阿拉斯加航空 (ALK) 2003 Q1 法說會逐字稿

Good morning.

My name is Terrell, and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Alaska Air Group First Quarter Earnings Release Conference Call.

All callers have been placed on mute.

If you would like to ask a question during the question and answer period, simply press "star" and the number "1" on your telephone key pad.

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

Thank you.

I would now like to turn the question over to Mr. Tilden, Chief Financial Officer.

Go ahead, sir.

Thank you very much.

And good morning, everybody.

I would like to mention that we have a number of folds in the room with us today, including John F. Kelly, Alaska Air Group's Chairman and CEO, Bill Ayer, Alaska Air Group's President and Alaska Airline's Chairman and CEO and Jeff Pinneo, CEO of Horizon Air.

Also before we start, we would like to give you our normal reminder that this call will contain forward-looking statements, and actual results may differ materially from such statements.

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

Thank you, and I would like to turn the call over to John.

Thanks, Brad, and good morning.

Perhaps we can start by giving you an Alaska Air Group overview, and then have our two CEO's brief you on the details of their respective operations.

I think you've seen by now that we reported a loss this morning of 56.3 million, or $2.12 per share, that compares to a loss last year before our write-down of goodwill of 33.7 million, or $1.27 per share.

This was obviously a very difficult quarter for the industry, given the Iraqi war, and it was for us as well, but I would have say we were a bit surprised to say that the impact of the war on our revenue was extremely mild, compared to the rest of the industry.

Alaska Air Group Revenue for the quarter fell short of our own internal budget by $18 million, which is a lot less than I would have expected, that's about 3.3% and obviously our budget didn't include the impact of the war, because it was completed late last year.

Compared to last year, we showed a revenue improvement given our increase in ASM's.

At the AAG level, we had an increase of $18.6 million or a 3.7% increase in revenue.

On the expense side, the key driver was fuel.

Fuel was up $25.5 million, a whopping 39% over 2002.

That, again, was driven by the Iraqi war with fuel prices rising dramatically.

We were at 35% hedged, and we had an average strike price of slightly less than $22 per barrel, and that hedge saved us 9.1 million in fuel expense for the quarter.

I might note that without the hedges, our fuel costs would have been up 53.4%.

At quarter end, the value of our hedges now is approximately $15 million, and of that total, about $4 million, which relates to the ineffective portion of the hedges, has been recognized in our P&L.

I am also pleased to say that we continue to maintain a relatively strong cash position.

We ended the quarter with $616 million in cash and short term investments.

At the down only $20 million from the end of December.

Our cash flow for the quarter was basically flat.

Our preliminary cash flow statement shows a slight negative cash flow from operations of about $2 million.

On the financing front, many of you know that we successfully completed a floating rate, senior convertible bond offering on March 21st that raised $150 million.

I would like to note that we, since then, have had the aircraft financing, which rose in the second quarter, and we also have some extra proceeds from recent fare sales, so our cash and short-term investment balance as we speak today is roughly $675 million.

I thought I might share a bit more information with you about our conversable bond offering.

It was a deal that was marketed and priced before the market opened on March 18th.

As you know, it's somewhat normal for the price of common stock to come under pressure during the marketing of a convert, so the idea here was to market the security while the market was closed, so our conversion price for the bond would be set based on the last available closing price of the common stock.

We ended up achieving a conversion price of $26 per share, and an interest rate of LIBOR plus 2.5% which all things considered we feel good about.

While the bonds have a term of 20 year, they are callable after three years, and investors have put options at the end of years 5, 10, and 15.

So we are really thinking of this as a medium term financing.

The cash raised from this convert will obviously help us mitigate the capital expenditures associated with the new aircraft we're taking on this year, and will also enhance, as I said before, what was a relatively strong balance sheet.

Finally, I'd like to note that we are still evaluating the impact of the new government aid package, while more information should be come available in the next few days.

Right now, we are estimating a total aid amount of about $60- 70 million for Air Group, and we expect to receive that in 30 days.

Now I would like to tint over to Bill Ayer to cover the Alaska Airlines Results.

Thanks.

Good morning everybody.

Once again I will start by giving you a recap of how our numbers compare with the industry, and I will give you the numbers for the quarter, but I also have the monthly build up on that.

The industry today is comparing to much lower base than we are, due to the continued reductions in capacity and yields in the industry, during the economic slowdown that has occurred since 9-11.

We at Alaska have had year-over-year capacity growth every month since 2002, and for the quarter, our ASM's increased by 5.4%, compared to an industry reduction of 2.1%.

With the exception of March, we've seen consistent year-over-year traffic growth in every month since January 2002.

For the quarter our RPM's increased by 5.5%, compared to an industry reduction of 1.3%.

Yields continue to be disappointing.

We've really had to offer continuous fare sales to stimulate traffic.

So compared to 2002, yields for the first quarter for Alaska were down 2%, versus the industry, which was off 4.4%.

Compared to 2001, yields were down even more significantly but our yield decline is still much milder than the industry, compared to 2001 in the fist quarter, our yields were up 6.9%, industry yielding were down 18%.

And with our ASM growth, we've experienced much better passenger revenue performance in the industry.

Compared to last year, ours was up 3.5%, compared to industry average, down 5.6%.

If we compare passenger revenue to 2001, we show an even larger gap compared to the industry-we were up 1.1%, the industry was off 28.3%.

Again that's passenger revenue compared to 2001.

Our load factor was basically unchanged for the quarter, on a 5.4% increase in capacity.

We were up one-tenth of a load factor point for the quarter, industry was up six-tenths of a point.

The timing of the Easter holiday negatively affected March load traffic compared to last year.

Overall our RPM's were up 5.5% for the quarter, on an ASM increase of the same amount.

Looking at things geographically, traffic to Canada, Mexico and from Anchorage and Fairbanks to the lower 48, and in the intra-California markets, all of those traffic numbers were up about 5%.

