阿拉斯加航空 (ALK) 2002 Q4 法說會逐字稿

Good afternoon.

I'm Elizabeth, and I am the facilitator for today's conference.

I'd like to welcome everyone to the Alaska Air Group 4th quarter and annual earnings results conference call.

All lines have been placed on mute to prevent background noise.

After remarks, there will be a question-and-answer period.

If you would like to answer a question during this time, press star, then the number 1 on your telephone key pad.

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

Thank you, Mr. Tilden, you may begin your conference.

Thanks.

Hi, everybody.

It's great to be talking with you again.

Before we get started, I'd like to mention that we have a number of folks with us today, including John Kelly, Alaska Air Group's Chairman and CEO;

Bill Ayer, Alaska Airlines CEO; and Jeff Pinneo, Horizon Air's CEO.

We also have in the room George Bagley, the EVP of Operations of Alaska;

Terry Mopin, Alaska's Controller;

Amber Post, Alaska's Treasurer; and Rudi Schmidt, who is the V.P. of Finance at Horizon.

Also, we'd like to give you our normal reminder that this call may include forward-looking statements, and our actual results may differ materially from such statements.

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

As I'm sure you've seen by now, we reported a net loss for the quarter of $43.1 million, or $1.62 per share versus a net loss of $37.4 million, or $1.41 per share in 2001.

In the fourth quarter of 2001, we had two unusual items: a special charge of $10.2 million for the impairment of Horizon's F-28 fleet, and the receipt of $52.3 million of government compensation under the Air Transportation Safety and System Stabilization Act.

Without these items, we would have lost $63.9 million or $2.41 per share last year, and, again, that compares to this year's loss of $43.1 million or $1.62 per share.

At the [INAUDIBLE] group level, the operating revenues, $527.7 million, up 13% from last year.

Operating expenses were $587.5 million, up 4.7% from last year.

Again, we had an operating loss of $59.8 million in 2002 versus an operating loss of $95 million in 2001.

For the full year, we had a net loss of $118.6 million or $4.47 per share, compared to a net loss of $43.4 million or a $1.64 per share in 2001.

Including in 2002's full results is a charge of $51.4 million to writeoff goodwill in connection with our adoption of Statement of Financial Accounting Standards, Number 142.

Excluding that charge, the company lost $67.2 million or $2.53 per share in 2002.

That compares to last year's loss of $88.3 million or $3.34 per share, and, again, that's excluding the government compensation and the special charge I just mentioned.

There is a table on the fourth page of our earnings release that will help you reconcile our GAAP results to the numbers we just talked about.

Briefly, looking at the results by company, Alaska Airlines had a pretax loss of $58.6 million in the 4th quarter, compared to $18.8 million in the 4th quarter of 2001.

Again last year's loss was held by $52.9 million of government compensation, and without that, the 2001 loss would have been $71.7 million, so this year's loss is marginally less than last year's.

Horizon's losses were $5.8 million this quarter compared to $35 million last year.

Last year's loss was impacted by both the special charge related to the F-28 fleet and the government compensation they received, excluding those items, they would have had a pretax loss of $25.4 million last year.

These results are substantially better than last year's for Horizon.

I'll turn the call over to John Kelly, our Chairman and CEO.

Thanks, Brad, good morning.

I think it goes without saying, this is obviously a very difficult quarter for both the industry and Alaska Air Group as well, but as difficult as it was, we were frankly a bit pleasantly surprised by our numbers.

Like a lot of our competitors, Alaska had pretty difficult month in October and November with both lows and yields down year-over-year.

Traffic came back strongly in December, where we saw a 22% increase in traffic, and an almost 6-point increase in load factor, so December was a very, very good month for us.

Our new markets, which you'll recall include Washington, D.C., Boston, Newark, Miami, and Denver, represented 7.3% of our capacity in the 4th quarter, net versus only 1.5% last year, and the new markets are continuing to do quite well.

In fact, a number of these markets had load factors in the low to mid-70s versus our system average of 66.5%.

We estimate the redeployment of some of our capacity from the traditional markets to the new markets actually increased our system load factor by 3 to 4 points.

The yield in some of these markets is still lower than we'd like to see.

In general we continue to be very pleased with this new growth.

On the cost side, we've done a very good job of executing against our plan for the quarter.

Our unit costs at Alaska X Fuel were 8.76 cents versus our plan of 8.80 cents.

For the year, we came in at 8.52, which was about 2% lower than our 8.69 cent target.

Now this year, we're aiming as you know for an X field target of 8.35 cents and we had a good plan that we think will help us get there.

As we've said before, we've established a goal of 7.85 cents for 2005, looking out a couple of years, and that's obviously very aggressive and will take some hard work and really some rethinking of current processes to get there.

The good news is, we have great folks here engaged in the process, I'm optimistic that we're on the right track to getting that very, very aggressive goal.

Again, that is a target, something that we're going to work real hard to achieve.

Now switching for a minute to Horizon, I'm pleased to report they had a relatively strong 4th quarter and were actually profitable for the month of December, so that's a nice turn for them.

