阿拉斯加航空 (ALK) 2004 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Alaska Air Group first quarter 2004 earnings conference.

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

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

If you would like to ask a question during this time, simply press star then the No. 1 on your telephone keypad.

If you would to withdraw your question press star then the No. 2 on your telephone keypad.

Due to time limitations, please limit your questions to one plus one follow-up.

If time permits additional questions will be taken.

As a reminder today's conference and question-and-answer session will be broadcast live over the Internet and recorded for future play back.

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

Thank you Kelly.

Hello, everyone and thank you for joining our first quarter confrence call.

Before we get started I would like to mention that we have a number of folks with us here today including Bill Ayer Chairman and CEO of Alaska Airlines and Alaska Air Group, and Jeff Pinneo, Horizon Air CEO.

We also have a number of other folks including George Bagley, EVP Operations;

Gregg Saretsky, EVP Marketing and Planning;

Glenn Johnson, VP Finance;

Brandon Peterson, Controller;

Amber Post, Treasurer; and Rudy Schmit Horizon's VP Finance.

Also before we start 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 SEC filings for additional information on risk factors affecting our business.

As you've seen by now Alaska Airgroup reported a net loss of 42.7 million for the quarter or $1.59 per share versus a net loss of 56.3 million or 2.12 per share in 2003.

You'll note that these results include an after tax impairment charge related to Horizon's F28 fleet of 1.6 million or 6 cents per share.

Without this charge our loss would have been $41.1 million or $1.53 per share.

Our operating revenues were 598.4 million.

Up 15.4% from the same period in 2003.

And that was on 10% capacity growth at Alaska and 12.3% growth at Horizon.

Our operating expenses were 656.5 million up 10.1%.

For the quarter we had a pretax loss of $66.2 million which compares to a pretax loss of 87.9 million in 2003.

At this point, I'd like to turn the call over to Bill.

Thanks, Brad and good morning, everyone.

I'd like to share with you some of my observations about the quarter and - for both Alaska and Horizon and then talk about some of the efforts we have underway to continue our transformation.

I think as most of our business is more seasonal than most other airlines and because of that the first quarter is often tougher for us than it is for the others.

And we generally lose money in the first quarter even in good years.

Now if we add the record high fuel prices to this seasonality, it makes in year's first quarter particularly challenging.

We continue to make good progress in reducing our unit costs, and our unit revenues also continue to improve.

But, no matter how you slice it, $42.7 million is a substantial loss, and it serves to strengthen our conviction that the restructuring program we have underway is exactly what we need.

Fuel prices for air group averaged $1.13 per gallon net of hedges this quarter versus 99 cents during the same quarter last year.

Now if fuel had been at 75 cents per gallon which is closer to our historical average, we would have had $36 million less in expense, cutting our loss in half.

On the revenue front, we were pleased with our performance.

We saw good increases and low tractor in each month of the quarter with an over all of 2.4 point increase at Alaska for the quarter and 6.9 point increase at Horizon.

As Brad mentioned, the low factory improvement came on capacity increases of 10% at Alaska and 12.3% at Horizon.

We were pleasantly surprised to see the 1.9% yield increase at Alaska which compares to an industry increase of .9%.

This yield increase comes on top of substantial increases in traffic and capacity, a 3.3% increase in our average passenger trip length, and most importantly, a new and much simpler fare structure that we rolled out beginning on February 12.

The major changes we introduced with the the new Alaska fare structure are typically much lower walk up and first class fares, a maximum of 6 structural fares in any market, a more logical sellout progression between the different fares and elimination of the Friday or Saturday night stay requirements, and a maximum gap between the highest and lowest fares in a typical market of 3-1.

We support this new fare structure with a advertising campaign and while it's too early to draw any firm conclusions, our sense is that this new structure has been very well-received by both our customers and our employees who have to sell and support these fares, and our yield results would indicate that it is not having a detrimental effect.

As we look forward, we see advanced bookings at Alaska Airlines ahead of last year on full year capacity growth of 6.5%.

As we've seen for some time now, filling aircraft is not difficult but our business is price sensitive.

On the cost side, the quick summary is that Alaska is generally tracking on plan but we are more convinced than ever that we need to continue to work to reduce CASM x fuel to our target of 7.25 cents.

Our CASM x feuel for this quarter was 8.61cants, down 1.6% from last year, and for the month of March our CASM x fuel was 8.21 cents, down 2.4% from last year.

With this quarter's results we now have 7 consecutive quarters of hitting our planned year-over-year reductions in unit cost.

We don't have the level of financial distress of other airlines that has permitted them to achieve overnight double digit declines in unit cost, but we think we're approaching the challenge with a long term prospective that should result in more durable reductions in our cost structure.