In our newer East-West line from Seattle to Boston, Miami, Newark, Washington and Denver has grown 2.2% of our capacity to 8.3%, bringing along with it significant growth to our traffic base overall.

Traffic has grown more modestly in other regions, Arizona and the Bay Area continue to remain soft, with traffic off 7% in Arizona and 6% in the Bay Area.

I might note that these decreases track reasonably well with our capacity reductions as we saw that weakness in demand in those regions.

We'll continue to execute our strategy to strengthen our network by selectively introducing new service to markets where our customers want to go.

On May 22nd, we'll launch service from Seattle to Orlando, nonstop service.

Also, back on April 8th, we started service between Anchorage and Adak, Alaska.

Adak is a subsidized, central air service market.

That operates only a couple of times a week up there in Alaska.

On July 10th, we will introduce flights from Seattle via Los Angeles to Guadalajara, Mexico and Horizon and Alaska are working more closely together to more optimally deploy our fleet across our combined network.

For example, Alaska will take over Horizon's RJ Service between Portland and Denver this summer,so that we can serve that market with aircraft which are comparable to what our competition is using, and the plan is to have Horizon operate selected flights from the Pacific Northwest to the Bay area, also this summer.

With more joint Horizon and Alaska planning, we can better match capacity with demand, really trying to put the right airplane in the right market at the right time.

We also continue to right size our current markets by making frequency adjustments when appropriate.

By July of this year, we will have ten 737-900s in our fleet, and eleven by year end, to make sure that the additional capacity of those aircraft, those 172-seat aircraft, is deployed appropriately, we are using a new fleet optimization tool to assist with fleet assignment decisions.

Seems to be working, for the first quarter our 737-900 load factor was 5.7 points higher than the system average, so we are getting those larger airplanes into some good markets.

Just like everyone else in the industry, our advance bookings were severely impacted by the Iraqi war.

On the day the war began, our daily bookings were off 30%.

To counteract the decreases that we were seeing we launched a sale on April 2nd with fare levels that we really hadn't seen since the days following September 11th.

For example, the fare between Seattle, Portland and Los Angeles was $79 each way, the fare had been -- the lowest fare had been $99 prior to this sale.

And between Seattle and Newark and Orlando, for example, we dropped the fare down to $99 each way, and in addition to these discounts, we're giving $10 off for any purchase made at www.alaska-air.com to stimulate that channel.

The sale helped a lot.

It built back load factors, future load factors gave us a number of record sale dates for www.alaska-air.com, and currently our book load factor is about flat now compared to last year for the second quarter.

Unfortunately, yields will likely be negatively impacted from the sale, but at least we got our traffic back.

I might also note that our advance bookings have not been impacted by the out break of SARS, because of our largely domestic and West Coast network which is less affected compared to the other major carriers.

Looking at some other revenue items, freight and mail, we're ahead of last year by $1.5 million or about 10 percent, and we're seeing improvements in mail and freight volumes compared to last year.

Particularly up North in Alaska, our intra-Alaska mail has grown as a result of the DSA waiver.

And cargo revenues continue to grow as we develop some new markets in the lower 48.

Operationally, we have continued to run well through the quarter, which I think a real tribute to our employees who are staying focused on providing excellent customer service.

On-time performance for the first two months of the year was ahead of last year and we continue to do well in both baggage and customer satisfaction ratings, so we feel that overall, we are meeting or exceeding our customer's expectations for operational performance.

Looking ahead, we are projecting that our ASMs will grow this year by 6.5%, and the breakdown by quarter is as follows: 5% growth for Q2, 8.5% for the third quarter, and 8% for the fourth quarter, which will bring us in at 6.5%, maybe 7% for the full year.

And the growth will come from the annualization of our 2002 growth, some added frequency both in some of our newer markets, as well as some modest frequency advacs(ph) on the west coast, and additional distinctions including Orlando and Guadalajara.

In 2003, we plan to add eleven aircraft to the fleet and retire 4, for a net increase of 7 units.

Those 11 additional aircraft include six 737-700s, five 737-900s and the four retirements are all MD-80s.

During the first quarter, we took delivery of three 737-700s and one 737-900, which grew the fleet from 102 aircraft at the beginning of the quarter to 106 airplanes at the end of the quarter.

In the second quarter we will be adding one 737-700, and three 737-900s.

The delivery of the rest of the new aircraft and the retirements will occur in the fourth quarter bringing our fleet count to 109 airplanes at the end of the year.

Given the current economic outlook, we are carefully evaluating our fleet plan for 2004, and I might just note, as I mentioned last quarter, we have a lot of flexibility with our fleet plan.

We have a lot of flexibility to either grow the fleet to as many as 115 aircraft, or bring the count back down through some lease returns down to as few as 105 airplanes.

Our thoughts right now are that we will take delivery of the three aircraft we've committed to in 2004, but will be cautious about any incremental capital commitments.

On the cost side, cabin increase by 2.8% and this increase is indicative of the higher fuel costs, as everybody is experiencing.

Excluding fuel, our unit cost decreased by 1.4%, coming in at $8.75, which I think is better than the guidance we gave you in our last quarter in our 8-K's, and it is also ahead of our plan.

As you'll recall, we have a fairly aggressive cost-management effort underway, with chasm x-fuel (ph) targets of $8.35 for this year, $8.10 for next year, and $7.85 in 2005.

These targets were established last April, well before some of the changes that our competitors have recently announced.

The bottom line here is that we are thoroughly committed to doing same things in the short term, medium term and long term to return the company to a normal level of profitability.

With that I'll turn it to Brad to take you through some of the specific line items.

Thanks very much Bill.

Starting with wages and benefits at Alaska airlines, we experienced an of $22.3 million or 13.5% for the first quarter. of this increase, $13 million, or more than half is due to an increase in benefits, and the remaining $9.3 million is due to wages themselves.

