult in the month ahead.

So we can get a better sense of how we're doing on a cumulative basis since 9/11 we may compare shof our metrics going forward to 2000 figures so we'll compare them to 2000 and 2001.

Thanks.

I'd like to turn the call over to John Kelly.

Appreciate it.

I must say it's good to be back again reporting on a profitable quarter.

Particularly given the losses reported by most of the industry.

In addition it was certainly encouraging to see both of our Air Group companies that's Alaska and Horizon reporting pretax profits.

If you exclude the government compensation it seems like Alaska reported a pretax profit of $10.1 million versus $12.9 million in 2001.

Again excluding government compensation Horizon went from a $3.5 million pretax loss in 2001 to a pretax profit of $5.6 million this year.

You'll find that much of Horizon's improvement comes on substantially lower unit costs.

In fact, Horizon's unit cost excluding fuel for the third quarter was $14.8 cents that was down 15.5% from last year so a very good performance on the cost front at Horizon.

Having said all that, I should remind thaw the third quarter is when our entire system gets busy with leisure travelers and when traffic to the state of Alaska almost doubles.

Unfortunately, if you look back at the losses we had for the first two quarters of this year, and look ahead to the difficult winter months we have in the fourth quarter, it's obvious we're not going be reporting a profit for the full year.

Now that maybe put the results in the third quarter in perspective especially considering our performance versus the industries.

I thought perhaps it would be helpful to look back to our plan post 9/11.

And you'll recall that was a 5 point plan.

The first point of which was to right size capacity in our core markets here along the west coast.

We did that but we reduced less than our competitors so we've seen some nice gains in market share along the west coast.

Second part of the plan was to shift some flying to strategic new markets.

We did that in the fourth quarter you'll recall last year to Washington, D.C. out of Seattle and we also started up Los Angeles, Cancun service.

Horizon began new long haul services using their CRJ 70.

The results from both carriers in these markets have been good.

Which I recall we've talked about on our past conference calls.

The third part of the plan was to return both of the entities to a full schedule as soon as possible.

We targeted February 10th for that and accomplished that at both carriers.

Then the critical fourth point of the plan was to execute an on-going strategic road plan.

The good news is that all of our new cities are doing much better than we would have expected.

For Horizon that's meant the deployment of new CRJ and dash 8 Q 400s in existing F-28 markets.

You recall the intent at Horizon is to get rid of the F-28s and replace all of them with either CRJs or dash 8400s.

Also look at the cost-efficientsy and customer preference from the Q 400 and that's resulted in positive swings in virtually every market where they've replaced the F-28s or some cases the smaller dash 8-200.

In the CRJs they've deployed in the new markets such as Portland and San Jose to Tucson, portland to Denver, Seattle to Long Beach and Los Angeles to Medford and Eugene, have generated good load factors and reasonable yields all things considered.

Looking at Alaska the system average load factor for the third quarter was 70.5%.

But in comparison Seattle to Denver as well as Seattle to Boston, Seattle to dulles, Seattle reagan national all exceeded that system average load factor.

In fact Boston's load factor was actually three tenths of a point shy of 80%.

Back in June it hit 88%.

The load factor in Seattle Denver was almost 77% for the quarter.

So a couple real winners with both Boston and Denver.

When you look at all this new flying, this expansion flying I think there are three things that are really important from it.

The first is that we're becoming a more important airline to the customers who live on the west coast out here where we make our home.

The more we take these folks east west the better we're going to be able to do continue to take them north and south.

So one bolsters the other.

Secondly, we're establishing positions in these markets at a time when our competitors have their minds on other matters.

Our thought is that our competitive position will be much stronger coming out of this part of the cycle than it was going into it.

That looks to absolutely proving to be true.

Finally the new markets have allowed us to keep our employees on board so we didn't have an across the board furlough like most of the other carriers.

On so that was the fourth point.

The fifth and final component of our strategy was to be diligent about managing our costs but try to minimize the impact on our employees who really been responsible for our success over the years.

So as I said a minute ago you didn't see any furloughs at Alaska and only a few employees were impacted at Horizon.

As many of you know at Alaska we've embark odd a three year program to reduce our unit cost by 8 tenths to the cent or approximately 10%.

Our goal is to get our annual unit cost ex fuel down to 7.85 cents.

Our cost management program really derives from a focus on what our customers want and it's never been more clear than now that airline customers want a fair value proposition.

They want to pay a price that makes sense for the service they're receiving.

From looking at either the long term trend in yields and I would remind you that they're in the same place they were back in 1991, if you can believe that, but if you look at that long term trend or the success that we've seen with some of the startup low cost carriers, it's clear that airline customers are become much more value oriented.

At Alaska we're fortunate for two reasons.

First, Southwest is a formidable carrier and they came into our markets in 1994.

So we've had a long time now to get used to having a low fare competitor in a significant number of our markets.

And we've been successful in that kind of environment.

So we have numerous years to be involved in that and we of course have turned ourselves into a lower cost and low fare carrier also.

Secondly, we're as encouraged as we've ever been that Alaska's customers appreciate our differentiation.

Our first class cabin meals, our mileage plan, advance seat assignments, et cetera.

But even those customers are looking for a fare structure that feels fair.

We know they'll pay a premium for Alaska's service but the premium needs to be reasonable.

We know that our prices in order to make sense have to come with it the low cost structure that enables us to make a profit.

The good news is that we're well on our way to achieving our cost goals for 2002.

And we feel confident with respect to 2003.

We're looking at a number of initiatives to keep this momentum going into 2004 and 2005 but our goals are aggressive and obviously tied to our ability to continue to grow.

Looking ahead, the next few quarters continue to be looking a bit mercky for us.