With respect to labor, we're taking a collaborative approach that should strengthen employee relations and mutual trust, but this approach does take more time.

It's also important to note that we had excellent employee productivity on an increase in passengers of 10.3% we ran a good operation with the same number of employees as last year's and 200 fewer employees than planned resulting in productivity being 10.3% above last year and 5% above our plan.

Our employees remain committed to making the necessary changes to ensure our success, and I want to thank our management team who is driving the transformation and our front line employees who are delivering friendly and caring customer service every day.

We were recognized for that service in the recent airline quality ratings by Wichita State University and the University of Nebraska, Omha.

Alaska was second overall this year and we placed second or better in each of the last four years.

We continue to be ranked number 1 in the indusrty for baggage performance and our on time and reliability figures, if we exclude the winter storm that we experienced in January, are ahead of last year and certainly meeting or exceeding customer expectations.

We are reexamining and simplifying every important process that we have and in many cases borrowing concepts that have been proven effective in other industries.

A great example is our use of lean principals to standardize boarding procedures and reduce aircraft turn times.

This project which we call TANGO, and that stand for turn aircraft and go, was rolled out February 15, and while there are still improvements to be made, I can tell you that it's working.

We're using the aircraft that these shortened ground times produced to launch service between Seattle and Chicago this coming Monday and our aircraft utilization for March was up to 10.7 hours per day compared to 10.2 hours last year.

The majority of our transformation efforts are focused around the two themes of customer value and operational excellence.

Our goal with the customer value initiative is to clearly understand what our customers want and what they're willing to pay for and to become very efficient at delivering it.

Our fare simplification project and our meal service modifications fall into this category.

Opertional excellence is really a subset of the customer value theme.

We believe that both our customers and our employees want a reliable and on time airline and achieving operational excellence both enhances our product and reduces our cost.

We recently announced that we're converting Alaska's two remaining firm deliveries to 737 900s to 737 800s.

And while the 900 is a great airplane for us, and while we acknowledge that it's our lowest CASM airplane and typically operates at our highest load factor we're also very excited about introducing the 737 800.

We expect that this airplane will have virtually no limitations in flying transcontinental missions and it will have unit costs that are very close to those of the 737 900.

Of course, the 800 has tremendous commonality with the 700s and 900s that we have: essentially no pilot training, spare parts inventory or maintenance differencees.

We also plan to install winglets on the 800s to improve the airplane's fuel efficiency.

Finally we were delighted to be awarded 2 of the 6 new beyond the perimeter round trip slots for Reagan National Airport in Washington.

One of these from Seattle, which will have through service to and from Fairbanks and the other from Los Angeles and this will be our first transcon service out of Southern California and the only LAX Reagan service in the market.

With these two new flights we'll have a total three daily flights to Reagan and one daily flight to Dallas.

Turning to Horizon we continue to see the benefits of optimizing the fleet assignments between Horizon and Alaska.

That is putting the right airplane from CRJs to 737 900s, the right airplane in the right markets at the right times.

A process that we call harmonization.

We're also seeing the benefit of the Frontier Jet-Express line where we can earn a predictable profit on each departure as well as seeing the benefits of optimizing our regional jet deployment.

Horizon currently has 8 CRJs flying for Frontier and to partially fund this flying Horizon reduced the number of departures in its "native" network and even with these reductions, Horizon has been able to maintain or increase traffic and market share and load factors have increased substantially and Jeff Pinneo will provide more details on that in just a few minutes.

So at this point I'd like to turn the call back over to Brad.

Thanks very much Bill.

I'd like to start by trying to reconcile our loss per share to the first call consensus as best I can given what we know.

We do recognize that there was a gap this quarter and we want to make sure the guidance we're providing you is as helpful as possible.

As you know, we file 8-K's withthe SEC each month that include guidance on growth, unit cost, x fuel, fuel costs, fuel gallons and our forward hedge positions.

We also provide actual RASM information for the first two months of the quarter.

From our review it, looks costa at both Alaska and Horizon came in reasonably close to our guidance and nonoperating expenses tracked in line with recent quarters.

It seems therefore that the variance may have occurred with revenues and given that we provided January and February RASM figures in out 8-K, the difference may lie with the March estimates.

One thing we can say, is that our January RASM figures at Alaska and Horizon were artificially inflated by the winter storm we experienced and the results in flight cancellations which amounted to 4% and 6% of plan at Alaska and Horizon respectively.

If any of you have extrapolated to March based on January data that that may have contributed to the difference.

Also Horizon's March RASM was lower than in February because of an increased proportion of Frontier flying which has a much lower RASM than their native network.

To complete the picture on this, Alaska's month of March RASM was up 2.6% and Horizon was down 6.9%.

I'd like to turn to Alaska's P&L.