They're really benefiting from their streamlined and simplified fleet structure they have now with their CRJ 700s and the Q 200s and 400s, and, also, adding the long aircraft line and stage lengths.

The unit cost X Fuel for the fourth quarter was 15.3 cents versus almost 21 cents last year.

A big, big improvement.

Their 4th quarter, of course, in 2001 was affected by 9/11, but if you make a comparison over that time period, their capacity is up a third, 33%, and their total operating costs, and that's excluding the special charge in 2001 for the F-28 impairment, their total operating costs are essentially flat and their revenues are up $18.4 million, so those are some good statistics.

We actually consider their pretax loss of $5.8 million to be relatively strong given the industry environment, especially considering it was a seasonably weak 4th quarter.

At the AAG level, our cash position and liquidity continue to give us a lot of comfort in these very troubled times.

We ended the quarter with $636 million in cash and short-term investments, which is robust by almost any measure.

I'd like to note that as with was the case last year, we expect to see a temporary drop in the cash balance in January because in January, we have some significant semi annual aircraft lease payments that we'll be making.

We did also have two charges to equity during the 4th quarter, both of which we've previously disclosed.

First in accordance with the new accounting standard on goodwill, we wrote off the company's goodwill balance of $51.4 million.

Second, we took a charge to other comprehensive income of $87.2 million due to the funded status of our defined benefit pension plan.

This pension charge, while significant, is proportionately less than what many of our competitors have reported.

I'd also like to note that we're essentially completing the restatement process that was first announced in the 2nd quarter last year with some information we'll be filing with the FCC on a Form 8-K today.

I know this is old news for most of you, but the restatement is primarily resulted in a way we accounted for leased aircraft return cost, and as opposed to other statements, ours actually resulted in an increase in equity, and for the record, that increase is roughly $31 million at December 31, 2001.

The 8-K we'll be filing includes some detailed information by quarter for 2001 and 2002.

On January 10, we filed a 10-K A with S.E.C. with full year audited information for 1999 through 2001, but today's filing gives you detailed information by quarter for the adjustments in 2001 and it also includes some carryover effect for the first three quarters of 2002.

As we said in the 10-K A, we'll be filing 10-Q A's for the first three-quarters of 2002, but with this filing today, the information is out and the process is essentially behind us.

Finally, I might note that while fuel prices are quite high right now, 35% of our 2003 consumption is hedged at prices below $22 a barrel, which does afford us some degree of price protection.

I'd like to turn the call over to Bill, and he can take you through the information on Alaska Airlines, and then we'll have Jeff Pinneo take you through the Horizon information.

Bill?

Thanks.

Hi, everybody.

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 build-up on any of those if you'd like that when we get to your questions.

The industry today is comparing to a much lower base than we are because of the greater reduction in capacity and traffic and yields for the industry in the months following 9/11, so I'll also provide numbers for the 4th quarter of 2000 on some of these measures which will give a more relevant comparison with the industry.

We've had year-over-year capacity growth every month since February, and for the quarter, our ASMs increased by 15.5% compared to industry increase of 4.6%.

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

For the quarter, RPMs increased 15.6% compared to industry wide 9.7%.

Yields have been disappointing.

But we've had to offer continuous sales to generate the traffic.

Compared to 2001, yields for the quarter for Alaska were down 3% compared to an industry that was off 1.6% on yield.

If we compare yields to the year 2000, which would be a more, quote, normal year, yields are down, but we are faring better than the industry.

Alaska was down 9.7% compared to an industry that's off 18.3%.

And with our ASM growth, we've experienced much better passenger revenue performance, comparing to last year, that is up 12.2% compared to an industry that's up 7.9%, and if we compare passenger revenue to the year 2000, we certainly haven't declined as steeply as the industry.

We're off 1.5% on passenger revenue compared to the industry being off 27.6%.

Load factor increased for the quarter on that 15% increase in capacity, our load factor was up a 10th of a point, the industry was up 3.3 points.

John talked about our stronger December and our relatively weaker October and November so I'll give you the load factor by month for the quarter.

October down 2.6 points, November, down 2.9 and December up 5.7, so you can see how that seasonality kind of works there and where we ended up for the whole quarter.

So overall, our RPMs were up 15.6% for the quarter on an ASM increase of a similar amount.

If we followed our original plan in 2001, taking out the impact of 9/11, both our RPMs and ASMs would have grown by 1.8% year-over-year.

If we look at things geographically, we continue to see increase in traffic in our leisure-oriented regions.

For example, traffic was up 29% in Canada, 17% in Mexico, and 12% in Nevada.

Traffic from Anchorage and Fairbanks to the lower 48 was strong, up 13%, and we've seen recovery in California.

Our intra-California traffic was up by 22%, the Bay area up 7%.

Southern California, 5%, Arizona remains soft with traffic up 3%.

We continue to execute our strategy to strengthen our Seattle hub by introducing new service to markets where Seattle-based customers want to go.