On the benefits side, pensions is the largest piece, pension costs related to our defined benefits plan have increased on an annual basis from $40 million last year to $71 million this year, so they're responsible for about $9 million of this quarter's increase.

Health insurance and workers comp costs both increased by about $2 million this quarter, accounting for the remaining increase.

Wages themselves increased, as I said about $9.3 million, which is about 7% Our FTEs increased a little under 2%, or fewer than 200 people on our 5.4% ASM growth, and that means that our wage rate increase, which of course, counts scale increases and step increases was about 5.5%.

Our fuel costs increased by $21.7 million or about 39%, again on ASM growth of 5.4%.

Again, as John mentioned we were helped significantly by our fuel hedge contracts which contributed $0.28 per gallon on the fuel hedged or about $0.10 per gallon on an overall basis.

Looking forward, 35% of our consumption is hedged for the rest of the year, with crude oil swaps, and those are all at prices below $22 a barrel.

Aircraft maintenance costs increased by $2.3 million or 6.5% due to more seat checks this year than last year, and more outside repairs on APUS, CSCs, landing gear and other major components.

We're expecting maintenance costs in the second and third quarters to be slightly higher than last year and in the fourth quarter, we are expecting our full year maintenance costs to be very close to last year's figure, maybe a little bit lower.

Aircraft rent decreased $1.3 million or 4.1%, because of lower lease rates on four MD-80s and five 737-400s that we negotiated and extended during 2002.

These lower lease rates were partially offset by new lease costs on two 737-700 aircraft that we took delivery of in January and March 2003.

Commissions decreased $6 million or 42% due primarily to the elimination of base travel agent commissions, which started in June of last year, as well as the ongoing shift in our distribution channel.

For Air Group, for the quarter, sales at traditional travel agencies were 46% of total sales this year versus 53% last year.

About 25% of our sales this quarter were on www.alaska-air.com compared to 18.8% of our sales for the first quarter of last year.

I would say for the month of March, 2003, 92% of our passengers purchased electronic tickets, which means we're getting closer and closer to squeezing out paper and exclusively using electronic tickets.

Planning fees and other rents increased by $5.1 million or 21.6% this year, compared to last year.

In 2002, we had about $2 million worth of favorable adjustments, which affects the year-over-year comparisons.

The remainder of the increase is due to some volume growth but also significant capital projects and operating cost increases at our major airports, which are now being reflected in landing fees and terminal rents.

Other operating costs decreased by $2.2 million, or 6.1% compared to last year, this line item includes insurance, which decreased basically $2.2 million due to lower rates that became effective with our November 15th renewal.

With respect to operating costs, as Bill said, while it's more clear than ever that we really need find ways to restructure our business and achieve our cost management objectives to compete in this new environment.

We really appreciate the efforts of all of our people managing their costs.

As we look down our P&L, we see a big unfavorable variance for fuel and a couple of other smaller ones, but we see a lot of our folks that are doing a great job of managing their budgets.

Again, it's clear that we have a lot of work to do, but it is encouraging to see the degree which costs are being controlled, and the degree to which we're managing our plan.

Looking blow the line at non-operating items, the first thing you'll see is a $3.8 million decline in interest income, $2.4 million of which is due to change in how we account for premiums and discounts on our marketable securities portfolio.

The is a one-time change and looking forward, you can expect that this line item will trend in a fairly stable fashion, with changes in our cash and short term investment portfolio, and with changes in interest rates.

You'll also note that interest capitalized increased by about $600,000 as we recommenced interest capitalization on aircraft deliveries that had be deferred.

And, finally other net non-operating items changed from a credit of $4.1 million last year, to a credit of just under $400,000 this year.

A number of things contributed to that, one was, last year we received $1 million from the sale of our investment in eKWAUPBT (ph).

Last year we received $1.4 million from an insurance recovery, and the gain, or the income that we recognized from the ineffective portion of our fuel hedges was $1.1 million lower this year than last.

I think it was $1.7 million last year, and $600,000 this year.

Looking forward, our cost guidance, our current projections of unit cost tech fuels for the remainder of the year are as follows.

For the second quarter, 8.4 cents, which I think is in line with the guidance we shared last call.

The third quarter 7.9 cents, again similar to last call, the fourth quarter 8.4 cents, and for the full year 8.35 cents, which in line with this overall cost target that we've shared and discussed on a number of our conference calls.

As we have done in the past, we will continue to update you with any changes in these projections through the 8ks that we file each month.

At this point, we'd like to turn it over to Jeff to discuss Horizon's results.

Thanks.

Good morning everybody.

As reported, Horizon posted a first quarter pretax loss of $15.3 million.

Compared to a $10.2 million loss in the same period last year.

Revenues were up 6.1%, or $5.7 million over last year, on a 15.9% greater capacity, but our operating expenses were higher by 10.2% or $10.5 million, with $3 million [inaudible] increase due to higher fuel prices.

On a unit level, our Rasem(ph) came in 8.5% lower than last year, due to soft passenger growth that lagged our ASM growth rate.

The negative effects of this were offset a bit by chasm(ph) reduction of 4.9%.

Excluding fuel, our chasm(ph) was 7.5% lower than last year.

As with last quarter, our challenges remain on the revenue side.

Where the continued stagnation of demand for air travel is exacerbated in many short haul markets of the type served by Horizon.

Services which compete with a range of viable substitutes, yet I must say that while profitability continues to elude us, I am proud of the strides our people have made on every other front.

Especially in the areas of unit cost efficiencies and process improvements that matter most to our customer, the reliability of our schedule and our on-time performance.

Each though we operated at a reduced schedule last year for much of the first quarter, our dispatch reliability for the quarter was up 2.1 points to 97.5%, and our on-time performance, departures within 15 minutes, was up 10.1 points to 89.5%.