Alaska, as we said, reported a pretax loss for the quarter of 53.2 million versus a pretax loss of $70.6 million in 2003.

On capacity growth of 10% we saw traffic growth of 13.9%, and overall revenue growth of 15.1%.

As Bill said given the significant capacity increase, the increase in our average passenger trip length, and the new simplified fare structure we were encouraged by the revenues we saw this quarter.

As has been the trend in recent quarters, approximately two-thirds of our ASM growth came from expansion in our transcon and Denver markets.

This flying represented 13.4% of our capacity for the first quarter versus 8.3% last year.

Load factors on our transcon routes were up 15.6 points for the quarter, demonstrating that these markets are very popular with our customers and are perhaps less seasonal than we experienced during the first year of operations.

As you've heard us say before, and as many of our competitors have said, average ticket prices continue to be depressed in these markets.

The remaining one-third of our capacity increase relates to growth in our Alaska long hall market, Southern California, Nevada and Mexico.

On the cost side fuel costs increased this quarter by 17.1 million or 22 1/2% on the 10% ASM growth our average fuel price net of hedges was just under $1.13 this quarter versus 98 cents in 2003.

Our fuel hedging program definately helped by contributing about 12.2 cents per gallon for the fuel hedged or 3.7 cents per gallon on an overall basis.

In dollar terms our hedging program provided fuel savings of 3.1 million at the Alaska level and 3.5 million at the Air Group level.

We're currently paying an average of $1.22 per gallon excluding hedges or $1.16 per gallon with hedges.

I will say that if we don't see a reduction in fuel prices we would project a loss for the second quarter although a lot could obviously change between now and then.

Looking ahead 40% of our consumption is hedged for the second quarter if prices of about $28 per barrel and for the next several quarters our hedge positions are as follows.

Second quarter as we said is 40% at 28 a barrel, third quarter 40% at $29 a barrel, the fourth quarter 41% at $28 a barrel and 2005 is now 38% hedged at $28 a barrel.

Looking at some of the other line items, aircraft maintenance cost increased by 5.6 million or 14.8%. 1.5 million of this is due to accelerated overhaul amortizations for the three 737 200s we've decided to retire early, and most of the remainder of the variance is due to more expenses fee checks this year than in 2003.

Looking forward we're expecting maintenance costs for 2004 to be about 1% to 2% higher than 2003.

Aircraft rent expense decreased 1 million or 3.3% for the quarter due to lower rates on leases we've extended and MD80 returns offset by three new 737 700 aircraft.

Our cumulative lease rate reductions amount to 10 million per year which is certainly helpful in our cost reduction effort.

Food and beverage expense per passenger is down 21% for the quarter to $3.12 due to changes we've made to our on board product.

Commissions and other selling expenses were up 3.8 million or 12.6% due largely to increased advertising costs to promote the new simplified fare structure and Alaska's customer friendly travel experience.

For the full year we expect advertising expense to be flat with last year.

Depreciation and amortization was up 4.3 million or 15.1% for the quarter. 2.3 million of this increase is due to the 737 200 early retirement decision with the balance due to the fact that we've had depreciation on the six aircraft we've purchased in the last 12 months.

Landing fees and other rentals were up 15.7% due to increased rates primarily at Seattle, Los Angeles and Oakland and due to our growth and departures.

Looking forward we're currently planning about 6 1/2% growth for 2004, I think that compares to guidance of 6% last quarter and that breaks down by quarter as follows. 8% for the second quarter, 5% for the third quarter and 4% for the fourth quarter.

This growth comes largely from an annualization of aircraft added in 2003, and from increases in utilization.

We're currently projecting utilization of 11.0 block hours per day for 2004 versus 10.5 hours in 2003.

We're currently projecting 2004 unit cost x fuel and the one time charge related to accelerated depreciation and amortization of our to 737 200s to be 8.0 cents.

This figure also includes any cost reduction we achieve from restructuring our labor agreements.

Our projections by quarter are unchanged from last quarter and just to remind you they are as follows.

For the second quarter it's 8.1 cents, the third quarter7.5 cents, the fourth quarter 8.0 cents, and again for the full year 8.0 cents.

At this point I'll turn the call over to Jeff for a discussion of Horizon results.

Thanks Brad and good day everybody.

At Horizon we posted a 10.4 million dollar pretax loss, which compares favorably to our 15.3 million dollar loss in last year's first quarter.

Overall, our revenues grew 11.5% to $110.3 million, while our operating expenses grew 5.1% to $119.8 million.

Our traffic grew 26.1% on a 12.3% increase in capacity and that resulted in a quarterly load factor of 65% which is which was a record for us for the first quarter.

On an unit level our RASM of 15.94 cants was .8% lower than last year based on a 10.4% decrease in yield and a nearly 7 point improvement in load factor.