On October 28th, we launched new service from Seattle to Newark and on November 21st, we started nonstop service from Seattle to Miami.

These new markets along with other new service introduced in the past twelve months such as Denver, Boston, and Washington, D.C., and if we include Calgary and Cancun in that, then all of that accounts for 9.4% of our capacity, again compared to only 1.5% of this a year ago.

These new markets are an integral part of our strategy to right size in our traditional West Coast markets and shift capacity to new markets by better matching capacity in the traditional markets and using some aircraft on new routes, we were able to improve our performance system wide.

If we had not right sized and capitalized on some growth opportunities, we estimate our system load factor would have been 3 or 4 points lower.

Specifically, Seattle/Boston had a 73.6% load factor in the fourth quarter, Seattle/DCA, Reagan National had a load factor of 70.9, and Seattle/Miami at 74.2%, so this kind of performance is helping to offset the traditionally weaker demand in the 4th quarter.

Our advanced bookings for the next couple of months look okay with continued discounting helping to fill seats during this seasonally slower time.

We're going to release our traffic numbers for January early next week, and we expect to report a load factor that is roughly even with last year's about 12% more ASMs.

For February our book load factor is slightly ahead of last year while margins is essentially flat versus last year in terms of futures and how that translates into load factor.

Freight and mail revenues were down about $1.1 million or 6.2%.

We are seeing a slow improvement in mail and freight volumes compared to last year with yields improving slightly for cargo.

The security restrictions that were put in place after September 11th had a negative impact on this part of the business, but we've been able to work within the new guidelines -- increasing our know shipper base, for example -- so we hope to see improvement in revenue for 2003 in freight and mail.

Other revenue increased $2.9 million or 15.7% primarily due to continued growth in the revenue to be received from our mileage plan partners.

Thanks to the great efforts of our employees who really are staying focused on providing just outstanding customer service, our operation continued to run well throughout the quarter, and particularly through the holiday season, where we had the real peaking in demand.

Our on-time performance for the quarter was close to the plan and improved significantly over last year.

We do well in baggage and customer service measures, so we believe, overall, we are meeting or exceeding our passengers expectations for operational performance.

Looking ahead, our growth plans for 2003 calls for about 6.5% ASM growth, and quarterly as follows: 4.5% in Q1, 4.5% in Q2, 8.5% in Q3, and 8% in Q4 for that 6.5% for the full year, and I think our previous guidance was 6 to 7%, so we're right in that ballpark.

The growth will come from the annualization of 2002 growth, added frequency --frequency of our newer markets and some modest add backs in the West Coast market and perhaps another new destination.

Looking at the fleet in 2003, we plan to add 11 aircraft and retire 4, for a net increase of 7 units.

This includes six 737-700s and five 737-900s, and the four retirements are all MD-80s.

So that will grow our fleet from 102 aircraft today to 109 aircraft by the end of 2003.

Four of the 700s and four 900s will be delivered by the summer, while the rest will be delivered during the 4th quarter.

Given the current economic outlook, we're carefully evaluating our fleet plan for 2004.

I might note, we have the flexibility to either grow the fleet to as many as 115 airplanes or bring the count down due to some lease returns so as few as 105 aircraft.

Our buy as is for growth, assuming market positions permit that.

On the cost side, CASM decreased by 6.2%.

This decrease is indicative of our higher CASM last year, as a result of the capacity reductions following 9/11, but also our growth, which is spreading fixed costs as well as our focus on cost control.

Excluding fuel, our unit costs decreased by 8.9%, which is in line with the guidance we gave you last quarter.

As John said, we were happy to see our full year unit cost of CASM X Fuel to come in at 8.52 cents which was 2.4% lower than last year and running 2% ahead of our plan.

At this point, I'll ask Brad to take you through some of the specific items on the P&L

Thanks.

Again looking at some of the items in Alaska's P&L, wages and benefits increased $13.5 million or 8.1% for the 4th quarter.

Of this increase, about $10 million was due to wages, the remainder due to increases in our benefit costs, primarily our defined benefit pension plans and health insurance.

Looking forward, we're estimating the wages and benefits will increase 13 to 14% for the 1st quarter of 2003, a big piece due to pension costs that we're expecting to rise from $40 million in '02 to an estimate of $65 million for '03 for the defined benefit plans.

Fuel expense increased by $17.3 million or 37.4% over last year.

Consumption increased 14% with our increase in flying, and prices increased about 18%.

We estimate that our fuel hedging program saves us 5 cents per gallon in the 4th quarter of 2002. aircraft maintenance costs increased $12.2 million or 41% due to major engine repairs -- more major engine repairs and overhauls in '02 than in '01.

In the 4th quarter of 2001, we reduced our flight schedule, which has the effect of deferring some seat checks and heavy checks.

And, in 2002, we had four more outside seat checks and two more heavy seat checks than in 2001, we had also 18 engine removals in '02 compared to 9 in 2001.

Looking forward, we expect maintenance costs to be approximately 5% higher than in the 1st quarter of 2003 than in 2002, and for the full year, we expect it to be roughly even with 2002.