At the same time, our work force was 17% more productive on an ASM basis than last year, and flat with last year on a passenger basis.

While aircraft utilization was 9% higher.

Together with Alaska, our baggage mishandlings are among the lowest in the industry and our customer satisfaction indexes are at an all-time first quarter high.

Our people are turning out a terrific product, and this will pay great dividends down the road, as things outside ourselves begin to improve.

Looking more closely at the revenue picture, our RPM's were up by 8.6%, but all of this came from flying longer routes.

Actual passengers for the quarter were down nearly 1% due, partly we think, to the differences in Easter, Holiday, and Spring Break travel patterns between 2002 where they were more concentrated in March and this year.

In addition the northwest economy remains one of the most sluggish in the nation, and that has clearly affected business travel in the region, which typically comprises about 37% of our revenue.

Our load factor for the quarter was 3.94 points lower than last year, and in March, with the added burden of war in Iraq, we were down a full 6 points over prior year.

One thing to keep in mind when making these load factor comparisons was that we were operating a reduced post 9/11 schedule until the middle of the quarter of last year, which resulted in higher than typical load prices in January and February.

Passenger revenue, which improved by 9% this quarter was driven mostly by higher average fares, and $3 million associated with a new method apportioning Alaska Horizon expired ticket revenues, and a change in how intercompany incentive payments are booked.

Without these adjustments, the yield was actually 2.7% lower.

But, at the level we had been forecasting internally, and slightly higher than the most recent quarter, so this was a bit of the good news - that yield, unlike demand wasn't worse.

One of the chief reasons for yield stabilizations this quarter is due to a change in mix.

That is lower yield, leisure customers, appear to have been affected more by the war than economy, than higher yielding business travelers.

You'll recall that at Horizon, following 9/11, we addressed the drop in business traffic by shifting capacity to seasonal, leisure markets.

Also affecting the leisure segment this past quarter was the weather.

We had warm weather in the mountains where people go to ski, and wet, cooler weather in the desert where people go to escape the rain.

Unfortunately, we had shifted a good deal of capacity to the ski and sun leisure destinations in anticipation of that shift in demand - that ultimately didn't materialize.

Looking ahead, we will continue to adjust capacity, and reallocate equipment types in conjunction with Alaska in ways that are tailored to market demand and a are capitalized on our relative strength.

Our newly announced service from Seattle and Portland to Santa Barbara, beginning July 1st, is a good example of a test to use the unique capabilities of CRJ to provide new nonstop service and to strengthen the Alaska Horizon network out of Seattle.

We are also exploring a number of cooperative ventures with communities and resorts interested new or added air service, along the lines of the Sun Valley - Los Angeles program that we're currently offering.

In December, we will begin service from Seattle to Cataloops(ph), British Columbia, in another similar arrangement.

Our fleet transition was completed in February with the retirement of the F-28.

Currently, over half our aircraft are new generation, 70C Bombardi AQ400 and rebuilt jets, all of which are still under warranty.

With the F-28s retired, our fleet now has an average age of 3.2 years.

Our oldest aircraft is a 37-CQ200 that was manufactured 1997, and like the other 27 that we operate, they are among the most reliable in the industry.

Rounding out the revenue picture are our freight and mail revenues, which were up 5.3% over last year, due principally to new handling services provided to other carriers.

Other revenues were lower by $2.1 million because of manufacturer credits that were learned last year, but which have since expired.

Looking ahead, we're projecting our ASMs will grow by 7.6% for the year, which is slightly higher than we told you on the last call.

The breakdown by quarter is as follows: 4.2% for the second quarter, 7.1% for the third, and 4.3% for the fourth quarter.

This growth stems mainly from the annualization of our 2002 growth, higher utilization because of improved schedules and reliability, and the expected delivery of two additional CRJ700's in the fourth quarter.

Looking at our costs, I noted earlier that our operating expenses came in $10.5 million higher than last year.

Looking at the fleet categories of aircraft rent and maintenance, we experienced increases of $1.6 million, and $1 million respectively.

However on an ASM unit basis, our costs regional lower by 4.1% and 2.3%.

Taking fuel into account, the new fleet was 8.5% more efficient based on ASMs.

So, the new fleet is truly helping us drive greater unit cost efficiency.

Our aircraft rent was higher because we flew five more CRJs this year, and three fewer F-28s.

Our maintenance expenses took a turn up this quarter with the beginning of planned, heavy check work on both the Q400 and CRJ, and a series of unplanned engines events on both aircraft types.

Our heavy check schedule will continue at an aggressive pace throughout the year, with eight CRJs slated for the work.

Looking at some of the other significant expense categories, our wages and benefits increased $1.8 million, or 4.8% for the quarter.

Of this increase $.5 million was due to wages, and $1.3 million was due to an increase in benefit costs.

Total FTDs were slightly lower than last year, so the increase is based on a 2% increase in average wage.

Our agency commissions were down $1.7 million for the same reasons that Brad noted earlier, and contract services were higher by $2.6 million due primarily to a change in how service is provided between Alaska and Horizon, or both.

This change has no effect on profit, but by no longer netting charges in revenue chasm(ph)for the quarter increased .4 cent, and conversely unit revenues were slightly higher.

Landing fees and other rents increased a note worthy 35.9% or $2.3 million over last year.

Like Alaska, in 2002 we reversed a number of accruals for airport surcharges after 9/11, which did not materialize.

They account for about $1 million of the increase.

The remainder of the increases are in airport costs as passed on to operators.

Other operating costs have decreased by $1.2 million.

This line includes insurance, which decreased by a $1 million dollars due to the removal of the war-risk surcharge that Brad noted earlier.

We had an increase in property taxes of about $.6 million due to new airplanes, which was offset by a reduction in legal fees, flight calls, and passenger inconvenience expenses.

Looking ahead, our projections for unit costs X fuel for the remainder of the year are as follows.