Included in our operating expense phase was a special impairment charge of $2.4 million to lower the book value of our retired F28 assets to their market value.

Exclusive of this one time charge our CASM x fuel was 14.91 cents or 8.9% below last year and slightly better than the guidance in the 8-K.

On the last call I alerted you to the significant year-over-year statistical variances we would begin to see this quarter related to the introduction of Frontier Jet-Express flying.

As a reminder we launched our 12 year fee based agreement with Frontier on January 1 with four CRJ 700s and have since been in the process of ramping up to the full nine aircraft commitment level, a mark that we'll achieve in late May.

Our agreement, which provides a base margin plus various incentives, relieves us of responsibilities for many traditional P&L line items such as fuel, landing fees, marketing costs, station labor and rents on the expense side; and provides a firm guarantee on the revenue side.

For the quarter, our Frontier Jet-Express product line accounted for 16% of our system capacity, 17% of our traffic, and 7.4% of our total passenger revenue.

Once we reach the mature state of 9 CRJs this will account for approximately 24% of our total capacity and 9.3% of our total revenue.

The longer haul jet flying associated with this contract generates a much higher percentage of ASMs relative to the rest of our system, with the result being increases in capacity that outpace both expense and revenue growth and unit costs and revenues associated with the contract that are both significantly lower than what we're accustomed in our native network.

That said, the positive margin associated with this flying is having the desired effect of shoring up our model through the profitable diversification of our revenue streams.

So let me turn now to a closer look at our revenue where on our native network we saw a 4 1/2% increase driven largely by traffic gains all on a 5.8% reduction in capacity.

The resulting 6.3 point improvement in Horizon brand load factor was driven largely by the realocation of capacity from certain underperforming markets to more profitable opportunities, both at Frontier Jet Express and on our native network.

As well as improved economic conditions and demand patterns in our regions and the further harmonizatoin of our scheduled planning with Alaska.

The improved demand patterns we saw in the first quarter appeare to be remaining strong into the spring and early summer with most of our key markets showing solid year-over-year improvements in book load factor levels.

On the yield front, we've seen a modest increase in our native network of about 4% due to a comparative reduction in fare sale, higher sale fare levels, and the improved opportunity to manage yield that stems from higher load factors.

Turning to expenses, our total operating costs were 5.1% - were higher by 5.1% driven primarily by fuel which was up 6.8% over last year on 7.7% less expensed consumption related to Frontier's coverage of fuel expense for the Jet Express flying; aircraft rent which grew 11.6% or 1.9 million with the addition of two CRJs and two Q400s over last year; and the impact of a $2.4 million special impairment charge to adjust the value of our retired F28 assets closer to market.

The remaining book value of these assets which are being actively marketed is approximately $3.8 million.

Other line items of note are as follows.

First, wages and benefits which were higher by 6.1% or $2.4 million on a 2.1% decreasein FTEs, an increse of 6.1% in average wage and 12.2% increase in employment taxes and healthcare benefit costs.

Our maintenance expenses, which were down $1.3 million or 15.1% due to fewer Q400 and CRJ heavy checks which was offset by engine events for the Q400 that are no longer covered by warranty.

In addition we recorded a $1.3 million spare parts inventory valuation credit.

Contracted services which were down 21.2% or $1.4 million due to changes in intercompany procedures realted to ground and freight handling charges and revenues, and finally year-over-year increases in our hub airport charges and booking fees which were offset by reductions in property tax liability, aircraft insurance and catering.

Our overall efficiencies continue to improve as well with 16 1/2% increase in passengers being served by 2.1% fewer FTEs than last year resulting in recod high productivity levels for the quarter.

A portion of this is driven by the Frontier Jet-Express effect noted earlier where many of the support functions are performed by Frontier personnel.

At a portion as result of further process improvement and excellent performance by our teams on the native network.

Working with our partners at Alaska we posted a 23% increase in connections between the two carriers over last year's first period.

Our operational performance for the quarter was heavily impacted by the January ice storm that took out - that took our Portland and Seattle operations down for several days, resulting in the cancellation of over a thousand flights.

I can't note this without acknowledging the incredible efforts put for the by our flight crews, reservation staff, maintenance and station personnel during this unprecedented period.

They and the rest of our team really rose to the challenge.

Excluding January's results we met or exceeded our targets in all three operational performance categories.

Capped by a record 99.1% mechanical reliability and 90.1% on time performance for March.

Our Frontier Jet-Express teams also performed extremely well posting a 98% scheduled completion factor and an 84% on time rating for the quarter.

Our capacity growth of 12.3% was 2.3 points higher than the guidance we provided on the last call due to higher than expected utilization of our Frontier Jet-Express CRJ 700s.