Although we have more checks scheduled for 2003, we have completed the consolidation of our base maintenance operations in Oakland, where we now have two lines operating, so we are planning to gain some efficiencies there.

Food and beverage costs increased $2.4 million or 18.2% due to 11% more passengers as well as increased food costs primarily on our new transcom routes.

We are planning some changes in that area this year, and we expect the cost per passenger to be 4% lower in 2003 than 2002.

As we've seen for the last few quarters, our aircraft rent was down, 1.2 million or 3.6%, due to lower lease rates for the four MD-80s that we extended in early 2002.

Travel agent commissions key decreased by $6 million or 44% primarily due to the elimination of base travel commissions that started in June of '02.

For the quarter, on-line sales were 31.4% of total sales for 2002 versus 28% in 2001.

And if we back out the online agencies such as Expedia and Orbit, sales at Alaska Air.com were 22.5% of total sales in '02 versus 17.4% in '01.

So we continue to be very pleased with the growth in the online distribution channel.

Other operating costs were up by $2.6 million or 7.3% compared to last year.

This line item includes our insurance costs, which increased $2.3 million over last year, and it includes other costs such as property taxes, legal costs, utilities, supplies, passenger [INAUDIBLE] and so forth, and those other areas increases and decreases essentially offset each other.

Looking at nonoperating items, our interest expense declined about $1.4 million even though our debt was the same in 2002 as 2001 due to lower interest rates.

In the 4th quarter, you see there -- the 4th quarter of last year, we recognized $52.9 million of compensation that we received under the Air Transportation Safety and Systems Stabilization Act, and, lastly, in the 4th quarter last year we had other net expense of $3.1 million, compared to a slight bit of income this year.

Last year's expense was primarily related to the ineffective portion of our fuel hedges.

We normally try to give you cost guidance on these calls.

Our current projections for our unit cost for 2003 is 8.35 cents.

That it be down a little over 2% from 2002's number.

Our current estimates of CASM X Fuel by quarter are as follows: 8.9 cents for the 1st quarter, 8.4 for the 2nd, 7.9 cents for the 3rd, and 8.4 cents in the 4th quarter.

As we've done in the past, we'll continue you to update you with changes in these projections through the 8 Ks we've been filing each month.

I'll turn it over to Jeff who will talk about Horizon's quarter.

Thanks.

It was a relatively strong 4th quarter for us, especially in the month of December, which was not only profitable, but also a record period for load factor in that month by comparison to the 4th quarter of 2000, which we believe is a more meaningful benchmark, our unit costs -- excluding fuel -- were 14% lower on 12% more capacity.

We expect to slightly improve on our CASM again this year, although the rate reduction will decline due to anticipated increases in maintenance costs and a few other expense categories.

Our total capacity, which increased by 13% last year, is expected to grow by another 7% in 2003.

While ending the year on a loss is always disappointing, it's especially tough when it stands in sharp contrast to the extraordinary efforts of our people to position their company to win in the eyes of customers.

Through their efforts in 2002, we set new records in virtually every service category, achieved new highs in productivity and efficiency, introduced service to a number of new cities and earned national attention for the quality and distinctiveness of the experience that they deliver, most notably in the form of the Condanast Traveler's reader's survey, whose participants rated Horizon the second best all coach airline in the country.

While it isn't reflected on the income statement, 2002 was positively memorable thanks to the remarkable effort and service offered by our people.

Turning to the numbers, 4th quarter passenger revenues were 23.9% higher than last year.

For the year they were only 2.5% higher than 2001.

And they were 8.6% lower than in the year 2000.

Comparing to the year 2000, unit revenue was 14% lower as Horizon and the industry have had to resort to almost continual price discounting to stimulate demand.

Yield for the quarter was down nearly 13%.

In our case, these actions helped to stabilize our load factor at about 62% at a time when we continue to grow into new longer haul markets while many our carriers cut capacity.

Our average trip length is up to 314 miles a year compared to 289 in both 2001 and 2000.

In the 4th quarter of 2002, we introduced service in the Boise/Phoenix, Long Beach/Seattle, Bozeman/Los Angeles, and Sun Valley/Los Angeles with a mix of Q400 and CRJ700 aircraft.

Each of these markets are performing up to our expectations with respect to introductory load factors.

During the past quarter, our monthly load factors were 57.1%, 58.7, and 67.2% respectively.

Only June and August, which are traditionally our strongest load factor months ranked higher in December which was helped a great deal by the late Thanksgiving holiday.

Demand patterns for both leisure and business travel have shifted dramatically from the events of 2001.

On the leisure side, demand has become concentrated around traditional holiday periods with deep valleys of low activity separating the seasons as exemplified in October and November.

Business travel continues to be off in general following below 30% of total revenues in 2002 for the first time in our company's history.

In our local markets, the weak economy and high unemployment in Oregon and Washington, which lead the nation in that category, are key factors.

Our customers experience with airport security has measurably improved.