For the second quarter we're looking at 16.4 cents.

For the third quarter 15 cents, and for the fourth quarter 15.8 cents, which rounds out for a whole year to 15.9 cents, and that is .4 cents higher than what we told you on the last quarter call.

And is due to the change in intercompany accounting methodology previously mentioned.

As we've done in the past, we will continue to update with you with any changes in these projections as part of the Alaska Air Groups 8ks.

So, now let me reintroduce Brad who will review the Alaska Air group balance sheet and cash position.

Thank, Jeff.

As John said we ended the quarter with a very strong cash position, $616 million, compared to $636 million at the end of the fourth quarter.

The decrease was mainly due to CAPEX of approximately $106 million, as well as $36 million of debt repayment.

These were both offset by $123 million of net proceeds from the issuance of our convertible bonds.

The net proceeds are significantly less than the $150 million of gross proceeds, because we elected to collateralize three years worth of interest to lower our financing costs.

And these collateralized payments are reported as restricted cash on our balance sheet, which we include in the other assets caption.

As John also said, for the quarter our cash flow from ops, were about break even, it looks on a preliminary basis like they were about $2 million drain from operations with cash flows.

For 2003, we're projecting capital expenditures of $370 million, and this number excludes five aircraft that will be taken under operating lease arrangements.

Our adjusted debt to cap ratio, adjusted for operating leases, is 79% as of March 31st, so it's up slightly from the 77% we had at December 31st.

The increase in primarily driven by the increase in long-term debt that came about from our convertible bond issue.

We believe that this number still compares quite favorably with the rest of the industry.

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

As many of you know after 27 years with Alaska Air Group, including 16 as the CEO of either Air Group or Airlines or Horizon, John is going to be retiring on May 20th, so this is his final quarterly conference call.

We would like to wish John all the best in his retirement and thank him for all that he has done to help grow and development Alaska Air Group over the years, and to position us for success in the years ahead.

We're certainly going to miss him.

And with that, we'll turn the call over to John for questions.

Thank, very kind of you, and we will open it for question, operator.

Okay.

And at this time, I would like to remind everywhere to ask a question, please press star and the Number 1 on your key pad, and now we'll pause for just a moment to exile the q and a roster.

Your first question comes from Ray Neidl from

Well, John, congratulations on your retirement, we're all going to miss you.

Thanks, Ray, appreciate it.

And basically, I think this is basically this is probably for Brad, is the pension.

This was a big expense increase in the past quarter, and probably will continue to do so.

Is there anything in the works where you're work booking with your unions to maybe go to a 401(k), or go to a different type of plan, the way that Delta is doing with their employees.

Good question.

Fist of all, our costs are up considerably.

For a couple of reasons.

We've lowered our expected return on plan assets to 8%, which we think is a good number, it's a realistic number, but it's also a conservative number.

So, that's a fair amount of the increase in cost.

And, the second is just the way the assets have performed for the last three or four years.

We've developed these big actuarial losses that have to be amortized, so two things have driven the increase, and I hope this is a stable level that we'll see for the next few years.

With respect to changes in benefit programs, you know, a lot of things are going on.

One is the cost, the securities, the benefits, the predictability of cost for us, and even changes in what our employees really want.

We did announce a change for management employees last year or early this year, where new hires will move to an enhanced defined contribution plan, and not have a defined benefit plan, and current employees will have the option of keeping a DC plan and a DB plan, or going to the enhanced DC plan, and so we're also looking at right now seeing if other groups are interested in moving to this plan.

We think -- the plan will appeal depending on where you are, what point you are in your life, how close to retirement, but we think that this new plan is a generous DC plan and it will have a lot of appeal to some of our employees.

Okay.

And a big picture question.

With Airtran and Jet Blue moving more of their operations toward the west coast part of their growth, and with United possibly coming up with a low cost product, and Southwest not growing that much on the west coast, but still a big presence, what do you think the mix is going to look like over the next year or two with increased low cost competition in your neck of the woods?

Ray, this is Bill.

That's anybody's guess, and we spend a little bit of time looking at that to see if there might be opportunities down the road, but I'll tell you the bulk of our time is taken up by working the cost issues here.

We're really committed to these cost goals.

No matter what happens externally, competitively, we're going to be better positioned with a lower chasm(ph).

We know that and that's where most of the effort is.

We've got a great product with great people, and we can execute against anything.

We've proven that year after year after year after year, and so Bill's focus on getting the cost down is really going to the key to competing against anybody in the future.

Bill, is there any chance -- what's your thoughts on these temporary tax cuts that the industry is getting.

Is there any chance that these could be converted into something more permanent since the user taxes are so high.

That would be nice.

We've been making the point all over Washington about the taxation of this industry, and comparing the tax on this business to tax on cigarettes and alcohol, and it is pretty ridiculous.

This is a step in the right direction, but I think we would like to see something more structural - that's imbedded.

All right.

Thank you

The next question comes from Brian Harris.

Now that you've had a little bit more experience and data on the long haul market, could you comment a little on your overall Seattle operations?

Do you believe that will have greater activity than, say, a year ago?

Yeah, certainly more connecting opportunities for people, particularly from the state of the Alaska, Brian, and in every one of these new markets, we build the timing of the flights to make sure we have all of those connecting opportunities.

We are also running a lot of through flights to Anchorage, in particular.

Our DCA service and our Denver service both have Anchorage tags on them, and we are seeing some good flow traffic through Seattle with that.

And then just general comments up and down the west coast, versus the competition you're seeing from Southwest, and the united service, any share shift that you would like to comment on?

Well, you know, we're always a little hesitant on this, because numbers tend to be volatile, especially the travel agency numbers that we see.

Those are the close ones.

Generally speaking, United has had a scheduled Reduction, if you go back a year.

They had 12 Seattle-San Francisco round trips last year.

This July they're planning on 8 and a half.

