阿拉斯加航空 (ALK) 2004 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the fourth-quarter full-year 2004 earnings release conference call.

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

After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions).

As a reminder, this call is being recorded Friday, January 28, 2005, and will be available after the conference at www.AlaskaAir.com.

At this time, I would like to turn the call over to Brad Tilden.

Please go ahead, sir.

Thank you, Tina.

Good morning, everyone, and thank you for joining us for our fourth-quarter 2004 conference call.

Before we get started, I'd like to introduce a number of folks with us here today, including our Chairman and CEO, Bill Ayer;

Horizon Air's CEO, Jeff Pinneo;

Executive VP of Operations, George Bagley;

Executive VP Marketing and Planning, Gregg Saretsky;

Treasurer, Glenn Johnson;

Controller, Brandon Pedersen; and Horizon Air VP-Finance, Rudy Schmidt.

As is our usual practice, I'll begin by reminding you that this call may include forward-looking statements and our actual results may differ materially from these statements.

Please refer to our SEC filings for additional information on risk factors affecting our business.

In addition, this call includes a discussion of non-GAAP financial measures and a reconciliation of these to the corresponding GAAP measures appears in our press release, which you can access in the Investor Relations portion of our website at AlaskaAir.com.

We have several unusual items that affect the comparability of our results for both 2003 and 2004.

Rather than go through all of these now, I would like to refer you to the tables on Pages 8, 9, and 10 of our earnings release that detail these items for Alaska Airlines, Horizon Air, and Alaska Air Group.

I will note that for the fourth quarter 2004, these amounts include a restructuring charge that amounted to 25.9 million before tax, as well as a mark-to-market charge for our fuel hedges, which relate to future years of 23.1 million before tax.

On a GAAP basis, Alaska Air Group reported a net loss of 44.9 million for the quarter or $1.66 per share compared to a net loss of 16.1 million or 60 cents per share in 2003.

Excluding unusual the items, our net loss was 14.3 million or 53 cents per share for 2004.

For the full year, Air Group's net loss was 15.3 million or 57 cents per share compared to net income of 13.5 million or 51 cents per share in 2003.

Excluding unusual items in both years, we had net income for 2004 of 5.2 million or 19 cents per share compared to a loss in 2003 of 30.8 million or $1.15 per share.

After adjusting for the unusual items, Alaska Airlines had pretax income of 2.1 million for all of 2004 compared to a pretax loss of 41 million in 2003.

And on that same basis, Horizon Air had a pretax income of 13.7 million in 2004 compared to a profit of 6.7 million in 2003.

The reason that you can't add the results of Alaska and Horizon together to get the results for Alaska Air Group is because of interest and other costs that Alaska Air Group bears.

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

Thanks, Brad, and good morning, everyone.

We're pleased to be reporting improved performance for both the quarter and the year, and we're about midway through our transformation plan, which will position Alaska and Horizon for long-term success in this extraordinarily difficult and permanently changed industry.

While there is a significant amount of ground left to cover, I'm very proud of the work our teams have done to produce these results.

After adjusting for unusual items, 2004 breaks a four-year trend of losses for Alaska, and at Horizon, we've now had two consecutive years of profits.

It's gratifying to see that we're in the black by even a small amount, as it's visible indication that the actions we're taking are working.

However, we recognize that a breakeven company cannot survive in the long run, especially in this industry.

Our results for 2004 were affected by several factors.

Good progress on our cost structure, significant increases in load factors, our relatively stable pricing environment on the West Coast, and substantially higher fuel prices, which were offset to some extent by our fuel hedging program.

I might note that without the fuel hedges, our pretax results would have worse by approximately $45 million and excluding unusual items, we would have clearly had a loss for the year at both Alaska Airlines and Alaska Air Group.

At Alaska Airlines, we hit our cost targets and saw a decrease in CASM, excluding fuel, for a tenth consecutive quarter.

The goal of all of our initiatives is to become the industry leader in delivering customer value.

We believe that our reputation for offering the best combination of price and product will secure our future and provide significant growth opportunities.

With respect to our product, there a number of features that differentiate us, but our customers tell us that it's our caring and personable employees that keep them coming back.

And regarding pricing, you saw our introduction of common sense fares almost a year ago.

But to offer our customers the best value and to be profitable doing it, we must have lower cost.

We're making good progress on this front but we clearly have more work to do.

Our unit costs for the year excluding fuel and other unusual items came in at 7.92 cents, which was ahead of our goal of 8.0 cents.

And for the quarter, our unit costs, X fuel, were 7.83 cents, which is down 8.6 percent from 2003 and our biggest year-over-year reduction since we started effort.

We're also encouraged by Alaska and Horizon with respect to revenue.

Alaska had significant increases in load factor for the quarter and the year, ending the year at 72.9 percent.

Our planning folks have done a great job of scheduling our fleet and employees are taking care of passengers in a way that keeps them coming back.

However, Alaska's yields for the quarter were down 5.8 percent and we did lose some pricing momentum as the quarter progressed.

It's much more difficult to compare Horizon's RASM performance to the industry, given the change in mix with our Frontier contract.

But load factor performance was quite strong throughout the year, averaging 69.3 percent, which is up 5.5 points from last year, moving Horizon above the average of its peer group.