However, Horizon and other short-haul regional carriers remain vulnerable to any blips to the process that can add time and inconvenience to the airport experience.

Looking ahead, we are continuing to experiment with simplified pricing structures and scheduling adjustment both internally and in conjunction with Alaska.

We will continue to shift capacity to capitalize on strong seasonal markets by Palm Springs, Tucson, Phoenix, and Sun Valley in the winter and Montana and Canada in the summer in an effort to mitigate demand volatility and increased yields.

We'll explore new market opportunities as equipment becomes available.

As John noted, unit costs were slightly higher in the 4th quarter on 33% more capacity than 2001 and excluding a 2001 special charge on about the same level of expenses.

By comparison to the 4th quarter, 2000, operating expenses were actually $12 million lower on 12% more capacity, and excluding fuel, $4.3 million lower with maintenance, fleet retirement and commission expenses accounting for $14 million of reduced expense offset by higher aircraft rent, landing fees and labor charges of $9 million.

As we mentioned before, maintenance is lower because our fleet is younger.

We had fewer major overhauls and we are no longer accruing for the cost to return lease aircraft as we were before.

Commissions were lower because of the industry wide decision to cut travel agent rates and the continuing shift to more direct channels.

There was a similar pattern of expense activity by comparison to 4th quarter 2001 except that security, insurance, and landing fees have increased at a higher rate because of 9/11.

Looking ahead, we are forecasting CASM X Fuel to be 16 cents for the 1st quarter of 2003 and 15.5 cents for the full year on ASM growth of 15.5 and 7% respectively.

By comparison for the full year 2002, our CASM X Fuel was 15.8 cents.

This year's ASM growth will result from operating a full schedule, which we didn't do until February 2002, higher daily utilization from the longer-haul flying, and the addition to our fleet of two CRJ700s in the 4th quarter.

On the operational front, the return of winter drove declines from the excellent marks we had posted through three-quarters in every category.

Schedule of reliability, on-time departures, and baggage claims.

However, our full year performance is the among the best we've ever posted, especially in the baggage handling category, where we, together with Alaska, rank among the industry leaders in low claims.

In the 4th quarter, we added one CRJ700 regional jet to the fleet.

We currently operate 61 aircraft.

Fifteen are 70-seat Q400 Turbo Props, twenty eight are 37-seat Q200 Turbo Props, sixteen are 70-seat CRJs, and two are 70-seat F-28 4000s.

The remaining F-28s, all of which we own, will be retired in the first quarter of this year, and the net book worth in reserves of that fleet and parts is about $7 million.

With the retirement of these aircraft, our fleet will be 100% leased.

That included the two CRJ 700s, which we'll receive later this year, which have partial finance and secure.

Now for discussion on Alaska Air's balance sheet and cash position, I'll turn it back over to Brad.

Thanks.

As John said, we ended the quarter with a very strong cash position, $636 million compared to $661 million at the end of the 3rd quarter.

There was a slight decrease mainly due to capex of $18 million and advance funding of a VIVA plan, which we have for funding our health insurance plan and sick leave benefits.

We estimate that we have positive cash flows from operations both for the quarter and for the full year.

For the quarter, our cash flow from ops were $9 million and for the full year, approximately $125 million.

For 2000, we're projecting capex of $309 million to $450 million, depending on the possible exercise of aircraft options, and that's for units that would deliver in 2004 and 2005.

This number does exclude five aircraft that we'll be taking under operating lease agreement this year.

Our adjusted debt to capitalization ratio adjusted for operating leases is 77% as of December 31, 2002, up a bit from prior years and quarters, and it's primarily driven by the goodwill writeoff on the pension charge that John mentioned earlier.

Our number still compares favorably with what most airlines have there.

I'll turn it back to John now so we can address your questions.

Thank you.

Operator, if you would, we'll take questions.

In order to ask a question, press star, then the number 1 on your telephone keypad.

We'll pause a moment to compile the Q&A roster.

First question comes from Ray Needle.

Good afternoon.

How are you doing, Ray?

Good.

I guess just a general question, and you may not be able to address this specifically, but most of the old line companies are having problems with their pension liabilities, what can you do going forward?

I know you want to talk to your employees about ways of reducing costs.

Maybe modifying or changing pension plans on the table, is that going to be necessary down the road?

Yeah, ray, it's a great question, something we spend a lot of time on.

I can say, the the two basic alternatives are defined benefit and defined contribution plans.

Alaska has both.

Traditionally, we've relied more on DB plans than on defined contribution plans.

As for management we're making a change right now.

New hires will go into a defined contribution plan as opposed to the defined benefit, and existing employees will have the choice of continuing with the current program, which offers them a DB plan and a DC plan, or they can come out of the DB for an enhanced DC plan.

So we are looking at structural changes there.

Over time, we hope to look at this with our other employee groups, as well.

One of the issues for all folks in this industry is that the DB plans, the employer's commitment is more question than it's been in other times.

You see what U.S.

Air is talking about doing right now.