Similarly in Denver, for example, they've gone from 11.5 to 8.5, and Southwest has been stable up and down the west coast.

We feel fine with where our market shares are ... we compare load factors, traffic numbers, and we've seen some modest improvement for us over a long period of time, and that's really the best way to look at it is over many, many, months.

Not on a quarter comparison, but what's going on over a broader time frame, and basically, you know, demand follow capacity here to some degree, and we're benefiting from that because we've had comparable reduction in those comparable markets than say United has.

Okay, thank you very much.

Your next question comes from the line of Michael Linenburg.

Yeah, hi gentlemen.

I think to Brad, you talked about some savings on the lease side, and renegotiating some leases for some MD-80s and 737-400s, is that a function of renegotiating lease rates in the midst of a lease period, or are these as these aircrafts come up for renewal.

Yeah, what we've talked about so far are as airplanes come up for renewal.

We have gone to the lessor, and said we want to extend, basically at market rates.

And, basically market rates have been, on the MD-80s far, far lower than the previous rates we were paying.

And, on the 400s, close to half of the previous rates there.

There may also be an opportunity to go to the operating lessors about trading term or something for a recasting of the rate, and that's something we're looking at now.

My second question, Brad, is just the aircraft financing market.

I mean, I think you mention that you were going to be bringing in be 5 aircraft on operating leases, and I presume the remaining will be put on balance sheet.

How difficult has it become to finance aircraft in general?

We have Amber Post, our Treasurer, is in the room, and I might ask her about that.

Sure, it's certainly much more challenging than we've seen in prior year, but we did see about twice as many proposals for the financing that we intend to complete for this year, so we feel confident we will get it.

As John mentioned, we did just close a financing on a 900 that was a pricing and loan valued advance rate was, we were very happy.

All of that stuff was -- we're very happy with.

Okay.

Just my last question, Brad, maybe you said this, and maybe I missed it, when you were talk about the cash flows, I don't think I heard anything about a tax refund, and I don't think you said you -- as I recall you said you were going to get one this quarter.

Could you update us on that front.

I wish our Tax Director were here.

We do expect $32 or $33 million from 2002, and another $3 or $4 million from earlier years, but we don't know when we're going to get that money.

There has been a change our IRS case manager, and it looks like we're at least a month or two away from receiving that right now.

Okay.

Very good, then.

Okay.

Very good.

Thank you.

The next question comes from Gary Chase.

Good morning, guys, I apologize, I had to step out a couple of minutes while you were doing your prepared remarks.

My apologies.

You announced in some test markets a new fare structure that America west is doing something similar and having a lot of to draw I know it's a tough environment to draw comparison, but is there anything you can talk to there??

Yeah, Gary, this is Bill.

We are in the process of evaluating this test.

We did about 15 or 20 city fares, so a small test, and we did them with a control market in the same geography and same kind of state or similar markets.

So, the test involves a dramatically simpler fare structure, and a much less of a gap between the high and low structure.

We are trying to compare what's going on with on-board revenue and really better understand the elasticity of the various segments of the market.

I would say it's inconclusive so far, but we're early on in it, and I don't think it's going to be until June or so that we've had time to look at this thing, and then we'll decide if we want to expand it.

I think even fit were revenue neutral, it would be the thing to do.

I think this whole industry has a credibility problem with the fare structure, and the more we can do to make it easier to for customers and make it seem more understandable and more logical the better off we're going to be.

We want to make sure from a revenue standpoint that it is reasonable.

Okay.

Great.

Do you think you could get either Bill or Brad to comment on the cost goals for Alaska.

You talked about Chasm X fuel going down.

Also there's -- you know, the newer flying you're doing is longer haul, east-west flying.

Should we look at that how you're doing on stage length, or what context??

Yeah, we've looked at that Gary, and I think what we concluded was that stage length certainly is a factor.

But our review is it is basically offset by inflation, even if there were no labor contract changes, just people moving down the scale, that sort of structural inflation would occur.

So, our view of things is to get, at the time, it was a 8/10 of a cent reduction in our unit costs, was that your question?

Well, that was the bulk of it.

I mean, it would be great to hear the detail, one of the things I did want to get to was talk about the aircraft utilization and what you're doing there.

East-west flying will help there, but anything else would be great.

Yeah, we've got in a number of big initiatives that we feel will be good.

One of them is aircraft utilization, we think we'll end this year at 10.7 or 10.8 hours a day, the goal is 11.1 hours next year and then up to 11.4 hour per day by 2005.

We have our folks going down that road, and that requires tremendous coordination with the operation and scheduling folks.

We have other initiatives, we've shared some of this with you in other settings.

Heavy maintenance costs, we've got an initiative to reduce costs by $20 million.

Both through -- we had a base maintenance line in Seattle, one in Oakland, we'll consolidate both of those in Oakland, and get people to work on two checks as once.

That's a big, big be driver.

We've had great implementation and acceptance of technology to sell our tickets and for folks to check in, but we're not really at the gate area of the airport yet, so that's another initiative.

Initiatives having to do with how we staff our airports.

We've got complex operations at our airports, and also complicated union contracts that influence how we schedule people, so using some technology to schedule customer service agents and ramp service agents and line mechanics ... we think there's $7 or $8 million saving as year from that initiative.

On and on. www.alaska-air.com the goal is to get that 50% of our booking by 2005, basically to squeeze out paper by the end of this year.

That's a huge savings for the company.

Amber is leading a project on supply chain management.

The company buys more than $1 billion of goods and services a year.

We have a very long tradition of being pretty scrappy with this stuff, but we think it's time that we can take advantage of the new ideas and approaches to purchasing and supply chain management.

We think there's a huge opportunity there.

So...

We've got George [inaudible] initiative also.

George is leading a simplification task force.

Even the fare project that Bill mentioned.

We think, one huge benefit of that is improved credibility with our passengers.