Despite the relatively stable revenue environment we saw for the year, we fully expect competitive pressures on the West Coast to increase and we're doing everything we can to prepare both companies for that eventuality.

I'd like to offer my perspective on the year ahead.

We've set aggressive targets for ourselves for the past several years and 2005 is no exception.

Our goal is to weatherproof our business to downturns in the industry and the broader economy, which should result in a reasonable level of profitability year in and year out.

When we embarked on our 2010 transformation plan almost two years ago, we were seeking cost reductions totaling $307 million based on our size then, and which are $340 million based on our expected size in 2005.

As of today, we've relied a little over $185 million of these savings.

Our request from labor in June of 2003 was about 37 percent of the total based on our view of the market at that time.

Frankly, we have not made sufficient progress in terms of labor cost reductions, so this is an area of significant focus in 2005 and it represents the majority of the remaining reductions needed to get to our current CASM X fuel goal of 7.25 cents.

We have an arbitration coming up with our pilots in early March, and since the variance for market is most acute with this group, the result of this arbitration will have a significant effect on whether we achieve our targeted overall labor savings this year.

We negotiated in earnest with our pilots in late 2003 and early 2004 and again through formal Section 6 negotiations, which ended on December 15th.

And while both Alpha and our management team put forth a concerted effort, we ended negotiations with a wide gap between us.

We have a responsibility to all of our stakeholders, most importantly our employees, to do everything we can to improve the viability of the Company.

So we're hopeful that the arbitration process will make us fully competitive with respect to pilot pay, work rules and benefits.

In terms of future growth, we expect capacity to increase about 3 percent at Alaska this year and 12 percent at Horizon.

We will take delivery of our first 737-800 from Boeing next Thursday, and it will be equipped with leather seats, larger bins, winglets and 166 seats.

We think this airplane with its low operating cost per seat mile and favorable range payload characteristics is very well suited to our long stage length missions.

As we mentioned on previous calls, we're in the process of putting leather seats in all of our current aircraft, and we're also putting winglets on our 737-700's.

This modification is being done along with C checks.

And today, we've completed three of these 700's with winglets.

We're also making some changes to our gain sharing plans for our employees for 2005.

With the new program, all employees will be eligible for cash payments of up to $300 per quarter based on on-time performance and customer satisfaction.

We'll also continue with a profit-sharing component, although at a lower percentage to fund the new operational incentive.

Finally I'd like to take a moment to acknowledge the efforts of our people.

The last few years have been without a doubt the toughest any of us have seen in our careers.

For a long time, we were able to avoid making changes that significantly impacted employees, but that changed for Alaska Airlines this past fall when due to the rapidly deteriorating industry environment, it became necessary to reduce our management staff, close our heavy maintenance base in Oakland, and contract out our fleet service and ground support equipment maintenance functions.

These were very difficult decisions.

Our people have maintained a professional attitude as we've worked through changes that are critical for the long-term.

So I want to thank all of our employees for their role in our continuing turnaround effort.

And it's gratifying to report clear evidence that the changes we're making are improving the financial position of the Company.

At this point, I'd like to turn the call back to Brad for a discussion of Alaska's results.

Thanks, Bill.

On a GAAP basis, Alaska reported a pretax loss for the year of 27 million versus a profit in 2003 of 11.8 million.

After adjusting for the unusual items, Alaska reported a pretax profit of 2.1 million in '04, which represents a profit margin of 0.1 percent versus a loss for 2003 of 41 million.

For the fourth quarter 2004, we reported a pretax GAAP loss of 68.9 million versus a loss in 2003 of 27.3 million.

Excluding unusual items, our fourth-quarter loss was 22.7 million, which is 4.6 million less than the loss in 2003.

Alaska's fourth-quarter revenue per available seat mile came in at 9.75 cents, 0.4 percent above 2003 and a bit higher than the guidance we provided in our most recent 8-K.

Strong mileage plan revenues boosted our operating RASM for the quarter, but our passenger RASM actually declined by 1.1 percent.

A 3.5 point increase in load factor almost offset a decline in yields of 5.8 percent for the quarter.

December yields were affected by aggressive discounting led by our competitors.

For example, in the California markets, fares between Seattle and Los Angeles and Seattle and Oakland were as low as $158 and $118 round-trip, respectively.

That's about 10 percent lower than the sale fares offered in 2003.

Our 1.1 percent decrease in passenger unit revenues compares to an industry decline of 5.4 percent.

So we again had a favorable GAAP versus the industry.

Our yield decline was less than the industry's decline by about 2.5 points, and our load factor increase was higher than the industry increase by a little over a point.

As Bill mentioned, our yield and passenger unit revenues trends weakened as the quarter progressed.

In October, our yields were down 3.5 percent year-over-year.

In November, the decline was 2.4 percent and in December, 10.9 percent.

When we add the effect of load factor, we saw a RASM increase of 0.3 percent in October, an increase of 5 percent in November, and a decrease of 3.7 percent in December.

As we look forward, we expect Alaska's January load factor to be up between 1 and 1.5 points on a capacity increase of about 5 percent.

Our advanced bookings for February and March are currently up modestly.

We expect these increases in load factor to be offset by decreases in yield as we saw in the fourth quarter, and we currently anticipate a year-over-year decline in RASM for the first quarter.