So that's what we have in place for management,and we'll just see where we go over the quarters ahead with the rest of the employees groups.

From an employee standpoint, the DC is affordable and it has some very attractive features to it.

We'll see as we move forward.

It's certainly a big issue, Ray.

I guess it would be easier to phase it in with new employees than try and change the plan for existing employees.

Right.

Another very difficult question to answer, but I'll ask it anyway, is going forward in the short term, one, you have a possible Iraq situation developing, and two, United is trying to start a very low-cost airline.

Whether they succeed or not is a big if.

If they come in with low-cost airline, a lot of it will probably be on the West Coast.

What are your thoughts on that?

I don't know why they'd be crazy enough to do it on the West Coast, since we have Southwest low-cost, Alaska Airlines low-cost.

The markets are only so big.

We've been there, done that.

United has been down that road here on the West Coast, we were able to compete effectively against them.

Continental West in the old days tried it.

If they do that, then they're going to be basically in the same position that the rest of the market is today in terms of fares.

I can't imagine that they're going to lower the fares beyond where they are today.

If you look at the West Coast versus the rest of the country in terms of fare levels, it's dramatically lower out on the West Coast already.

But there wouldn't be a place where if I were looking at it I would say gee, this is a great place to come in and stimulate additional travel.

Whatever travel is being stimulated by the low fares is there today, and as both Bill and Jeff have mentioned, continual fare sales are the order of the day, so it didn't seem to me like that would be the best strategy in the world.

And, we'll just have to see what they do.

I think the best thing, John, we can do regardless is keep this focused on our cost structure and make these targets as we go forward.

So we have a lot of focus on the process changes we may have to engage in, and then best meeting the customers new value proposition, the right trade off between cost and service and so we have a lot of effort in that direction, but a good focus on CASM is really important.

If we can get down to 7.85, if we can do that by 2005, that is a huge step from where we are today.

It's an aggressive goal, but one that Bill and his team are working on diligently.

I guess as far as Iraq goes, being a domestic carrier on the West Coast, you would expect to have less effect on you than most other carriers?

Yes.

No one likes the prospect, but we seem to have a lot more resiliency out here when it comes to traffic.

So much of our traffic originates in the state of Alaska, where it is virtually the only way to get around, and post 9/11 we saw that it held up much better up and down the West Coast and particularly in Alaska.

And very good job on Horizon Air with getting the CASM down.

A lot was due to the new equipment type as you mentioned.

Can we expect to see more of that going forward in the immediate future?

Well, yes, we can, although the rate of decline will flatten out a bit because the CRJs are starting to mature, they're still very young, burr we're entering into heavy check season with several of the aircraft this year and engine overhauls so that will take the operating CASM on the plane up a bit.

Having said that, we're still projecting a modest CASM decline from last year's number.

The maintenance warranty honeymoon only lasts so long.

Thanks.

Just jumping in on that Iraq question, we may be seeing some Iraq effect now in our traffic and fuel costs on the operating side.

What we saw after the Persian gulf we're was a pretty quick recovery.

It's certainly an industry phenomenon.

You guys are as familiar with most of this as we are.

There could be a pickup in the operating performance when it's over, currently we may be affected already by the prospect of it

Next question comes from Michael Lennonburg of Merrill Lynch.

Good morning.

Two questions here.

Brad, you commented about the increase in pension expense, you said it was going from 40 million to 65 million.

How does that compare to what your cash contribution is this year and did you make any changes to some of the underlying pension assumptions?

'03 will be approximately 38 million.

So that is close to the 2002 expense level.

On the issue of changing assumptions, we have -- [INAUDIBLE ]

Our expectation is that we'll move it down somewhere between the 8 and 8-1/2% range.

We haven't quite finalized that number.

We're completing an asset liability study to pinpoint that.

That hasn't moved down from 10 we've had over the last years.

So the increase in expenses come from the lower expected return on assets and also the losses in plan?

That's correct.

My second question is actual cash related.

Are you guys expecting to get any sort of tax refund early this year as a result of they changed how far you could go back?

Absolutely.

We expect -- we're just on the tax provision, not the tax return, but we expect something in excess of $40 million as a tax refund for 2002.

That's in addition to 22 million that we received during 2002 for 2001.

That was made possible by the five-year carry back that we got post 9/11.

It was increased from a two-year carry back that we had previously.

Thank you.

Next question comes from Peter Jacobs of Reagan McKenzie.

Peter?

Peter might be down the hall or something.

Next question comes from Helene Becker of Buckingham Research.

Thank you very much.

I'm sorry, I missed the capacity growth numbers by quarter for Horizon for this year.

Can you repeat those?

You bet.

I got seven for the year, but I didn't get the quarterly break down.

The 1st quarter will be 15.7%, 2nd quarter, 6.7, 3rd quarter, 2.6 and 4th quarter 4.2.

And did you say anything about book load factor in the 1st quarter?

I don't believe, no, we didn't mention that other than general trends, that peak and valley effect.

We're seeing softness in the January/February time frame and on par or slightly ahead of where we were in the March time frame.