Our advanced loads are reasonable but we're not seeing any signs the economies is improving and yields continue to be depressed for us as they are for the rest of the industry.

From a balance sheet perspective, we're still positioned very well with an adjusted debt to capitalization ratio of 72%.

And cash and marketable securities of $663 million.

So that's a top level view.

Now like to have Bill Ayer our President and CEO of Alaska run through some of the details of Alaska's performance and then we'll have Jeff Pinneo go through the Horizon side of the equation.

And Brad will provide running commentary in between.

Hi everybody.

Once again I'll start by giving you a recap of how our numbers compare with the industry.

And I'll give you the numbers for the quarter but I also have the monthly buildup on any of these if you would like to get to that when we have your questions.

We've seen consistent year over year traffic growth in every single month this year.

For the quarter our RPMs increased 10.4% and that compares to an industry decline of 1.1%.

We've had year over year capacity growth since February when we got back do our full schedule post 9/11.

And for the quarter we had ASMs up 11.1% versus the industry down 3.4%.

In our -- our yields have been much less impact than the rest of the industry.

And for the quarter our RPM yields are down 4.2% compared to the industry off 6.7.

And with our growth we've experienced much better passenger revenue performance for the quarter our passenger revenue is up 5.7% compared to an industry decline of 7.7%.

And importantly our market share performance remains solid.

Primarily due to strong customer loyalty and our route system with the state of Alaska operation and generally a greater reliance on leisure versus business destination.

So we've been less impacted by the economy.

Turning to some of the geography.

Overall our RPMs are up 10.4% again on an increase of 11.1 percent a lot of the increase was due to the reduced capacity of September of last year.

Even normalizing for the 9/11 impact our RPMs would have grown by 2.7% on 3.4% more ASMs.

Looking at the geography.

We saw the biggest increase in traffic in the more leisure oriented regions of our system.

And for the third quarter traffic was up by 13.1 percent in nevada. 15.2% in Mexico, and 11.9% in Canada.

We do continue to see softness in Southern California, the KBA area and in Arizona where traffic was up more modesty by 1.1% in Southern California. 3.3% in the Bay area.

And 7.3% in Arizona.

New markets continue to perform quite well.

As John mentioned in the third quarter our Seattle to Washington reagan flights operated at 71.4% load factor and Seattle to Dulles at 71.7%.

And we achieved these load factors even with an additional Seattle Dulles route trip which brings our total Seattle to Washington, D.C. both airports daily service to three round trips.

Seattle Boston had a load factor of 73.7%.

Which for the summertime operated with our 7397 airplane.

Seattle Denver 76.7%.

Which again is quite good considering we just started both of these routes in April .

We continue to execute our strategy to strengthen our Seattle base and we've announced two new services from Seattle.

First is Seattle to Newark which starts next Monday, October 28.

The second is Seattle to Miami which starts November 21st.

And the new flying here will be accomplished similarly as the past by shifting a small amount of capacity from existing west coast markets.

Where the traffic and fare levels have continued to be depreesed due to the slow economy.

So far the advanced bookings are looking good.

Advanced gookings for the -- bookings for the system in November and December are looking okay.

Of course there's a bit after comparison difference on a year over year basis with the end of the Thanksgiving holiday falling into December this year.

But we are having to discount a lot in order to motivate traffic.

Our holiday bookings appear to be tracking with capacity growth and forecast load factors for the hom days look to be close to where they were in year 2000.

On the yield side we see the need for continued discounting to stimulate demand and we have no sign of the economy recovering so we expect yields to continue along their current trend.

Freight and mail revenues were below last year by 1.1 million or a little over 5%.

Freight revenues increased modestly while mail revenues declined.

Yields for both freight and mail were down compared to last year.

In 'other revenues increased $5.4 million or a little over 30% due to continued growth in the revenue received from our mileage plan partners.

Operationally we continue to run a good airline during the busy summertime.

The average completion rate for the quarter was 98.5% which is right on our goal.

And that was even up from where we were on the second quarter.

Our percentage of flights arriving within 15 minutes of schedule our on time performance continues to improve.

We had an ontime arrival rate for the quarter of 81.3% and that compares with 73.1% last year and 8.2 point improvement.

Unfortunately our relative standing within the industry hasn't improved much.

Our DOT on time ranking is still toward the bottom of the list.

Other carriers are reporting very, very high on time performance numbers due to I think industry capacity cutbacks you know consequently less air space and airport congestion at the hubs and also other carriers have additional operational spare aircraft to boost their on time performance and reliability.

We were number two in the industry for fewest mishandled bags and main taked our number one place for the year here to day.

That's continues a trend we've seen for the last couple years.

Really good baggage performance.

Looking ahead our growth plans for 2002 have changed I think just slightly from what we gave you last quarter on the call.

Our current estimated ASM growth is a bit lower at 15% for the fourth quarter.

And 8% for the full year.

We have adjusted our schedule to eliminate some non-peak flying due to continued soft demand.

Our plan growth is now 15% for the fourth quarter, I think we said last 17 to 18% time we talked. 8% now for the full year.

I think that's 8 to 9% was the guidance we gave last call.

As I mentioned last time our full growth our full year growth would be roughly 3% if we adjusted the 2001 based line for the schedule reductions we made after 9/11.

We're still working on our plan for 2003 but the current draft of that operating plan reflects capacity growth of somewhere between 6 and 7%.

We told you 8% on the last call.

And that growth will come from a couple things.

One is the annualization of the current year growth.

And secondly some added frequency.

Added frequency in our newer markets as well as some modest frequency add backs in our west coast markets.

Maybe another new city fare in 2003.

We recently applied for nonstop authority from the DOT for Washington reagan to Los Angeles using a long haul slot that has been given back by national airlines.