On the cost side, Alaska's total operating expenses increased by 62.9 million or 12 percent.

However, excluding fuel and the restructuring charge, our operating expenses actually decreased for the quarter by 18.7 million or 4.2 percent on our 5 percent increase in capacity.

As Bill mentioned, excluding the unusual items and fuel, unit costs were down 8.6 percent year-over-year, which is our largest reduction since we started our cost reduction effort.

We're very pleased with the progress that we're making on cost.

While there is still a substantial amount of work to do, we had to become more disciplined about cost controls and managing the budget and we appreciate the efforts of our front-line managers and supervisors in this regard.

For 2004, we had variable favorable variance against plan for the Company as a whole and for the majority of our operating divisions.

I think you're all familiar with our hedge accounting, which is somewhat unique in the industry.

For GAAP purposes, we now use mark-to-market accounting, but we're providing information in our SEC filings to help analysts and investors track our results on an economic basis, giving credit to our results per hedged contract that settle during a given period.

Because of the decline in crude oil prices between September 30th and December 31st, we had a mark-to-market loss of 23.1 million at the Air Group level related to contracts to purchase fuel in future periods, which we have excluded in the adjusted results we're talking about today.

However, we have realized gains totaling 17.2 million for Alaska and 2.3 million for Horizon for hedges which settle during the fourth quarter, which we do count in our adjusted numbers.

Excluding the effect of hedges, Alaska's fuel cost for the year increased by 155 million or 47 percent.

Including the benefit of hedges in both 2003 and 2004, our fuel cost increased by 140 million or 46 percent.

Our 2004 hedges produced gains for the year of 39.8 million at Alaska and we obviously would have had a significant loss for the year if not for these.

Looking forward, 50 percent of our 2005 consumption is hedged at a price of $30 per barrel.

For 2006, 35 percent of our consumption is hedged at a price below $38 per barrel and for 2007, 9 percent of our consumption is hedged at about $40 per barrel.

Hedging is an example of an area where we have been able to use our relatively strong balance sheet to improve the Company's strategic position.

Turning now to other items in Alaska's P&L, the restructuring charges we mentioned at the outset of the call totaled 25.9 million for the quarter.

This is in addition to the 27.5 million that we recorded in the third quarter.

These charges relate to severance and other benefits that will be paid as a result of the initiatives announced in August and September.

We recorded substantially all of the severance paid to our management staff as a fourth-quarter item since that's when the decisions became final.

Wages and benefits decreased by 12.9 million or 6.5 percent for the quarter.

Of that decline, 11.8 million relates to benefits and 1.1 million relates to wages.

The reduction in benefits is largely due to a decline in workers' compensation expense attributable to favorable claims experience and a related 6.6 million adjustment in December, reflecting a reduction in our loss reserves.

Our total FTE's for the quarter declined about 4.9 percent on a 5 percent increase in capacity and a 7.7 percent increase in passengers.

So we saw another healthy increase in productivity this quarter.

That means we've had year-over-year improvements in productivity in 11 of the last 12 quarters.

Stepping back a bit, we ended 2004 with 9,968 FTE's, which is down by about 70 from 2003 on an 8.3 percent increase in passengers.

Our client (ph) is for about 9500 FTE's in 2005.

Contracted services increased by about 5.5 million or 27 percent compared to the fourth quarter of 2003.

The increase reflects costs associated with an agreement with PenAir to provide flight service to Dutch Harbor and increased payment to third parties related to the contracting of fleet services and GSE maintenance.

Looking ahead to 2005, we plan to change the way we account for engine and airframe overhauls at Alaska and Horizon effective January 1st.

Under the new method, we will charge the cost of these overhauls directly to expense as opposed to our current practice of capitalizing and amortizing them.

To affect this change, we will write off the unamortized portion of previously capitalized overhauls this month as a cumulative effect and an accounting change.

We expect the onetime charge to be approximately $95 million after-tax.

As of now, we're planning about 3 percent growth for 2005, which breaks down by quarter as follows -- for the first quarter, 4 percent; for the second and third quarters, 3 percent; and for the fourth quarter, 2 percent.

This growth is coming from an annualization of 2004 growth, an additional row of seats in our 400's and 700's, as wells as from the addition of three new 737-800's.

We also plan to retire two 737-200's this year.

As you know, our cost target for some time now has been to get to an annual run rate of 7.25 cents X fuel in 2005.

We've been careful to call this a goal or a target and not guidance.

Given the significance of our pilot arbitration to 2005 operating costs and the savings that we hope to achieve from other restructured labor contracts, our plan is to provide guidance now for the first quarter of 2005 and to provide guidance for subsequent quarters when we know more about the outcome of the pilot arbitration.

Our estimate for the first quarter unit cost X fuel and unusual items is 8.2 to 8.3 cents per ASM, which would be down about 4 to 5 percent from 2004.

As we've done in the past, we'll update this figure as we move forward in our monthly 8-K's.

At this point, I'll turn the call over to Jeff to walk you through Horizon's results.

Thank you, Brad, and good morning, everybody.

At Horizon, we're pleased to have posted a $17.1 million pretax profit for the year.

This compares to our $25.3 million profit in 2003.