Our guidance now for the next three quarters, taking into account the higher utilization of Frontier, breaks out as follows.

For the second quarter 24%, for the third quarter, 17%, both unchanged from the last call, and for the fourth quarter 26%, which compares to 24% on the last call.

For the full year, we are now projecting a 20% increase in AFM's.

Looking ahead we are projecting our CASM x fuel for the year to be 14.1 cents which is identical to the guidance we provided on the last call and is based on our higher growth projections and higher actual expenses quarter to date compared to the original forecast.

By quarter we are forecasting CASM x fuel to be in the second quarter 13.9 cents and that compares to 13.8 cents on the last call, the third quarter 13.3 cents which is unchanged from the last call and in the fourth quarter 14 cents which compares to 14.2 cents on the last call.

As before, these projections include Frontier Jet-Express.

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

Brad.

Thank you, Jeff.

We ended the quarter with $830 million in cash and marketable securities compared to $812 million at the end of 2003, our cash flow from operations were positive for the quarter in the amount of $22 million and we had proceeds from new financings net of repayments of $48 million.

These were offset somewhat by CapEx of $52 million.

For the full year we're projecting capital expenditures of approximately 220 million, which by historical standards is a very low amount for us, Air Group is not committed to take any more aircraft in 2004, and we're committed to take two CRJs and two 737 800s next year.

Our adjusted debt-to-capitalization ratio and that's adjusted for operating leases is 78% as of March 31 and that's 1% higher than at the end of 2003.

That concludes our remarks, as always we'll try to keep you updated through our monthly 8-Ks and at this point we'd like to open the call up for your questions.

We have a numbe rof folks here with us today to help us address them.

At this time I would like to remind everyone if you would like to ask a question, please press star then the Number 1 on your telephone keypad.

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

Your first come from Michael Linnenberg with Merrill Lynch.

Hi, good morning.

I guess two questions here.

Bill, can you update us on, I know it was a couple months ago that I think you initiated a quick turn type operation where I think you were going to limit the amount of time on the ground with planes, I think it was 25, 30 minutes in cities outside of Seattle.

How that gone and with a what have you learned from that?

Yeah, I can start and maybe George Bagley can fill in too since he runs the operation.

I think it's going very well.

The whole effort here we call this, you know, one of these lean initiatives and trying to reduce the turn time in order to provide greater utilization.

And it's as simple as that but the process is what's important about this and the process involves, kind of recoreographing what happens from when the airplane blocks in to when it pushes back and who does what when and it's a very much of a front line employee effort.

We've involved them to the greatest degree possible.

We've tried all kinds of different approaches in how we board the airplane, how we service the airplane and the result being that we're accomplishing the new standards and over time we will have more and more of the turns actually reflect the shorter time.

But we do have a new process for how we turn airplanes virtually everywhere and the other benefit is that the employees themselves kind of own the process and that's the continuous improvement part of this so I think it's just going really, really well and it's a great template for a lot of other process improvements that we're going to have down the road.

George, do you want to add anything?

Yeah, do you have another question, Michael?

Yes, I do.

Turning over to unit costs, I think Brad you talked but unit cost goal I think this year is 8 cents and I know historically when you, you know, talked about bringing costs down by 2005, I think the original progression was something like 8.35 going to 8.10 and then to 7.85 in x fuel and I think now we're shooting for seven and a quarter.

I think you were 8.35 last year, you're looking at 8 this year, is 7 and a quarter is that the goal for 2005, or is that more like a 2006 since it would appear to be a sizable drop from eight to seven and a quarter in the 12 month period.

If you could give us your latest thoughts on that.

It's a terrific question Mike.

You have the goals exactly right.

Initially the goal was 7.85 cents by '05 and I think it was early 2003 that we lowered that to 7.25 cents for 2005, we are tracking very well with our objectives a to date.

But we do have a big gap between the 8 cents that we want to hit this year and the 7.25 cents that we planned for 2005.

We do need some help from labor to hit that 7.25 set number.

But as we look at the competitive situation out there in the industry, we think that that's the number that we need to hit.

I don't think we're at the point yet that we want to give that to the analyst community as guidance for 2005.

But I think we do want to share with you that that's our goal and that's our target and everything we're doing is to get this company positioned to be at that level for 2005.

Now, Brad, did I hear you correctly when you gave us the eight cent number you said it did include labor savings and I presume some labor savings and if that's the case-

No.

Oh.

Sorry, it does not include labor and the only reason is it's very difficult to know the amount or the timing that of that so just to keep goal setting simple and straight forward we said it's eight cents for 2004 excluding anything we might achieve from labor.

My mistake, I misheard you thank you.

Your next question comes from Ray Neidl of Blaylock and Partners.

Yeah, Brad.