It's highly covetted slot obviously with most all thefl majors filing applications in the proceeding.

And we expect DOT to make a decision by the end of the year.

We're still evaluating our current ASM growth plan for 2003 is 6% growth first two quarters and 8% growth in the third and fourth quarters next year.

Terms of the fleet, we took delivery of one 737900 last month and retired one MD-80.

Looking ahead our plans include delivery of four 737-700s and five 737-900s all by the middle part of 2003.

And up to two additional 737-700s in the fourth quarter of 2003.

We expect to retire four MD 80s next year.

We currently plan to take three more 737-900s in the early part of 2004 and retire one MD-80.

So overall the current plan is to grow our fleet from 102 aircraft which we have today to as many as 109 at the end of 2003.

We're still evaluating our fleet plan for 2004.

I might note we have the flexibility to grow the fleet to as many as 115 aircraft by the end of 2004.

Or bring the count back down through lease returns to 105 aircraft.

Our bias obviously is for growth assuming market conditions permit.

On the cost side our CASM decreased by 4.9%.

This is decrease of our highest CASM rate last year following 9/11 as well as growth this year.

Excluding fuel our inner costs decreased 3.7% which is better than guidance last year of 2.5%.

We also had small but favorable variances in many different parts of our business.

Indicating that we're having relatively good success managing our cost overall.

So this point I am going ask Brad to take you through some of the specific line items and talk about the work we're doing to reduce our CASM over the next three years.

Thank you very much, Bill.

Look at some of the line items in the P&L, first of all wages and benefits increased $19.5 million or 11.7%.

Of this increase a little more than half due to substantial increases in benefits cost primarily our defined pension plans and health insurance.

And remainder of the increase which is again about half is due to wage increases and FDE increases.

They're each accounting for two and a half percent increases compared to the base period.

Looking forward we're estimating that wages and benefits will increase by 9% in the fourth quarter and that figure will be heavily influenced by higher benefits cost year over year.

Aircraft maintenance cost decreased by $900,000 or 2.8% due to fewer major engine repairs and overhauls.

Our heavy airplane checks and scheduled engine removals are seasonal.

That's to say we don't schedule as many of these activities for the summer months but we did have a slightly lower level of activity this year than last year.

Looking forward to the fourth quarter we expect maintenance cost to be 30% higher this year versus last due to more scheduled engine removals and three more heavy checks this year versus last.

Aircraft ramp is down akmsot 50% or 4.7% due to lower lease rates.

Depreciation expense was higher by 2.1 million or 7.7% due to software amortization, communications, and lease hold equipment, depreciation.

We also have one more owned 737-900 and one more owned 737-200 this year versus last.

Travel agent commissions decreased 4.2 million or about 26% due primarily to the elimination of the base travel agency commission that started in June of this year.

For the quarter travel agencies sales if you exclude the online agencies such as or bit and skpeed yea acted -- accounted for 45% of our sales versus 52% in third quarter last year.

So we are making headway.

If you include the online agencies agency sales were 54% of our total sales and 52.5% of our sales for September .

So I think we'll soon approach the point where direct sales exceed travel agencies sales and that will be an important benchmark for us.

Landing fees and other grants up 4.3 million or 17% due to higher rates as a result of airport construction projects ground ramps four new routes and seven percent more departure this year versus last year.

Other operating cost up by $5.5 million or 16.2% compared to last year.

This line item inclouds insurance up 8 million dollars but that was significant offset by decreases in other areas such as property taxes, legal expense, utility, supplies and passenger remum racing costs.

Looking at non-operating items my guess is you are not surprised by the variances in our interest income and interest expense accounts given what's happening with interest rate.

You can see that Alaska recognized roughly $300,000 of government compensation air group in total recognized about $500,000.

We received this amount from the government and recognize it as revenue or income and our understanding is the government has no further questions on our application for this compensation.

In the other net line you see a charge of 3 million dollars this quarter. 2.1 of which relates today fuel hedges.

Fi can I might defer a discussion of this until Jeff takes you through horizon's results then we'll talk about the balance sheet and fuel edges.

Good day everybody.

As you'll recall Horizon's year to date pretax loss at the end of the second quarter was $12.9 million and it would have taken a record breaking third quarter which is traditionally our best quarter to overcome that and give us a chance to earn money this year.

It didn't happen but we still had a strong quarter nonetheless as we exceeded our forecast in both ASMs and CASMs and earned more operating income than in any quarter than 1999.

More over our efforts to reduce the hassle factor in our short haul business travel markets have not only won us praise but more importantly to bring customers back.

Turning to revenue, our passenger revenues were $10.5 million higher than last yeart but if you add back $14.5 million of passenger revenue lost due to 9/11 we were down four and a half million year over year.

Load factors for the third quarter over the last three years have remained about the same level even though capacity was 8% greater this year than in 2000 and 18% higher than last year.

Unit revenues however are down 13 and 9% respectively due to yield erosion steaming from fundamental shifts.

Through nine months of this year 28% of our passengers flew on business fares that generated 46% of our total passenger revenue.

And that compares unfavorably to 31 and 50% respectively for the prior year.

The 5% change in revenue max was worth about $10 million.

For the quarter, yields were lower in all of our markets including our short haul business markets where in several cases we are competing with Southwest and in all cases attempting to mitigate the customers perception that flying remains a hassle.

As noted earlier we've made great headway in this area.

In the Portland Seattle shuttle for example four single largest market September business travel revenue was higher than at any time since last year.

We attribute much the reason for this to the introduction of our security express lines and our five minute guarantee for shuttle customers.

With the exception of September, load factors in each month of the quarter were slightly weaker than last year.

But triple length adjusted yields were about the same.

Our average passenger trip has grown to 318 miles up from 295 last year and 288 in 2000 all due to our new CRJs and Q 400s flying to new markets.