After adjusting for the unusual items outlined in the press release, our pretax profit for 2004 was $13.7 million, up from the $6.7 million figure we posted in 2003.

Revenues for the year were up 8.5 percent or 39.4 million, while operating expenses were higher by 8.1 percent or 36.8 million.

Excluding fuel and special charges, our operating expenses were up 3.9 percent on a 20.9 percent increase in capacity.

Our traffic grew a remarkable 31.4 percent, which drove a 5.5 point gain in load factor to 69.3 percent for the year, a new record for the Company that positioned us in the top half of the industry and among the top three carriers industrywide in year-over-year load factor gain.

For the fourth quarter, we recorded a GAAP pretax loss of $1.6 million.

These results, however, included a $650,000 impairment expense and a $2.8 million mark-to-market fuel hedge charge.

Excluding these items, we would have posted a $1.8 million pretax profit as composed to a $5.4 million profit in 2003.

Our revenues for the quarter were up 6.1 percent or $7.4 million over 2003 on 36.8 percent more traffic, while our operating expenses grew at 11.2 percent or $13 million on 28.1 percent more ASM's.

Fuel accounted for approximately 57 percent of the increase in our expense.

Our system RASM for the quarter was down 17.2 percent, a figure that reflects the fact that 23 percent of our capacity is now operating as Frontier JetExpress, where unit revenues are, by definition, significantly lower than on our native network.

Balancing this was our unit cost performance where CASM X fuel and special charges came in at 13.6 cents or 18.1 percent lower than in 2003.

This was again largely due to the effects of our Frontier flying, and yet it was helped along by a 13.3 percent improvement in aircraft utilization and a 7.9 percent improvement in employee productivity on the native network.

For the full year, our CASM X fuel and impairment charges was 13.6 cents, which was slightly lower than the guidance we provided last quarter.

Turning to our revenue streams, the native network accounted for 91 percent of operating revenues for the quarter and the year with Frontier JetExpress responsible for the remaining 9 percent.

For the quarter, our native network load factor was 72.4 percent, up 5.1 points from 2003, an industry-leading gain for the period.

Overall yield on our native network was 2.6 percent lower than in the fourth quarter of 2003 on 5.9 percent more traffic.

In turn, our native network RASM was 2.5 percent lower than in 2003.

The yield decline was not unexpected as we responded to deeply discounted industrywide fare sales throughout the quarter.

But we were able to mitigate it somewhat by shifting capacity from under-performing markets to more productive missions, both with Frontier JetExpress and within the Air Group network.

For the full year, native network raw yields were actually 3.4 percent higher than the prior year on 2.1 percent more traffic, leading to a RASM improvement of 4.2 percent.

In 2004, we shifted nine of our CRJ-700's to Frontier JetExpress and added 3 Q400's to the Horizon system, which netted a 1.6 percent decline in native network capacity for the quarter and 5 percent for the year.

Looking ahead, we are projecting an increase in capacity of 12 percent for 2005.

By quarter, this breaks down to 12 percent in the first quarter; 8 percent in the second; 15 percent in the third; and 13 percent in the fourth quarter.

We'll take delivery of our 19th CR-700 in March with no other deliveries planned for the year.

No changes are planned for the Frontier JetExpress fleet of nine CRJ-700's at this time.

With respect to Frontier JetExpress, I'm happy to report that we met or exceeded all our first-year targets for this new product line; have developed an excellent working relationship with the Frontier team; and are looking forward to our second year of the contract, where we'll be eligible to earn incentives for performance above our targets.

As I've noted in previous calls, the introduction of this program in 2004 created a number of unusual variances to the prior year.

The structure of our agreement is such that a significant number of operating expenses, like station rent and fuel, are handled and booked by Frontier, and when combined with the longer trip distances, unit revenues and costs are naturally significantly lower than on our native network flying.

For the full year, the average stage length on our native network was 325 miles, while at JetExpress, it was 621 miles.

Turning to costs, our operating expenses for the quarter, excluding fuel, were up $5.6 million, due largely to increased aircraft maintenance, depreciation, F-28 impairment charges and wages and benefits.

Increases in overall expense were partly offset by favorable year-end landing fee credits and adjustments to our workers' comp accruals.

Aircraft maintenance was higher by 48.1 percent or $3.8 million due to an 18.4 percent increase in block hours flown, fewer aircraft cover by warranty, and additional engine overhauls and heavy checks (ph) on both the CRJ and the Q400 as compared to 2003.

On a block hour basis, maintenance was higher by 25.8 percent for the quarter and 11.8 percent for the year.

We further impaired our retired F-28 fleet by $650,000 to reflect market based on recent offers.

We expect to complete deals for the remaining seven aircraft and spare engines before the end of the first quarter.

The remaining net book value for all F-28 assets is about $2 million.

Wages and benefits were impacted by year-end adjustments for workers' comp and employ health insurance in both 2004 and 2003.

Excluding these adjustments, wages and benefits were up 8.5 percent for the quarter on 5.2 percent more employees and were up 5.2 percent for the year on nearly 2 percent more employees.

It was another great year for our people who influence so many of the things that drive profits -- asset and employ productivity were both up dramatically.

And for several months, our service quality index measures were industry-leading and the highest we've ever achieved.