But simplifying fares should make our business much easier for people to operate in reservations and revenue accounting and revenue management, and all of these area.

So, it's a very aggressive goal, and we've got a lot of work to do to get there, but I think we'll e we're feeling good about the degree to which the plans are developed and how we're proceeding.

Okay.

Thanks very much, guys.

Your next question comes from Peter Jacobs.

Good morning, gentlemen.

First of all, Brad, could you please give us an update on the spot price that you're seeing for fuel?

I think it's at roughly 95 cents right now, Peter.

That may be a day or two old.

At the with the plane taxes and everything.

And excluding the benefit of the hedge.

That's correct.

Okay okay.

Agreement the follow-up on the last question about the cost goals going forward.

Will any of that achievement of that 7.85 cents per seat mile include changes to union rules, or do you think you can do it outside of that.

This is Bill, Peter, and this is a service business we're in, and we have been blessed with just great people that have really been the key to the success of the company.

They are really the point differentiation that you can ever have in this business, so we don't take any discussion of wage rate lightly at all.

We have been working the nonwage component, and Brad mentioned some of those things.

The number of people we have in these functions, using technology to the best advantage we can, but whatever we do, if we need to go down that road, and we are committed to these goals, and we need to be competitive, and we are committed to these philosophy of market pay, and certainly market pay is redefining itself across the industry in the last few weeks.

But, we want to work collaboratively with our people on that.

It would only be with lots of discussions and working together, because, you know, you can solve a problem in the short term, and create a much bigger problem in the long term, and we're committed to a long term goal here that's viable.

Okay.

Thank you.

Brad, just to clarify on some of the cash proceeds from the government aid and the tax refund, essentially is it fair to say that it's about $100 million in cash you expect to receive this year, $30 million from the tax refund, and $60 million or $70 million from the government aid.

Yes.

And I think we're confident the government aid will come in the next month, Peter.

The tax, we're less confident on the timing.

And one other clarification, on the restricted cash was that $20 million, or $30 million, I think I missed that.

It was $22 million.

Of the $150 million of proceeds about $22 million went into restricted cash.

Okay and for Jeff, I'm curious about two things.

At Horizon the guidance in the AK for April was about 16 cents for available [inaudible] -- your unit costs excluding fuel, and it came in at about 16.4.

Can you help me understand the difference there, what might have caught you by surprise.

The second question, Jeff, would be the last two quarters, the traffic growth at Horizon has lagged passenger growth, but I know things have been going on at a macro level, but I wonder about your ability going forward, to -- do you think that traffic could match the capacity growth, or do you think that might not be in the cards this year?

Well, yeah, good question, Peter.

On the first question, our actual chasm all boiled down to a change in the way we account between our 2 companies for revenues and expenses.

That actually was .4 cents exactly.

That accounted for the entire difference, and maybe either Brad or Terry could elaborate more on the process there.

I'm not sure if there's -- just modest -- what we do is we go forward.

There was expired ticket, tickets that go unused.

Horizon is receiving a larger share of that revenue going forward, and then we updated the corporate charges that get passed onto Horizon, and I think that's showing up in your contract services line.

So, that essentially just came up as you were the books for the quarters then?

Well, it's swap between revenues and expensing.

There's no difference in the bottom line.

And I think it's fair to say, Peter, it was in the plan, and until our cost guidance going forward.

And on the traffic question, please, Jeff.

Well, we're still adapting to changes in our world, and Horizon has been disproportionately impacted because of our heavier dependence on business travel.

The actions were taken to shift some of that capacity into leisure markets.

It has had some impact on keeping load factors up, although we saw a significant decline this quarter because of war, primarily.

But going forward, we're looking at a number of different missions that should help to even that out, first of all, the work we're doing together with Alaska on harmonizing the deployment of our fleet, to make sure we have the right equipment in the right markets at the right time has already placed equipment in markets that have higher traffic and load factors.

Long Beach is a good example.

Last month it was our highest load factor market. [inaudible] around 72%.

Eventually that will evolve where Alaska take as higher role in there, and we'll continue to do more of that.

We are seeing good results from our announced Seattle-Santa Barbara service.

Probably the best for a market like that in anything we've done in terms of advanced load factors, why that works is because it plays into Seattle network building strategy, and provides new service where none exists on a nonstop basis, so we're not only providing it point to point, but a lot of network flow there as well.

We have a lot more work to do in building Seattle to get our combined share to the level it should be for an entity of our size, and we'll continue to pursue those opportunities.

And over time, we think that will have a positive impact on traffic as you refer to it.

John, I would like to say that we will all certainly miss you, and wish you the best of retirement, and look forward to seeing you at the last annual meeting in May.

Absolutely.

Thanks, Peter, I appreciate it.

Next question comes from Jamelah Leddy.

I wondering with respect to the freight and mail increase, do you expect that to continue to increase every year over the next 3 quarters or so, until the anniversary of some of the changes?

Hi, Jamelah, this is Brad.

I think that's a fair assumption.?

And, with respect to the security fee you won't have to pay this summer will most of that be used to generate new traffic, or will we see some of that drop toe to the bottom line.

I guess I think the way pricing works is that we're going to see a benefit from that, if that $2.50 fee amounted to roughly $50 million for Air Group on an annual basis, so for the summer it's maybe $15 million, and whether we -- we don't know exactly how we'll respond in terms of fares, but fit lower this fares by 1%, maybe you'll see a 1% increase in volume, if it lowers the fare, maybe fares go up, if you raise fares by that amount maybe volume stays the same as where it would have stayed had the tax been in place.

The way we understand elasticity and pricing and decision making by our passengers, we think it will get most of the benefit of that tax benefit being suspended.

And lastly, in terms maintenance expectations, I didn't hear what you said on the call with respect to Alaska.

I think at Horizon you said some of the heavy checks would be continuing throughout this year.