I was just wondering, could give us an estimate of what the cost was for the winter storms in Portland and Seattle which I guess they're kind of unusual type of items, and what would translate to per share?

Yes.

You know, Ray, we started down the path of calculating that and we have in mind that we were going to share some sort of information with the financial community about that.

What we found is that - a couple things.

One it was very difficult to know how many of those passengers you lost permanently just versus just losing for a few days following the storm, and the other thing is that you do save some variable costs when those flights don't operate.

You have some unusual costs but you also save fuel, anding fees, those sort of costs.

So I think our take away was that for the month of January we had those 4% reductions in Alaska and 6% at Horizon and that certainly pushed up RASM and CASM for those months so it distorted RASM and CASM but I don't think - A. we felt like the loss can't be calculated really objectively and I think we ended up concluding that it's not a huge number for those two months or for the two airlines for the month of January.

Okay.

And in your labor area, now it's understandable why you don't want to put potential savings there until you're closer to an agreement.

How is it working there though?

Maybe you could refresh us on when the contracts become amenable and would you be willing to deal with each unit separately the way that Northwest is.

They might get a separate pilots agreement before the contracts become amendable to the unions, are you flexible in that area as well?

I can answer that a little bit, Ray.

This is Bill.

Hey Bill.

Just to give you a refresher, we are in section six discussions with AFA currently with our flight attendants and with IAM which includes both the customer service agents, res agents and ramp.

Ramp folks.

Those are all current active discussions that are going on.

And we are preparing for section 6, formal discussions with ALPA, with the pilots, and that one has a May 05 amendable date and you might also recall that's the one that if we can't reach agreement we have an arbitration provision that an arbitrator would decide so we get a definite ddecision on wages, for example, prior to the amendable date where it would become effective.

And as I said in my remarks, we have taken a very collaborative approach to this thing and I have been very pleased the discussions to date with all of the groups whether they're in section six or not, and we've talked to everybody, given our plan here for the cost reductions, everybody has had the right attitude about it.

They've been very creative in terms of things to look at, to improve productivity, reduce costs, and I am confident that we will achieve the necessary changes and the changes that will work for everybody long term and that's the key to it.

So that's where we are, we don't have any results to share to date.

But I'm hopeful and confident that we're going to get there.

Okay.

Thanks.

And Leslie, Brad, did you say that Alaska at current fuel prices will lose money in the second quarter, is that just Alaska Airlines not including Horizon?

That was a comments for Alaska and Alaska Air Group and we qualified that a little bit saying if we don't see some relief in fuel prices and given what we know today, we couls certainly see a loss for the second quarter.

A lot could change, there's obviously a tremendous operating leverage in these models, there's lots of room for surprises on the revenue side, but we would say forecast a loss if today's prices stick.

Okay good.

Thank you.

Your next question comes from Jamelah Leddy from McAdams Wright and Ragen.

Hi, thank you.

When I look at the historical rates that Horizon has recognized revenue as a percentage of rpm's it's been quite a bit higher than the last quarter and I assume that quite of bit of that due to your agreement with Frontier.

But I'm wondering if going forward-looking at Horizon revenues as a percentage of rpm's it's going continue the percent that it was at this last quarter which is about 23.3%.

Jamelah I - this is Brad.

I had trouble hearing.

I think that you're getting at the imapact of the Frontier relationship on Horizon's yields and RASM but I don't think I fully heard your question.

Yeah, as a percentage of rpm's with this new relationship, I guess my question is do you expect Horizon's revenues to decline as a percentage of rpm's as this relationship matures and you have more aircraft involved in this relationship.

I think the answer is yes, I think the fares that Jeff shared that should definitely help is that the Frontier relationship, once we, are a mature state, and I think that's beginning in May, Jeff, -

um hmm

- we expect it to be he 24% of capacity of Horizon's capacity but only 9% of their revenues so does that help you?

Yes, it does.

Just add on that, Jamelah, the RASM depression effect is more than matched by the CASM reduction as well so because both the revenue and the expense related to Frontier are variable that way, and, you know, as a stand alone it continues to have a positive margin and then the impact across the airline, you know, kind of has that proportional affect so you'll see CASM declines projected this year to exceed what we're seeing on the RASM decline.

Just for those things, Horizon does not pay for fuel, they don't pay for marketing cost, passenger service cost, and because of that they don't get paid revenue for those costs, but as Jeff said it is positive margin the first two months have been profitable months for that relationship, it just that - it does distort the RASM and CASM numbers and we kind of need to reset for that.

Okay.

I appreciate you going over that.

That certainly helps.

Just one other quick question.

It seemed to me in the past the difference between Alaska's fuel costs and Horizon fuel costs had been about 3 cents per gallon and every month this quarter it was quite a bit larger than that and I think it was about about six cents for the full quarter.