Our Frontier JetExpress teams did their part by consistently exceeding all contractual performance measures while staying on budget.

January's monumental ice storm was a tough way to start 2004, but we finished strong by setting record load factors and achieving the No. 1 ranking among all airlines in both October and November for fewest mishandled bags.

On our native network during the fourth quarter, we completed 97.7 percent of our scheduled flights with 82 percent of them departing on time.

All of this is a tremendous credit to the scale and tenacity of our people.

Looking ahead on the expense side, we are forecasting our CASM X fuel to be 13.1 cents in 2005, which will be a 3.7 percent improvement over 2004.

By quarter, unit costs X fuel are expected to be 14.7 cents in the first quarter, which is down 1.3 percent compared to 2004; 13.2 cents in the second, down 1.5 percent; 12 cents in the third, which is down 4.8 percent; and 12.8 cents in the fourth quarter, which is down 5.8 percent.

We expect the lower unit costs to come from process improvements and related increases in productivity, maintenance cost initiatives, lower distribution and insurance costs and a full-year effect of Frontier JetExpress operations with nine aircraft.

So while significant challenges remain for 2005, there is much that are people can and should be proud of as they reflect on the ground we've covered in the year just past.

Looking ahead, our efforts to establish and sustain the levels of profitably needed to secure our future will include continued intense focus on our operational processes and the costs that they drive, as well as an aggressive revenue management posture toward achieving fully allocated profitability in our native network markets.

While our traffic forecasts for the first half of the year appear reasonably healthy, the depressed yield environment shows no sign of abating.

It will take our very best cost management and market development practices to navigate this environment successfully.

Our plan is to leverage our capabilities and strengths and shoring up existing market performance and in exploring new strategic opportunities that are aligned with our mission.

If we do these things well, I'm confident our story in 2005 will continue to build on the good gains of the last two years.

Now, let me turn it back over to Brad for a review of the Air group balance sheet.

Brad?

Alaska Air Group ended the quarter with $874 million in cash and marketable securities.

And this compares to 812 million at the end of 2003.

I will say our cash balance has declined to approximately $803 million currently due to significant semi-annual lease and debt payments.

For all of 2004, cash flows from operations were roughly $330 million.

We also received 94 million from aircraft financings completed during the year.

CapEx was approximately 161 million, which is relatively low by historical standards and we paid down the total $150 million on our line of credit and $60 million on other long-term debt.

At this stage, we financed all 34 737-700's and 900's we've taken delivery of in the last five years.

As we disclosed in our most recent 8-K, our $150 million credit facility expired on December 23rd, 2004.

We're currently negotiating a replacement facility and expect to close on a new agreement in the next month.

Our debt to capitalization ratio adjusted for operating leases is 78 percent at the end of 2004, 1 point higher than at the end of 2003.

We expect the change in accounting with respect to airframe and engine overhauls to bring this number to about 80 percent.

At this point.

I'll turn the call over to Bill for some final remarks.

I'd like to end our part of the call by offering my perspective on where Alaska and Horizon stand today and how we're positioned for success going forward.

As I look at our organization, I see many strengths.

We have outstanding employees and an unmatched tradition of providing great customer service.

This has resulted in well-known and preferred brands at both companies that help us earn superior revenues.

We've carved out a niche in the state of Alaska, the Pacific Northwest and up and down the West Coast.

But our network also offers significant growth opportunities.

We continue to be leaders with technology, both on the ground and in the air.

An example is the recent approval by the FAA to use our GPS RNP navigation system for operations in Palm Springs.

And finally, we have a relatively strong balance sheet, which includes the strong fuel hedge portfolio.

And we do have an imperative to continue to improve our profitability.

But as we go down this path, we do so with all of these strengths, a good plan and a good record of executing against the plan.

This is a difficult and permanently changed industry, but we believe when the dust settles, there are going to be some winners, and I'm increasingly optimistic that we'll be one of them.

At this point, we're available to address any questions you might have.

(Operator Instructions).

Please limit yourself to one question and one follow-up question.

Gary Chase from Lehman Brothers.

Good morning, guys.

Hey, Brad, I apologize.

Kind of moving through a lot of stuff quickly there.

Could you just go over again the salaries and wages line for the quarter?

You said you had some benefits from reversal of loss reserves and there was something else.

Could you just go back over that for us, please?

Yes, there's a lot going on there.

I think we're down about $12 million for the quarter.

About $1 million of that was wages.

And about $11 million of that is benefits.

And of the benefits, I think 6.6 million of it is an adjustment to our workers' comp reserve, which is basically based on -- it's an adjustment to the reserve going forward, which is based on favorable claims experience.

I think we also had a favorable adjustment in the health insurance reserve.

In the wages and benefits line, I think we did have reductions of 3 or $4 million related to some of the areas that we -- the changes we announced in August and September.

But that was offset by increases in other areas.

Okay.

On a run rate going forward, obviously before any assumptions on the pilot side, should we expect that you would look closer to the 245 level that you were at before?

Or is this a good run rate?

I mean can you give us any sense at sort of what a normalized level would be?

Well I think that 6.6 million favorable adjustment to the workers' comp reserve, I would not factor that into your run rates.

That is one-time December stuff that is the change in estimate that I wouldn't factor in going forward.