The new markets typically require some discount pricing for a while to generate traffic and this of course has further depressed yields.

In the pricing arena we've been encouraged by the result of several controlled experiments with fare simplification.

We've reduced the total number of fares offered by significantly lowering the last minute walkup or business fares.

In nearly every trial we've been successful in establishing new business trial and enhansing total on board revenue as a result.

Our third quarter unit cost X fuel with the lowest of any company history.

Breaking the 15 cent flesh hold on 18 more percent AFMs.

Our 14.8 cent CASM was better than the 15.7 cents we forecasted at this time last quarter.

Relative to last year, maintenance and fuel expenses were 60 and 13% lower respectively which equates to a combined $8 million cost reduction.

On an ASM basis the fleet was 19% more fuel efficient and fuel prices including hedges were 13% lower.

Because we were still spending heavily to retire the F-28s last year, depreciation was down by nearly 1.9 million dollars.

Offseting some of those new airplane benefits was of course an increase in related lease cost which grew by $4 million or 11.7% on a seat mile basis.

In addition our property tax accrual was nearly a million dollars more than the prior year due to higher aircraft valuation.

Manufacturer credits related to fleet performance which offset costs are both in otherrevenue for the quarter they were 1.6 million versus two and a half million last year.

This year's credits are tied to the operation of the F-28 and will phase out over the next six months.

Aside from fleet driven cost travel agency commissions were lower by $2 million as Horizon joined the industry in sharply cutting rates.

Offseting this was two and a half million dollars in new war risk insurance and higher ramps and landing fees.

In September 2001 we accrued 10.3 million for federal government aid as non-operating income.

Without the aid package our pretax loss last year would have been 8.9 million for the month and 3.4 for the quarter.

All acrude aid has been has been paid by the government.

With one more quarter to go we're forecasting CASM X fuel to be 16 cents for the full year or 13% last year which is about the guidance we gave you at the end of last quarter.

For the fourth quarter we're projecting it to remain 16 cents or about 23% lower than last year.

These unit rates are based on a capacity growth of 12.6% for the full year and 31.7% for the quarter.

Were it not for the 9/11 effect on 2001 our capacity growth for the full year would have been 6.6%.

For 2003 the full year affect of our 2002 deliveries coupled with the CRJs we're scheduled to take next year translate to 6% growth for the year.

Our operational performance has been a bright spot.

For the quarter it continued to be excellent thanks to profit enhancements and great execution on the part of our people.

For the quarter we operated 98.3% of our scheduled flights up from 97.9% in the seconds quarter of this year which is a more meaningful comparison due to the affects of 9/11.

Our on time arrival rate was 91.1% up from 85 oib 4% in the seconds quarter and that's arrivals within 15 minutes.

Our already low baggage claim rates dropped additional 11% from the second quarter on much higher passenger volume again right in line with Alaska's industry leading performance.

In the third quarter we added one CRJ 700 jet and retired one F-28-4000.

We currently operate 62 air crafts. 15 are 70-seat Q 400 turboprops, 28 are 37 seat Q 200 turbo props, 15 are 70 seat CRJs and four are 70 seat F 784,000s.

We'll take delivery of our sixth CRJ in nof NV and expect to retire the last F 28 in April .

In the fourth quarter of 03 we'll receive two more CRJs.

By the end of this year all aircraft will be financed as long term leases.

Now I'll turn the call back over to Brad.

I meant to provide CASM guidance for our fourth quarter when we were talking earlier.

Our guidance right now is 8.8 cents obviously a bit higher than our full year average because we have a low level of flying in the fourth quarter.

I might just also note we have been filing monthly AKs and where we update that CASM guidance regularly.

We ended the quarter with a very strong cash position $663 million versus $770 million at the end of the second quarter.

The decrease was mainly due to capex we have 26 million for Alaska and we have biannual lease payments of 25.6 million for Horizon which includes some out of period amount.

As well, we had increase in our restricted cash deposits associated with airport policies of almost $7 million.

We estimate we have positive cash flow from operations of $36 million for the quarter and that we've had positive cash flow from operations of $117 for the first nine months of '02.

With respect to that figure I might note due to seasonality of our business air traffic liability is lower at e end of the third quarter.

While that doesn't affect cash flow on a full year basis it does affect it for the third quarter.

For 2001 we're projecting capex in the range of $410 million to $430 million.

That depends on the possible exercise of aircraft options.

This compares to $663 million for 2001.

And of the 2002 amount the majority is represented by aircraft deliveries.

Finally that number excludes as many as five aircraft which we could take under operating leases nearing 03.

Our adjusted debt to capitalization ratio is 72%.

Which is the same as it was in December 31st and June 30th and which we think compares favorably with the rest of the industry.

I would like to update date you on a couple accounting changes which are affecting many companies out there and which could also affect Alaska during the fourth quarter.

First as many of you know that they issued a new pronouncement which changes the way all companies account for good wil.

Alaska has about $50 million of goodwill on our books which relate to purchases of Jet America and Horizon.

Previously we amortized this over 40 years and that resulted a charge of roughly $2 million a year.

Under the new pronouncement we test the goodwill annually for impairment and we're still completing this testing for 2002 which is the year we implement the new pronouncement.

I guess I would note if we do end up a charge it would be reflective of a cumulative affect of a accounting change and we would let you know about that shortly after we know.

Also like many employers with pension plans our plan liabilities currently exceed our plan assets.

If this situation were to remain the same through year end and I have to say we believe it will we could deal with it through either a significant cash contribution or through a charge to other comprehensive income which is a component of equity.

We're still working with our accountants on year end liability assumption and asset values are changing every day so it's difficult to estimate the act amount of a charge.