Could you help me understand what's going on at Alaska and what to expect for the next couple of quarters.

Yeah, based and the planned schedule of checks and so forth, we're expecting slight increases in maintenance costs in the second and third quarter, and a decrease in maintenance costs in the fourth quarter, with the full year effect being that maintenance costs are flat or slightly down from last year.

The next question comes from Chris Kennedy.

Hi, actually it's Jim Higgins at CSFB.

You mentioned no Sars impact, and I don't know how you can sort this out, but are you seeing any difference in traffic that you're feeding to northwest in particular?

Well, it's hard to say, Jim.

Northwest has not had any scheduled reduction out of Seattle.

They had one Tokyo flight a day.

They had planned to reinstate their Osaka service, and I think they had delayed that - I think that was seasonal.

So weren't seen any direct schedule impact where we get the bulk of that Asian fee, which is Seattle, and our interline numbers with northwest appear to look pretty flat, pretty comparable, so we can't infer anything with Sars going on in our network.

Okay.

Great.

And could you sort of step back and update us on your expectations for full year pension expense, and also cash contributions?

Full year expense, we're expecting $70 million, and cash contributions of right around $40 million.

So that was the full year you were talking about?

Yes.

Okay.

Thank you very much.

Your next question comes from Helane Becker.

Thank you very much operator.

Hello, gentlemen.

Hi, Helane.

Just real briefly, air traffic liability in the first quarter?

How did that look?

It wasn't on that, numbers you gave us.

Do you have another question.

I'll try to pull that up while we're talking here.

Actually, no.

I have no more questions.

Here it is.

ATL was $258 million at the end of the first quarter, which I'm not sure in I've got our year-end handy but I think that's tracking with normal how we would see it.

John mentioned cash from the fare sale, cash proceeds have been up since the end of the fist quarter, which would imply that ATL is moving up right now.?

Right, exactly.

And my other question really is with regards to profitability.

You know, you're doing everything you need to do with regards to profitability, it looks like, on the cost side of the equation.

When do you think you can get back to at least operating process?

That's a great question, Helane.

I mean, you guys follow this stuff as well as we do.

What we've said consistently is that we have these cost objectives that we've laid out.

We understand that it's extremely important that we hit them.

We came up with these in April of 2002, it may be necessary to reevaluate them as we move forward.

We operate in one of the lowest fare regions of the world, and definitely the country, and so know we have some sense about where RASM(ph), you look at the growth of lost cost carriers and look at the long term trend of yield.

It gives you some confidence of where we're at as we go forward.

We definitely don't see a profit in 2003, 2004, we hope we're on our way back, and it's hard to say.

I guess that we are saying consistently is that we are committed to getting to a normal level of profitability, and we understand a lot is going to have to come from the cost side.

I think it's important to say we're not counting on any external events to help us.

It would be nice, but we're not counting on a competitive vacuum being created, the government long term reducing taxes, we're saying given where we are today, what do we need to do to the cost item in particular, but also to continue to work revenues.

But also what we're doing is saying what do we need to do today to up increase market share.

Right now in this environment, it's market share.

The markets are not growing, so the customer service side of this thing continues to be very important, and we don't want to lose sight of that.

As we hopefully continue to shift business from the Competition.

But given that it's what do we need to do with costs to get the company back to a break even.

Thank you very much for your help.

John, we'll miss you.

Thanks Helane.

Your next question comes from Glenn Engel.

Good morning.

I guess, John, congratulations for leaving the airline business.

Two questions please.

One is the unit cost forecast the beginning of the quarter I thought for Alaska was 8.9 cents.

You did better than that.

Why wouldn't that suggest that you'll continue to be doing better throughout the other quarters??

You know, we may do better in the other quarters, Glenn.

It's -- I will say our budgets either has gotten hard and harder over the last couple of years, We were very pleasantly surprised to see our costs come in at 8.75, versus the plan of actually 8.88.

We want to give you guys conservative guidance, we don't want to under perform, but we do want to do slightly better in the coming quarter, we don't want to commit to that at this point.

But there was nothing really one time that let you beat your goal.

If you look through, as we said, Glenn, I think there's great understanding between our employees and managers of the seriousness of the problem, and people are doing a great job of managing every line.

There is a lot of favorable variances to plan, is that what there is.

Second question.

Your new routes are they adding to seasonality, detracting from it or is it keeping your business the same seasonality?

Doesn't seem to be helping much, Glenn.

There is some more seasonality in these markets.

We see numbers that are at or below the system average and we had just the opposite the last time we talked with you.

We were significantly outperforming the system with these new markets, so it appears there is some seasonality there, but again this is our fist season there, so how much of this is reduction.

Maybe people aren't traveling east-west as much during the war.

Washington and New York may be places people don't want to go at the moment, it may come back.

It's hard to say.

But they're healthy load factor, and they're going to grow as we get to the year over year comparisons.

And finally, could you give us some business mix numbers?

I'll give you both revenue and passenger volume numbers.

In first quarter of 02, the top four buckets accounted for 24.3% of our revenue, and that's down to 22.2% in 03. 12.6% of our passengers in 02, down to 11.3% in 03.

I also have top 6 if you care about that.

Oh, what the hell.

Top 6 went from 47.4 revenue to 44.2 this year, and passengers -- compared 30.1% of passengers in 02 to 24.7% in 03.

It's more of a volume issue or trading down issue than a business pricing issue?

Right.

Thank you.

And at this time, Mr. Kelly, there are no further questions.

Okay.

Well, we would like to thank everyone for being on the call.

And as for me, I will not be seeing you later, but I do appreciate all your partnership over the years, and Bill will be leading the charge here.

We have a great team in place, have nothing but the utmost confidence in what will transpire in the years ahead, or I wouldn't be leaving.

So, good luck to you, Bill, and to all of you, thanks for being with us.

And this now concludes today's conference call.

You may now disconnect.