Otherwise, I think what you have here, X any changes in our labor agreements, is a good basis for that, for forecasting going forward.

Okay.

And could you just walk through the critical elements on the pending arbitration?

As I understand, you would have submitted your unresolved issues by now.

Arbitration starts March 1st.

And the issue here is going to be the economics as decided by the arbitrator.

Is that -- are there any other real milestones in the process that we're missing here?

No, you've got it, Gary.

That's it.

It's wages, and each side submits five other issues.

And it's an arbitration with some standards about the competitive marketplace for comparison.

And then a decision with the implementation on May 1st.

Other than JetBlue bill, are there any major carriers we might think of that don't qualify for that overlap provision?

You know, and they have to have a 5 percent city pair overlap with you or something of that nature?

Maybe Frontier, but that doesn't count.

All right.

Thanks, guys.

Ray Neidl of Calyon Securities.

Good morning.

A very broad question.

You were a little bit early in the game in doing the fare simplification type of program.

And I was just wondering if you could point out the differences between how your program was implemented and worked versus Delta, which is creating quite a bit more controversy.

I know they're a much bigger system and had more overlap.

And since you were early into the game, how's it working?

Are you pleased with it?

Do you have to still fine-tune it?

And how's it working compared to what you know about Delta's?

Hi, Ray.

This is Gregg.

You'll recall when we launched our own fare simplification last year in February, so this is coming up on our first anniversary of the new fare structure.

We said that we would call success a point when we got to revenue neutral RASM.

And I think we've had success.

If you look at our RASM performance over the last twelve months compared to the industry, we've actually had favorable RASM.

So Delta's implementation of their fare structure simplification looks a whole lot like our own.

For that reason, I'd expect there to be very little impact on Alaska going forward.

They have done some things that are a little bit more complicated than ours for that fare simplification, with respect to how they treat geography.

Ours is absolutely the same system-wide.

But pretty much the same.

Okay.

So you're pleased with your program and theirs has a good chance of succeeding also I guess.

My second question, my follow-up question, has to do with Horizon.

And it looks like you're getting about 10 percent of your revenues on the guaranteed revenue program and the other 90 percent as far as independent flying.

And I'm just wondering also if beyond Frontier if there's any other potential partners out there -- maybe United, which is looking for people.

This is Jeff, Ray.

You're right on the numbers or pretty close.

It's about 9 percent to 91 percent is the split right now.

And as it relates to what we've learned this year, we've learned we can do this well.

The team did a fabulous job in executing and performing at or above targets.

We think it's a line of business that falls squarely within our mission to contribute to Alaska Air Group profitability in a way we uniquely can.

So we've let it be known that we're interested in being in the game and have been involved in discussions with various partners over time and will continue to do so to see if we can find something in some sweet spots that we can be competitive for.

Okay good.

Thank you.

Mike Linenberg of Merrill Lynch.

Good morning.

I guess a good couple of questions here.

I guess if maybe, Gregg, you could just walk through maybe how the revenue performed regionally, maybe where you saw strength in the quarter versus maybe some of your newer long hauls.

And then how the numbers -- at least on a mix basis -- how they looked this quarter maybe versus a year ago.

Let me give you an attempt of doing that.

The comps are a bit difficult because when we look at 2003, it's against the old fare structure.

There's a new fare structure in 2004.

So as we look at business versus leisure mix, so it's really hard to see exactly how that's moving, principally because with such a great reduction in lower -- in business fares -- we see a lot of leisure demand taking advantage of those upper buckets.

So I guess at a system level on an annual basis, I would say that we've seen the revenue from the upper buckets decline about 5 points year-over-year.

And with respect to regional performance, RASM regionally, we have seen strength really throughout the 12 months, no different in the fourth quarter than the preceding three quarters.

We've seen strength in Mexico, Canada, and the trans-cons.

And those were driven mostly by improvements in load factory year-over-year, not in average ticket price or RPN (ph) yields.

I guess my second question -- maybe it's a question for Bill and/or Jeff -- when you look at the numbers that Horizon has been putting up, the profitability has been good.

In fact, it seems like it's been superior to Alaska itself.

And this question has been asked numerous times over the years.

Is there a reason and maybe a compelling reason to possibly monetize Horizon?

And, you know, maybe the vehicle isn't necessarily for the public markets, but maybe as a source of funding for pensions, ala maybe what Northwest and Continental have done.

I mean I'm sure that you guys go back and look at that time and time again.

Any latest thought on that?

Or maybe things that have changed throughout the industry that may make you rethink monetization of Horizon?

I'll start, Mike, and maybe Brad can finish up.

I think you asked this question -- or somebody asked this question a call or two ago.

And we're just more convinced than ever about the strategic value of Horizon as a wholly-owned subsidiary.

And the things that we're doing with harmonization and the way that we're looking at markets and the way that the planning groups in particular are working together and the revenue management teams, I can't imagine being successful in this environment without a certain amount of feed and without the flexibility that the 70-seat airplanes give us in some of the weak markets, and then allowing us to take our units and go do more strategic or more profitable things.

And as we've worked together, I think we recognize more and more the value of this partnership and ownership, which is really at the crux of it.

The only things I might add to that, Mike, are that if you looked at our presence in Seattle since -- Alaska Airlines by itself has market share low 30 percent, 32, 33 percent. something like that.