But based on information we've seen if you scale the figures for size we do believe that Alaska's charge will not be at the same level of those that many of the larger airlines will report.

Finally I'd like to update you on our fuel hedges.

We were hedged 40% for the third quarter.

We're hedged 40% for the fourth quarter.

And 35% for the each quarter of 2003.

All of these hedges are prices between 21.70 and 22.15 per barrelment relatively good prices compared to where crudes today.

Crude oil mriss increased throughout the quarter so the fair market value of our hedging contracts increased from 17.9 million at the end of last quarter to 21.6 million at the end of this quarter.

Additionally for contracts which expired during the quarter we recorded 5.8 million credit to fuel expense that.

Equated to six cents a gallon.

As I mentioned earlier we did record a 3.1 million charge at the air group level.

This is the charge to earnings, which reflect the fact we have a higher level of effectiveness with our outstanding contracts this quarter than last quarter.

Last quarters our hedges were in the money and based on the relationship between the crude oil prices and our hypothetical jet fuel cost they had a relatively high ineffective percentage.

So under accounting rules last quarter we took five and a half million dollars of the unrealized gain as income.

This quarter our hedges are still on the money but that relationship is tighter so they're considered less than effective so essentially some of that income we took last quarter we had to reverse.

That's what accounts for the 3.1 million dollar charge in other non-operating income.

We appologize for the hedge basically doing what they're suppose 20 do which is helping us reduce volatility of our fuel cost but sometimes it's kind of difficult to follow these things through our financial statements.

At this point I'd like to turn the call back to John so we can address your questions.

Thanks, Brad.

Operator, we'll take questions now.

At this time I would like to remind everyone in order to ask a question press star then the number 1 on dwrur telephone keypad.

We will pause for just a minute to compile the- Q & A roster.

Your first question comes from Ray Nidle of Blaylock and Partner.

Very good quarter guys.

Thank you.

Basically I guess general question is what do you feel that Alaska Airlines going forward fits in with the airline industry with some people saying some airlines are going to go out of business, there's others that are threatening bankruptcy and shrinkage.

How does Alaska Airlines fit into the future picture do you see?

And basically you continue your growth strategy and it looks like it's working.

Do you want to comment on that also?

Absolutely.

I think we're well positioned considering everything that's going, Ray.

I think you know first of all from a customer standpoint everything that we see people love flying Alaska Airlines.

The Seattle strategy appears to be exactly the right one and the way that we've done it by shifting capacity I think has been very smart.

The new markets are performing really well.

I mean you know we haven't had a big build up.

We started service and the folks that live in the pacific northwest are on us.

We see the share shifting.

So obviously there's no growth going on in this economy so we've been successful in shifting business away from others and filling up air and bringing in new revenue and maintaining our market share and core markets where we've been selectively reducing frequency is to fund new flying.

I think the strategy appears sound.

We're encourages to do more of it.

And that's where we have no growth numbers going forward compared to the rest of the industry that doesn't.

We have a great market place out here on the west coast with both Alaska and Horizon.

Then addition we're able to complete effectively because we went through the very, very difficult process of getting our cost down back in the 1992/1993 era for Alaska and Horizon has recently gone through much of the same thing.

So we've been able to compete very, very effectiveIly.

We now have the opportunity to build the franchise out and whether it's Alaska or Horizon, the receptivity from the customers has been nothing short of phenomenonal.

What do you think the turn around in horizon is attributed to?

Some of the changes, the growth or new equipment.

Outside of superior management, Jeff.

I think we had a lot of fundamental benefits that have come with fleet transition.

The cost benefits associated with the Q 400 and CRJ are remarkable in terms of maintenance, fuel efficiency.

And in addition to that they've allowed us to to tailor the frequency levels and service to our markets more effectively.

Anywhere we've put the Q-400 in to a market that had a high frequency level of Q-200s prior it's really turned the economics positively so.

We see that as a big contributor.

I also have to give a ton of credit to the leadership and the company on really watching our resources closely.

Great systems for managing.

We had an all time high on passengers for FTE this quarter about 126 which is about remarkable testimony.

Not only to mangle group but to the people making it happen every day.

And finally, Brad, did you give a fuel cost estimate going forward?

We're roughly 95 cents today, Ray.

We think it might be headed down in the next few days.

I think you could count on the hedges to provide about six or seven cents of benefit again.

So the raw cost about 95 at the moment and again some benefit from hedging.

Great.

Thank you, guys.

Thanks, Ray.

Our next question comes from Helen Becker of Buckingham Research.

Thank you very much, operator.

Hi gentlemen.

Hi, Elaine.

You indicated that you thought your -- you were seeing an increase in market share.

Is there any way for you to figure out how much of an -- from traffic you may have picked up from united?

I can tell you some of the numbers we have.

This is for August .

We're measuring market share on some of the west coast markets.

This is travel agencies.

We don't have the dot figures yet.

Right.

But travel agency share for August between L.A. and Seattle we gained 1.1 points of market share.

United lost 1.1.

And in Portland to L.A., we gained .7.

United lost .1.

In San Francisco portland to San Francisco we gained 1.4 versus united losing 1.5.

And in Seattle to San Francisco we gained 3.6 against United's loss of 3.7.

And we watch these things every month and you know it seems tole be holding plus or minus those sorts of numbers percent or so of growth share in our favor.

They've taken out a significant number of frequencies compared to us also, Bill.

Right.

If we look at the July schedule and compare toit what's planned for December , for example, in all of the markets where Alaska and United compete, including Denver now, both Seattle and portland to Denver, United has gone from 51 round trips a day in all those markets down to 37 with their December schedule.

So a loss of 14 round trip frequencies per day.

We have just lost -- we've gone from 37 to 36.