Is there anything to this differentiation or a trend?

There's a slight change, Jamelah, in the inventory methodologies that the two companies are using for fuel.

I think another factor is the fact that 13% of our flying is now transcon, and right now there is a big gap between west coast fuel prices and gulf coast or east coast prices so Alaska is getting a modest benefit from buying some of the fuel off the west coast and Horizon isn't getting any of that benefit.

I notice that at our fuel - at Alaska Airlines our fuel price this quarter was $1.13.

I think we said we had a had a three or four cent hedge benefit so without the hedge we would have been $1.16 or $1.17 and a lot of our competitors that are buying fuel mainly in the midwest or on the east coast are paying $1.00 or $1.01 per gallon so there is a big west coast refining spread penalty right now that's hurting us.

Another factor too, Jamelah, is while we do our share of tankering to maximize the effeciency of our fuel buying we have to buy a slightly higher percentage of our fuel in smaller locations through sole sourced FBOs and these operations and those prices tends to be higher too.

Okay.

Thank you very much.

Your next question comes from Gary Chase of Lehman Brothers.

Morning, guys.

Brad, I apologize, I missed a small portion of your remarks the one where you were going over year on year variances, could you go through the bookings fees and other selling expense line?

I thought I caught a comment about advertising on the new fare structure.

But I'm also just curious if, like some other carriers that we've seen, that you just, you had a lot of bookings come in towards the end of the quarter and whether or not that an impact.

You know, the comment that we made, the commissions and other selling expenses are up $4 million due to largely some real front ending this year of our advertising cost is to support the new fare structure and the Alaska travel experience.

We did also have an increase in CRS fees, I think it was in the neighborhood of - I'll just kind of check it here as we talk - but in the neighborhood of 13% for the quarter.

Let me just.

That must be volume driven, right Brad?

It's -- Gregg, maybe you want to jump in but we're definately being hit by rates for some of those folks as well.

We have double digit increases in rates from the GES's so it's almost equally volume and rate.

Yeah.

Gregg.

It was, maybe to get to your question we're actually up 19%, Gary for the quarter, CRSP so our passenger volumes were up 13 or 14% so that leaves a lot of room for rate increase and perhaps some advance - higher rates for advanced bookings.

Okay.

Gregg, I wondered if I could ask you a question about the change in fare structure and I'm trying to think about how we ought to think about this as an opportunity for Alaska.

You know certainly America West, one of the advantages that I think they had was a mid-continent hub creating a lot of connecting opportunities through Phoenix.

And an ability to capture some, you know, capture passengers and so on from potentially nonstop flights on much higher fares.

You know, given where you are, I'd have to assume there probably isn't anywhere near as much opportunity for you and I'm just curious if you can comment on how that factors into your thinking and also, you know, aside from obviously you can't isolate the revenue impact yet.

I'm wondering if you have any and anecdotes for us on the corporate side as to how people are responding to what you've done.

Gary, your comments are right on the money.

We don't benefit from an unmatched price advantage that America West has had for the last year and a bit only recently have the other network carriers started to disallow them on that price advantage.

Probably largely as a result of nonstop service coast-to-coast.

But you know it is a bit to early for us to declare victory on our price restructuring.

I think on the last call I said victory for us would be a small decline in rpm yield offset by an increase in traffic to get to a revenue neutral position.

And I think what we're seeing - remind everybody that we only launched this initiative halfway through the first quarter in the middle of February.

So while it is a bit too early to see anything definitively what I can tell you is that we haven't seen the rpm yield decline.

In fact our rpm yield in the first quarter was up 1.3% against the domestic industry which is up only .9.

How our corporate accounts respond to this, we have gone back and spent the last six weeks renegotiating every single corporate agreement that we have.

Because witha much lower fare structure obviously we don't need the same level of discounting.

So they have work with us very closely.

I think that they recognize that the big benefit to them is not only in the fare level but in the great reduction of some of those annoying restrictions that the've had to live with before and the very high walk up periods which are now a thing of the past at Alaska.

Have you been able to renegotiate those discounts where necessary?

We have.

And just, you know, any commentary, Gregg, on, sort of, how different pieces of the network are.

Presumably the transcon flying that you do is challenged.

Anything else worth noting?

Yeah, you know, as I look forward, our capacity in the second quarter is up about 8% year-over-year and our advances are tracking well ahead of that without any real regional disparity.

We're seeing strength across all regions and if you saw what happened in arc sales in the month of March, travel agency sales were up 21%.

So it appears that there is some strength building in the marketplace certainly on the volume side.

Almost no strength, in fact probably the other way on the yield side.

So it's a bit disappointing that, you know, the big increase in volume that we're seeing isn't being met with some ability to move yields up.