But when you add Horizon in, our market share is approaching 50 percent.

I think it's 47 or 48 percent.

So the S curve that you folks sometimes talk about really begins to work for us.

It gives us the kind of presence that we really want to have out of Seattle.

The other thing, as folks say, well you could have a -- you could float them or spin them off or do something and still have a contractual relationship with them.

And I guess our sense is that that will never be the same as an ownership relationship in terms of the spirit of cooperation of working together with passengers and scheduling fares and all of that stuff.

Okay.

One thing maybe, just I'd add too, Mike, is that we talk about this as being the best of both worlds scenario in a sense too, particularly with the encouragement we receive from Bill and the board to explore the contract line opportunities as a way to supplement what we do for Air Group while not undermining our primary mission of supporting the network -- the Air Group network development effort.

So in that sense, it really works well for our employees.

They see a sense of purpose and mission, and feel entrepreneurial at the same time.

Thank you.

That answers my question.

Helane Becker (technical difficulty).

Thank you very much, operator.

Hi, gentlemen.

Brad, I know you went through the maintenance.

So going forward, I think you said that we have to think differently about the way you're going to account for this.

Can you just run through that one more time?

Yes.

Historically, our policy for both engine overhauls and airframe overhauls that are like a "B" check or a 15K or an SI -- a check that happened every four or five years or so has been to capitalize the check and amortize it or the overall and amortize it over the expected life.

And so we ended up with -- we have an asset on our balance sheet I think between both companies of $140 million pretax, something like that.

With the accounting change, we're going to write off that asset, and then as we do these overhauls, we'll just charge the cost of the overhaul directly to expense.

I'll tell you at Alaska, what we think that means is that we'll have a little bit higher expense in 2005 than we would if we had the old accounting policy.

I think somewhere between -- expenses will be higher by somewhere between 5 and $10 million higher than we would if we had the older policy.

Jeff or Rudy, do you guys have a thought on Horizon in terms of how it affects you (technical difficulty)?

We'll probably go the other way.

We'll be somewhere between 6 and $8 million better because of the writing off of the prior year.

And we won't have any overhauls in 2005.

The new policy helps Horizon (multiple speakers) for '05.

Got it.

Okay.

And then my other question, Brad, is can you just say what possible spending for '05 will be?

I got the '04 number, but do you have the '05?

Yes, it's a little bit up in the air still.

As we look at what we're committed to right now, Helane, it's below $200 million.

But we do have authority from our board to purchase -- to acquire three 737-800's for 2006.

And if we were to move forward with that authority, we would have some purchase deposits or something that might take that up.

So I think a good healthy mindset might be somewhere between 200 and $250 million for the next twelve months.

When would you have to order the three aircraft?

Probably relatively soon.

Okay.

And just as a reminder, those would be backfill for 737-400's that would be converted for cargo use in the state of Alaska.

Okay, great.

Thank you.

Jamelah Leddy of McAdams Wright Ragen.

In terms of a longer-term outlook, do you think that 7.25 is low enough?

Hey, Jamelah.

It's Brad.

I think our view on that is that it may not be low enough.

We'll have to wait and see to have a sustainable and competitive and a viable business.

And we see what the Company is doing with its own cost restructuring plan, but we also see all the actions being taken by our competitors.

And it's possible that once we get there, we'll have to look around and perhaps go further.

Right now, we are 7.25 is a very aggressive goal and we are squarely focused on getting to that level.

Fuel prices play a big role on that because that's an X fuel number of course.

Right, right.

And Bill, in the past, you've talked a little bit about capacity growth and I believe you said that you wanted to wait until you had your cost structure in place before really looking to grow more aggressively.

And maybe this is too difficult of a thing to look at, but if you look over the next maybe three to five years, longer-term capacity growth, assuming you get your costs in line, what do you think that the industry can sustain?

And are there opportunities in connecting the dots like you did with Seattle-Orlando?

Or do you think the longer-term growth would come just from taking market share from others?

Well for Alaska, I think the industry, obviously, it's one of the problems with our industry is too much capacity existing today.

And as it grows, the industry problem gets worse.

As we look at it, you're right.

We've said consistently that it doesn't make any sense to grow an unprofitable company.

So we think we've taken this in the right order, which is to address the cost issues, do all we can on the revenue side, and then when we have visibility to that -- and I don't even think we need to require that we are actually there.

I think we need to have, for example, labor contracts in place that get us there.

And we have good, solid certainty about where the costs are going, then we talk about growth; and we think something on the order of 5 to 10 percent annual growth is something that the business model could sustain if we can get the costs down as we planned.

In terms of market opportunities, I'm looking at Gregg.

I think there are many.

And what you said, Jamelah, connecting dots, more frequency in existing city fares, and beyond that, some brand-new things.

And the planning group, as always, is hard at work at looking at those and valuating, prioritizing, ranking whatever.

But we're not going to pull the trigger on any of that until we have a lot more certainty about our cost structure.

Okay, thank you very much.

Peter Jacobs of Ragen Mackenzie.

Good morning, gentlemen.

First, Brad, what are you seeing -- or what are you paying for fuel right now?

Unhedged, we're paying $1.50 per gallon.

Unhedged.

Okay.