That's a particularly difficult comparison in March because of the movement of Easter?

I hadn't focused on that.

I know we've been looking at it more as the first true year-to-year comparison since we were back to 100% capacity in February of '02.

So we were pleased.

But I will take a look at that.

Honestly, we haven't looked at the seasonality issue of Easter.

And when they take a vacation it's spread out over a long time frame, from our root system in Alaska to California it varies a lot.

Six to eight weeks it can be for spring break.

And the other question for you, Brad, you talked about maintenance being up 41% because of the increased engine repairs and overhauls, and then -- [INAUDIBLE] In a full year, it would be about equal to last year?

That's correct.

That's what I thought.

Good.

Okay, those are my questions.

Thanks.

Again, I would like to remind everyone, in order to ask a question, please press star, then number 1 on your telephone key pad.

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

Hi.

You gave a lot of information for load factors and the new long haul markets.

I realize there were cross current with the new ramp-up, et cetera, but can you shed light on how -- RASM in those markets is looking relative to your base system?

I don't have the detail of that in front of me.

What we know is that we've had lower yields, part is an introductory market and part of an industry market, I think over time, those will come up as we mature the market and as hopefully yields trend up over some period of time.

I don't have that specifically.

Those are 2000 plus markets, our system average is 830, something like that.

They are low RASM and CASM markets.

Profitability I think is an issue.

We're encouraged by them long-term.

We need to see revenue.

Part of it, you got the new market, as some of the ticket mix changes, we'll get some help.

Great.

We're seeing a lot of traffic originating in Alaska flowing through Seattle from some of the new places, which is significant.

I would imagine a lot of your competitors who have service into please like Anchorage only do it seasonally, so you're probably the only game in town.

And the other big point is this has been a redeployment for the most part, so we know what we're doing in the new markets are adding revenue on a net basis compared to what we were doing before, we know that for sure.

We really don't appear to have lost much at all, selectively reduced frequency where we could and redeploy the airlines.

It's fresh revenue.

Expense is not much more than had we kept in the existing markets.

Very good.

Thank you.

Thank you.

Next question from Peter Jacobs from Reagan McKenzie

Good morning.

We'll try this a second time.

First of all, Brad, can you please give us an update on where spot fuel prices are now?

$1.03 is the last I saw.

Does anyone have more?

No.

And again, that's the raw cost.

We would expect at that level, 6 cents from benefit, 7 cents, something like that.

That's all up cost to us, including all fees.

Great.

And secondly, this is more of I guess a broad-based question, perhaps John or Brad, one of you could tackle this, with you as we look at wage costs both within -- at Alaska as well as industry wide, there's been substantial increases in wages, it's becoming a burden not necessarily critically on your airline, but industry wide it is, but even if we look at Alaska Airline, Alaska Air Group wage costs since 1999, back then, just rough numbers, they accounted for 31% of revenue, and for 2002, it's about 38% of revenue.

In fact, in the 4th quarter it was 41% of revenue.

And I guess if you could give us a sense of where you see that expense line trending going forward, are we going to see continued creep on revenue, or do you think that this might be the pinnacle here and that wage costs relative to revenue could start to decline a bit?

I'll let bill -- Bill and Jeff speak to that for their particular airlines, but in general, we pay market wages.

That's our philosophy.

As the market moves up, then we move up with it.

If it moves down, then that will be what happens also.

Our strategy, as I think you well know with both carriers, is to come up with a game plan where we are as efficient and effective as possible and have the right number of people doing the right jobs, and to grow.

And as we grow, we've said before that we've had a good investment in infrastructure in people and facilities and as we grow, we don't expect that to continue to grow at the same level, so we'll be spreading the overhead, every day, every month, every year that goes by, as long as this growth strategy works and the good news is it has worked.

It's produced load factors, produced new revenue, so our strategy is to continue to implement that, and we'll deal with our labor costs as the industry deals with them.

Anybody want to add anything to that?

I really can't add much.

There's volume and rate, and the rate is we're committed to a market based program.

On the volume, we just continue to look for technology, to re-engineering processes, to help our people on the front lines do their jobs as efficiently, as easily as possible.

Make it easy for the customer, make it easy for our employees.

That's been the whole mantra here.

Technology has a big role in that.

We've been very successful in deploying technology, and we have several more things that we're working on that should continue to help.

Great.

I appreciate that.

Lastly, John or Brad, would you care to speculate or have any comments on kind of the overall profitability outlook for 2003?

We can go through several different scenarios, of course, some that, at least from my take, could produce some modest levels of profitability in 2003, and then on the other hand, if we could see some moderate type losses in '03, is that a kind of picture that you're looking at, or am I -- what kind of ballpark would you have us be looking at?

We don't give forecasts on profitability.

What we've done traditionally is let you know what we're trying to accomplish with CASM front with both entities and we feel confident that the estimates we have out there, we're going to work real hard to be able to deliver.

We were able to overdeliver last year on our estimate, and this year, we feel that we've got a good game plan in place to get there.