Again this is you know Seattle and portland to L.A.X., San Francisco and Seattle and portland to Denver.

That's obviously a part of it.

We're able to hang in there with the frequency and maintain decent load factors here and they're going the other way right now.

Great.

So I'm kind of surprised you are not really able to raise fares in some of these markets.

You know what we do is we have a sale end and we don't immediately jump on the next fare unless competition has.

And we watch our advance bookings.

And it's pretty amazing that the advanced bookings really drop quickly when we don't have the low fares out there to stimulate demand.

We keep looking at it and trying but a few days into it we say we don't have the stomach for this because we're not seeing the bookings come and we go back to discounting.

We've been doing this for many, many months now you know trying to find the opportunity, but with this economy we really haven't seen it.

Okay.

And then just to shift gears for a minute.

When you say that your hedges benefit you to around six or seven cents.

Does that mean your fuel cost for the quarter at Alaska horizon would be 89 cents?

For Alaska for the quarter would e had 82 cents roughly.

So I think they would be 87 cents.

Elaine was going off what you said the current amount was.

In other words whatever the figure is can she just reduct.

For the fourth quarter.

Yes.

That's probably the best assumption that we have.

Obviously fuel has been very volatile and we are exposed to that still so that's probably the best number for today.

But at least know where we are on a cost per barrel basis between the 21 and 22 and that gives you the spread between what you see on any given day and the market place.

Yep.

That's for 40% of our consumption.

Two other questions.

One, Brad, can you talk about the pension contribution?

I think you said you know your salaries wages and benefits were up partly due to pension.

So what will the pension expense be then for '03?

Have you determined that yet?

We have not determined that.

We are looking at I think like a lot of folks that sponsor benefit plans we're looking at our assumption for on 3 and its likely we'll have a reduction in our assumption for the expected return on plan assets.

But we're not through that analysis yet.

And haven't had a chance to talk to the board and others about it so we're probably not ready to say exactly where that might be headed.

See where the market goes also.

Well no just at the end of last year -- [inaudible].

So you were pretty close to being well you were fully funded.

So you are basically saying with the change in value in the market you'll be under funded so you are going have to make a contribution to pension expense.

That's the way it works.

It's kind of weird.

But we have had decline in asset value and continue to have service cost and interest cost so the liability has gone up.

The underfunded amount of increase.

You got a choice either take that unfunded amount as a charge to equity or if you can get enough cash into the plan so there's more assets and liabilities you end up a big asset on your liability sheet but you can avoid the equity charge.

We haven't had a chance to flush out those two assumptions and had a chance to talk with folks around here and see which route we'd want to go.

My last question is Brad sometimes you comment on the consensus estimate for the go forward period.

With the information you gave us today would you still be comfortable with that level?

You know it's very -- as John and Bill said the outlook is as murky as it's ever been.

We don't know exactly what to expect with the fourth quarter.

What we will do in the absence of better information is we're going to in the AKs that we've filed and the one we file in November we'll tell you what October 's was and the one filed in December we'll tell you what November's was so we'll keep you fully aware with the same information we have in terms of revenues.

But we would be happy to have that be the outcome.

Certainly we would.

Looking ahead that seems you know better than what one would expect given just the computation of the numbers that we've seen for yield on one hand.

You already have our cost estimates that we've placed out there.

So really hinges on yield and traffic.

Yep.

Thank you very much.

We'll see you next week.

Thanks.

Your next question comes from Kevin Murphy of Morgan Stanley.

Thank you, operator.

Hi, guys.

Hi, Kevin.

I guess first question is I guess you've changed your plans on going into Long Beach.

But irrespective of that have you seen any fall out from jet blue's expansion on the west coast?

Well we've only changed from last -- Alaska going into to having Horizon going into.

On Long Beach in particular you know we ended up with a slot issue with the airport.

And I think we've got an agreement in principal as to how we're going to resolve na going forward over the next couple years.

In the interim Horizon was able to use unused regional airline slots at Long Beach so it made sense as we want to preserve our future for future growth to have horizon begin flying that three time as day.

That's going fine.

We have very good load factors after only a couple weeks operation.

I think going back to Helen's question on price sensitivity with some of the load factors close to 80% on the new trans con routes is that because the introductory fares?

Is there some latitude to see fares go up in.

We work that every day.

We've got a pretty decent revenue management system that you know understands elasticity and we do a lot of movement over the buckets.

We got more buckets now to allocate here and we're working the equation as hard as we can but the result is what you've seen on the RPM yields and that's as good as we can do today.

We're hopeful if the economy turns up we're able to do better.

Obviously once you start getting above 70% you can be much more effective in controlling those buckets and moving people.

Demand is what it requires.

So as you move up to 75 and 80%, yeah, you've -- you should be able to extract you know the higher prices.

Actually as you increasingly go east of the Mississippi are you seeing any fallout from some of your alliance partners that maybe that might be a competitive threat?

Not at all.

We've been very up front in communicating what we're doing.

We've tried to work with our alliance partners to do coach sharing wherever possible.

Most everyone understands that an entity has to grow out of their hub.

And they all do it from their hub to other hubz and you know we're just doing much the same thing.

So I don't think it's been unexpected at all that we'd be doing this,, Bill.

And in our discussions with the other entities, you know they understand.

They sure do.

What would it take for you to seriously consider a share buy back?

That's a great question.

We've talked about that from time to time, Kevin.

I think the sense of the board last time we discussed it is that right now liquidity is very important and we need to manage for liquidity.

If we knew what was out there on the horizon.

If the economy had turned around and we were still languishing in stock price that might be one thing.

But keeping one's powder dry right now and preserving that liquidity is just very, very important.

Good luck with your Newark inaugural.

Well we'd love to see you come out there.