But it's pretty, you know, the results are pretty uniform across the network.

Thanks a lot guys.

Your next question comes from Glenn Engle of Goldman Sachs.

First question on Horizon, I wasn't quite sure if I got this right but if you look at the native network you were mentioning that the revenue wars up 4 1/2% and the expenses were up 5%?

Let's see here Glenn.

We've got on the native network I was referring to the revenue I think there.

We have 4 1/2% increase on a 5.8% reduction in capacity.

Is that the line you were referring to?

That's right.

Did you mention what expenses were?

The expenses on the native network?

Yeah.

We didn't have that broken out.

I guess what surprised me a little bit is that we would assume that Frontier made money, the Frontier flying versus those planes were losing money and yet it doesn't seem like you have as big of an improvement on the Horizon side as I would expect.

I think the real benefit of this restructuring is it's given real clarity to the three distinct lines of business we're operating in right now and we started to create better financial tools to isolate the costs and revenues associated with each line.

And on that, as it relates to the Horizon brand flying we've not only been able to focus more clearly on the expense side, but the market by market break-outs as well as provide a greater clarity.

We started to take action, you know, there to shore up both the productivity on the revenue side as well as the allocations of overall expense across that line of business.

And so, you know, while it's not as instantly, you know, much of a turnaround story as something like a fee-based opportunity, the clarity that we have through this is giving us a good tool to go forward so --

Will this changes mean that I'll make less money in peak quarters like the third?

I don't believe so.

Because with the traffic and the demand patterns have, have improved dramatically and we've been able to accommodate that on the more fit level of capacity that we have assigned to the native network so we're expecting with the overall capacity increases to have a broader base to spread our overhead.

That's going to go reduce our native network CASM as well and with the improved load factors and some stability on the yield front we think the RASM component of that is coming up nicely as well.

Can you please go over your - for Alaska the five fare categories and how those performed?

Yeah.

We've got that here.

The top five buckets.

Yeah, we give the top four is what is our comparison has been, Glenn, and in terms of revenue quarter - year over year for the quarter 22.5% in '04, 22.3 in '03 and the top six in terms of revenue 41.1 this quarter and a year ago 44.2.

You want percent of passengers as well?

No that's okay.

So you're saying that you actually saw slightly more volume in that top five buckets but because the fares are down you saw less revenues.

Yeah.

I think that's right.

Thank you.

Yep.

Your next question comes from Jim Higgens of CSFB.

Yes, hi.

Thanks very much.

Northwest I think is going to be introducing Portland, Seattle, -- Portland, [Noreeta] service.

Do you suspect that you'll have meaningful feed in to that.

Yeah we have working with Northwest and have realigned some of our capacity at Portland to provide good connecting times.

So I do expect that we'll see a fair amount of connecting track off of that new [Noreeta] service.

That's great.

Are there currently pilot talks going on?

Yes, we've been in discussions with our pilots for several months.

And we - kind of unofficial basis and then we're scheduled to begin section 6 negotiations next month.

Okay.

Great.

Thank you very much.

Once again, if you would like to ask a question, please press star, then the number 1 on your telephone keypad.

Your next question comes from Peter Jacobs of Ragen MacKenzie.

Good morning, gentlemen.

Most of my questions have been answered but I was wondering if you could refresh my memory if you hadn't already stated it on what the distribution of capacity was across your markets?

For the first quarter, Peter?

Yes.

Is that your question?

Sure.

It was - let me just try to add this together.

It looks like the state of Alaska, all up was in the 17, 18% range.

California was all together maybe in the -- between 35 and 40% of our capacity.

Arizona 6%, Nevada, 7%, Mexico 13, transcon I think we mentioned about 13%, sorry transcon with Denver were 13%.

You also mentioned, Brad, during your prepared comments something about transcon loads being up 15% and I'm trying to understand is that.

Is that 15 percentage points or did I misunderstand you.

It's 15 percentage points so those airplanes are very full.

Well, they were, -- now I forget what that number was last year.

But from what I basically recall is that pretty much every quarter the transcon's load were running above systems loads is that correct?

That's not - They were a little bit seasonal last year Peter.

They were below the system level last year.

But I think what you've heard is second and third quarters really high transcon load factors and not so high during the fourth and first quarters and I think what we're seeing now is maybe a little bit less seasonality in the transcons than we experenced in the first year.

Would those comments then suggest the transcon loads are running in the 80, 85 range?

Not collectively but some markets are.

Okay.

Super, all my other questions have been answered.

Thank you,,.

Yeah.

At this time there are no further questions.

Mr. Tilden, are there any closing remarks?

No, I think we're all done, we thank everybody for your participation.

And we'll see you next quarter.

Bye-bye.

This concludes's today conference call.

You may now disconnect.