So that leaves revenues.

And, you know, there's so many variables, weather there's an Iraq war, what competition does, what happens with United and their bankruptcy and all those kinds of issues.

If you do the math going forward, you can come up with some of the numbers you're talking about.

It really is speculation.

I'm not sure this early in the year it serves us well to get into that.

We'll have to see as we move further along.

Brad do you want to add anything to that?

No.

Super.

Thanks a lot, and good job and a very difficult year.

Thank you.

Your next question comes from Jamella Lehti of McAdams Wright Reagan.

I have a quick question.

With respect to your maintenance costs in the 4th quarter, would that increase all planned maintenance or was that a little bit of a surprise?

It was not a surprise.

It actually came in slightly lower than planned.

In past conference calls you've talked a little more about your competition and your market sharing and you've given us some antidotal evidence of market share gains.

Can you go through that again?

The difficulty there is the source of some of that data.

We look at a number of different sources.

Some of the travel agency data tends to be pretty volatile, so I'm hesitant to quote.

We see shifts week to week.

Generally speaking, we have seen some increasing share in most markets, and that's just the trend line there, but it does jump around month to month.

You can look at the D.O.T. data, which runs about six months late, and you can see how we're doing there and that's pretty good information, but it is a little old.

It shows modest gains in all of our important markets.

Which is basically what we were saying we were seeing from the travel agency, but it's a narrow cross section of the total.

When we were talking about it, then we started getting quoted on it, and it was just being used to convey the general trend that we were seeing, not what the final numbers might be because that doesn't come out until the D.O.T. reports come out, so it's probably better off just relying on D.O.T. reports.

There's no question we're encouraged by the performance in the markets.

Okay.

Finally, in the past you've talked a little about the percentage of your revenues that comes from paths originating in Alaska as well as the potential revenues coming from leisure versus business.

I think originating in Alaska was around 30%, and I'm wondering if that's changed very much and if you can also breakdown leisure versus business.

We'll try to get the Alaska percentage for you.

I looked at something recently on that.

Just with the growth of the trans CON and new markets which is 10 periods of our flying, Alaska does represent a slightly smaller piece of the pie. [ overlapping speakers ]

If we look at our top four booking buckets, we're at 10% travel booking in those buckets versus 12% last year, so that's down two points, 2%.

In the top six buckets, 23% of travel, and these are passengers, not revenue.

Okay.

Versus 31% last year so that's down nine percentage points.

You said versus 31% last year?

Right, that's correct.

Great.

On the first question, if you looked at the full year 2002, of the state of Alaska, intra-Alaska and Alaska long-haul flying down to the lower 48 was 23% of our capacity, and some are longer stays, the percentage of revenue would be higher than that.

I don't have it handy, but we could try to have it ready for next call maybe.

Thank you.

I'd like to remind you, if you want to ask a question, press star, then the number 1 on your touch-tone phone pad.

We'll pause a moment.

Next question comes form Glenn Engel of Goldman Sachs.

Good morning or good afternoon.

Hi.

A couple questions.

One, are you seeing any relief on the insurance side?

Yes, we are.

We are -- November 15 is our renewal so we're into the new period now and we did see significant relief really compared to where we were in the prior period.

We talked about this on other calls.

We have huge increases if you go back to pre 261 getting up to an excess of $51 million.

We're off in the neighborhood of 20% from the prior year.

We still have a lot more work to do to get it to a place where it makes sense for us.

We spent a lot of time talking about the folks in that industry and presenting our case.

We work it very hard.

You mention that wages would be up 13% for the 1st quarter.

Could you give a number out for the year?

You know, do we have that?

Terry is looking it up.

For the full year, wages an benefits up 9.3% is our current estimate.

And finally, I was a little bit disappointed with the cargo side just because last year, you weren't allowed to carry any cargo mail after 9/11, so why are you still running down versus a pretty ugly period a year ago?

We've never really carried mail per se in the lower 48.

We looked -- we looked off on the trade-off between higher yield and cargo and mail, specifically in the state of Alaska, and decided not to get involved in the mail contracts.

We're not comparing against that.

Other carriers have lost more because we were carrying a lot more lower 48 mail.

So the principal activity has been in the state of Alaska, so it's a smaller base to look at, but we think we're getting back much of that business with the easing of the security restrictions.

And the state of Alaska doesn't really grow.

The company grew 15% in the 4th quarter, but Alaska's line wouldn't have grown nearly that much.

And of the aircraft you're taking this year, are you planning on purchasing them or are you going to be leasing everything like you've been doing in the past few years?

Well, at Alaska we had been buying and putting debt financing on them -- Horizon has been doing lease financing.

There are 11 new deliveries, and the plan is to purchase six from Boeing and take five other operating leases and we haven't decided how we'll finance the six deliveries we're going to take.

You mean whether you're sell and lease them back or not?

Exactly.

Thank you.

At this time, there are no further questions.

Mr. Kelly, are there any closing remarks?

No, we want to thank everybody for participating and we'll see you next quarter.

Thank you.