We're having a little function back there on Monday 28th at 8 p.m., the western New York at time's square.

If anybody from that area can make it, we'd love to have you.

If any folks in the New York area haven't received an invitation feel free to give my office a call and wield we'll make sure you get the information.

Thanks a lot.

You bet, Kevin.

Your next question comes from Michael L:innenberg of Merrill Lynch.

Hi.

Good morning.

Hi.

Just two questions here.

One on the mix side on Horizon you gave some great information about what was high yield passengers and looking at it as a percentage of your passenger totals and also percentage of revenue.

This year versus a year ago.

Would you have the same information available for Alaska?

I can give you the kind of the bucket breakdown, Mike.

We're 14% travel in the top four buckets.

Okay.

This quarter versus 19% last year.

This isn't exactly apples to apples ba us would e added buckets.

But those are what we consider to be the you know the business more walkup or short-term purchase buckets.

So 14 versus 19 a year ago.

Top six buckets 34% of travel this year versus 43% last yearment that's pretty indicative of what we're seeing here with you know business travel you are not there or you know as often as not still there but planning ahead.

And paying much lower fare.

Is that passenger numbers or percentage fare or revenue?

Passenger numbers.

Okay.

Then secondly on the mix side on some of the longer haul service, and maybe this is actually hard to actually CALC.

But how is the mix compare to some of the longer haul markets like D.C. and Boston versus the rest of the system?

I not sure we have great mix information yet.

But one of the things we do think is our average fares are lower than what some of our competitors are getting into these markets.

The markets from a profitability perspective look fine from us and that's a little bit of what Alaska brings to the table.

But from looking at the average fares you think we maybe have a little bit more leisure content than some of our competitors.

We tried to be smart about the fact we serve Dulles and Reagan.

We're obviously allocating more of the business fares to reagan and trying to hold out for more higher yield traffic last minute bookings.

Especially over the summer the leisure component going to Dulles.

And that's worked pretty well.

We've seen the load factors pretty balanced and a higher yield to Reagan versus Dulles.

My last question on the internet, maybe you gave us this information, but what percentage of revenue is booked on online on your own site and third party and maybe what that compared to a year ago?

It is 22% for the quarter versus -- what was the figure last year.

It was up 22.5 point for the quarter our website Alaska airline com which is up five points.

The other online travel agencies are 9.5% that's up 3.5 points.

Little over 30% total.

I might note a lot of these figures have monthly momentum.

I think our internet figure for September was 24.5%.

That's really moving in the right direction.

And just to clarify that is revenue; right.

Yes.

Thanks and great quarter.

Thank you, Mike.

Your next question comes from Sam of UBS Warburg.

Hi everybody.

I guess I'm getting kind of mixed signals on Alaska's pricing philosophy.

I'm trying to understand.

I know what south west pricing philosophy.

I know what America west pricing philosophy is.

I know what American's pricing philosophy is.

When I look around your system I see low fares where there's discount competition and when I price out newark to Seattle it's $1100 each way.

So how would you address that?

Well I think frankly we recognized the same opportunity to have a little more value kpopt to some of our long haul flying.

We started Washington D.C. a yaor ago at lower raits than the competition.

For the most part we've maintained that.

You think one of the things we're saying here that is going forward we recognize the market place is changing to be more value driven and in terms of our pricing philosophy maybe wae want to make a little bit of an adjustment.

Certainly the notion is that you know we're matching competition.

It's the old ad slogan here for the same price you just get more as we dealt with the low price competition up and down the west coast.

Discounting you know for the leisure traffic but also selling out where we've got more business travel and people that appreciate the added amenities.

That's been a good approach.

A longer haul market I think we have an opportunity to maybe relook at that as we expand and do more of those.

Okay so so I guess I am hearing the value proposition in your longer haul service may not be shining through yet.

I guess secondly with this may be difficult for you to comment on really, but with a large fourth quarter loss, you know seasonal loss, and given your second half results, it just appears for me to be increasingly difficult for the company to achieve profitability next year.

That's a long ways away, a lot of things can change.

Is there any way you can address that challenge?

Yeah.

I mean we have said probably that we feel like 2003 is iffy as you say there's huge we're operating close to the water line and there's huge leverage with revenues.

We are putting a tremendous amount of energy into this cost management plan.

We've got a goal of getting our unit cost down by 10% over the next three years.

We certainly and we feel confident about getting at least to our goal or '03.

That's going to help put us in the right direction.

I but I don't know the margins are so slim and there's so much uncertainty with the economy it's tough to estimate.

Right.

You would expect to see a much better third quarter next year.

By then hopefully the world will have changed enough that you can see a much better third quarter.

The real question is how much will that offset what will obviously be a loss in the first quarter and what can we do in the second quarter?

Then the always present question of the fourth rt qaer.

This fourth quarter last year's fourth quarter were extremely difficult and can you expect to see much difference next year?

You know that's a lot of murkiness out there.

But you know we just never give up.

When we sit down we establish a profit plan.

That's the whole intent is to come up with a profit plan.

And we're work the components on both side of the equation.

We recognize that next year we're going to have to really really work the cost side and that's why we established the targets and feel comfortable about being able to meet those.

But there will be a tremendous amount of energy on the revenue side.

Right, Bill.

Okay thank you.

Your next question comes from Peter Jacobs.

Good morning, gentlemen.

Hey, Peter.

First of all, Brad, could you help kind of box in what the potential pension liability is.

If I do a rough estimate that you might have lost about 15% year to date in that -- in your assets I would get the liability is somewhere in the tune of about $150 million.

Is that kind of a fair number?

I think that's a little bit higherment I think in our last 10 K we had planned assets of $450 million or something like that.

So if you did 15% of that you would get $75 million or something like that.

I with will say if you end up with a charge you have to add the unfunded amount of the assets with the prepaid amount on your balance sheet.

So you add both of those together then tax them to give you your charge I. guess we could say that you you are right in the right ballpark -- That's the high end probably.

You mean when it's all said and done if you have to take a charge it could be over $100 million?

We're not seeing that.

I mean I think you're kind of in the right range but we're not seeing the number that's that high.

But like I say the -- we still haven't determined final assumptions which are used to determine the liability and plan assets can move a lot.

They've been very, very volatile the last, first nine months of the yaor so they can move a lot in the next three.

We were originally going say on the call that it was in the range of $75 million.

Yep.

We decided not to say that because really --. [ Laughter ]

You literally can't say at this point and time.

But we don't expect it to be you know significant compared to what some of the other entities are having out there.

Many of you guys have published that show our unfunded amounts versus other airlines and are most of those we've seen if the folks at the plan Alaska's unfunded amount is aamong the least of the carriers.

That helps puts thing in prospective, thank you.

On the goodwill issue, you know I am -- it's about what $50 million or so in goodwill.

My understanding is that primarily pertains to the late '80s acquisition of Horizon air.

So I guess the test would be then for the going concern valuation of Horizon.

We're going to test both Alaska and Horizon.

How much goodwill is the Alaska Airlines entity carrying.

About 12, 13.

Not much.

Three quarters is horizon.

Okay the other thing, Brad, would you care to peck late on 2003 non-fuel operating costs?

I don't think that number was discusssed.

Well we have said that our cost management objective ts 8.35 cents.

I guess we just said we feel pretty confident at this stage that we're going meet or exceed that figure.

Okay.

Great.

And lastly, the 150 million dollar credit facility that you have out given John's comment on wanting to preserve liquidity is it safe to assume you'll probably be maintaining that line for at least the near future?

Yes that's something that we talked to the board about regularly and tried to get a sense for their sentiment.

But I don't think there's any change in our thinking at this point on that.

What's the -- what are you paying to have that credit line out?

Can we talk about that, Amber.

No.

I don't think we can talk about that.

I think we have a confidentiality agreement with the bank.

But it's good rate.

Okay.

Very good.

Thanks so much.

And nice quarter.

Thank you.

Your next question comes from Jim Higgins of Credit Suisse First Boston.

One question and I'm just trying get a sense of sort of the all else equals what's happening with your operating costs as you look ahead.

To get to that longer term goal, 7.85 cents non-fuel CASM, over three years how much of that getting there is related to a longer increasing your stage length and how much is just pure apples to apples picking up costs?

I can't -- that's a terrific question.

I don't have the numbers at my fingertips but we do have a lot of tail winds helping us.

The longer flying.

A lot of our growth will be with 737-900s which are larger, 172 seats.

About a 15% cost advantage compared to our average planes.

The fact that we're growing gives you the chance to spread costs over more available seat mights -- miles.

And the distribution we think about a third of that improvement will come in the distribution arena alone.

So there is a lot of help from those factors those four factors together which are different than just you know going out and seeking rate reductions or you know higher productivity or something like that.

Great.

That's certainly helps to give confidence that you can reach that goal.

Yeah.

Thank you very much.

Your next question comes from Brian Harris of Solomon, Smith Barney.

Just a couple questions.

I was wondering if you had had any sense of how your current activity is doing now that you have so much more long haul flying.

Does that change much or is that primarily local as well?

The extent we measure it we're -- we built schedule try to connect with everything.

In our focus in Seattle with with our own flights to and from Alaska and horizon within the pacific northwest.

So our schedule connect Seattle and departure and arrival times to maximize the number of connections.

And we look at the number with Horizon we see connections up year over year.

And we know kpoept of that is the new long haul flying.

So I think it's going well and of course we work with other partners at both ends especially were we co share but in Seattle we've got northwest going to Asia which is an important -- creates important connections for the two of us.

And we're just working harder and harder on the schedules to make sure we got connecttive and -- connectivity and with the port of Seattle who has been very supportive to make sure we got plenty of gates to accommodate the future growth and make sure we can get all the airplanes on the ground at the same time.

Can you give any kind of number stars -- as far as the connecting this year versus a year ago or percentage of passengers connecting on long haul versus short haul.

We don't have that information at our fingertips.

That's a good question.

We'd certainly be happy to get that and find another public forum we could share it and kind of communicate with everybody at the same time.

Okay.

Just one other question.

How are the Alaska markets doing?

I understood that there was some competitive actions there.

Can you just review that and just what percentage of your revenue is from the state of Alaska.

In general they're doing pretty well.

I'm trying to pull them up right now.

RASMs for the third quarter were you know flat in southeast, up a tiny bit -- or sorry, yeah up 1% in southeast.

Up marginally in northern and down about almost 5% in the long haul market.

In general I think it's doing better than the best i arrest of our system.

That's what we see with the state of Alaska doesn't tend to be nearly as volatile.

Which times are good it doesn't respond as much as the lower 48 and when times aren't good it doesn't get impact as much as the lower 48.

What percentage of your revenue is state of Alaska right now.

We just -- flying is 25%.

Probably about 30 some -- 32.

32% of your revenue is state of Alaska?

We look forward the first nine months it was about 25% off ur flying, capacity.

I don't have full year revenue numbers with me but those are a little bit bete yielding markets to the percentage of revenue would be better than the percentage flying.

Thank you very much.

At this time I would like to remind everyone in order to ask a question press star then the number 1 on your telephone keypad.

At this time there are no further questions.

Thank you, operator.

And thank all of you.

We look forward to seeing some of you back in the big apple on Monday.

And appreciate your being on the call with us today.

Thanks, operator, goodbye.

This concludes today's conference call.

You may all disconnect.