Secondly, just a follow-up on the amortization of the aircraft and engine overhauls, that $95 million or so that has been capitalized that you are going to write off, wouldn't that artificially -- well I guess it would artificially boost earnings in the near-term until those engines then come up for the third-party overhauls.

So my question would be, why not just continue to amortize them until you bleed those off and then it would just be a natural segue into the third-party maintenance expensing program that you're going to do.

Now, understanding that there's no impact on cash flow here with the change in the accounting, it would still suggest that you're going to get an extra $25 million a year in income if you were on a five-year amortization schedule with those assets on the book.

The way we think through this, Peter, is that it's basically a question of accounting method.

And with the current method, what shows up in our P&L is the amortization cost.

And with the new method, what shows up on our P&L is the cash flows that we pay the vendors for the overhauls.

And so what you do want to have to make sure that you're cleanly on one method or the other.

And so with the write off of the 140 million before tax, 90 or 95 million after-tax does, is it gets that asset off of our books so that we don't have any amortization charge.

But we will have substantial costs that we'll be charging directly to expense in '05 for engine overhauls and airframe overhauls.

And I think it's approaching $100 million, something like that, just to give you a sense of the order of magnitude.

So I don't think there's any big honeymoon or free ride or anything like that.

I probably should have said at the outset, the reason we're really doing this change is really for management.

It makes it very difficult to manage and control this area well when the cash flows are so different from the P&L of an organization.

Of what maintenance does in a year, half of it doesn't show up as expense because we deduct it out and capitalize it.

Then we throw this amortization into their budget that the accounts produce, not them.

And so this gets all of that out of the management of the organization, and the cash flows they spend is what will show up on their budget reports.

And we think there's going to be, in terms of the visibility and the quality of the data that we're working with to manage the organization, we think they will be a big improvement.

Okay.

Hey, Brad, one other thing.

Or maybe this is better for Jeff Pinneo.

Would be -- could -- would you be willing to discuss the difference in the profitability -- I guess you don't even have to give numbers -- or I'm not asking for numbers -- but between the Frontier JetExpress line and the native network.

Is there a big difference in the profitability picture of those two different businesses?

Well, conceptually, certainly, because the contract flying arrangement has fixed guarantees built into it in terms of base margin plus incentives, which contrast to our native network flying, which is open market risk.

So all of the moving parts that go along with competing in the open market accompany the native network, and that's where characteristically they're most different, which would lead you to know that the profitability is more assured on the Frontier side and more at risk on the native network.

That said, what we have done with this restructure is to develop new and very good models to look at line of business profitability -- product line profitability.

And with that clarity, what we've seen on the native network is we've still got work to do, but we've made tremendous headway over this last year, both through the right-sizing of capacity, taking advantage of the increased load factors to exercise what little pricing power may remain in the world today, to improve native network yield and RASM.

So we're making a move in the right direction.

And as importantly, I think, is we've got the right dashboard to stay focused on them.

Is it fair to assume that the native network was unprofitable in the fourth quarter?

Yes.

Can you give us a sense of that magnitude?

No.

Fair enough.

I didn't think you would.

That concludes my questions.

Thank you.

Hey, Peter, one additional note on the Frontier flying is that basically the way that flying works is we get paid for our cost of maintaining the airplanes what those maintenance costs are expected to average over the term of the contract.

And obviously, earlier in the contract, our actual costs are a little bit lower.

So that's another reason the profitability of that Frontier flying is probably a little bit more favorable in 2004 than we'd expect it to be over the life of the contract.

Okay super.

Thank you.

Robert Ashcroft of UBS.

Good morning.

My understanding is Alaska Air has no real scope clause.

Is that fair?

That's about right today, yes.

I think you also said that you like the 70-seaters at Horizon, so which raises the question of would you like 100-seater at Horizon?

Or if you were to bring in 100-seater, which operating unit would it be at?

And is that a point of sensitivity to the pilots at Alaska Air?

We've operated as though we had a scope clause for all these years.

We didn't want to push the envelope on it.

We've got good flexibility with the current Horizon airplanes.

And scope is a topic for this arbitration.

And I think we're better off to let the arbitrator decide where that ends up.

Yes, I guess the real question I'm asking you is that the 100-seater sort of sits right smack in the middle there.

And I guess the question is, in a perfect world, would you like that airplane?

Maybe I'll take a stab at that in terms of our planning and out thinking (technical difficulty) in our network.

We have plenty of the small (ph) at 120 currently with our 737-700.

And the gap between the 70-seater CRJ and the 120-seater 700 is not a big gap in terms of how we think about it in a planning sense.

And so I think the economics of the industry and where ultimately the regionals go with the size of the units that they may use in regional markets against which we would compete, is there is a migration which we've seen more recently, to 90-seat units and maybe over time to 100-seat units with JetBlue.

The economics of those size units would favor those carriers over a 70-seat unit.

But as we sit today, we don't see a need for the units that's smack in the middle at 100 seats.

And as we look at the profitability of that 120-seat 700 fleet, at a 725 X fuel CASM, the current deployment of that airplane becomes much more profitable and future growth becomes much more probable.

So you've got to look at all these things, not just based on current cost, but on where we're likely to go with our CASM.

Thank you very much.

Robert Toomey of RBC/Dain Rauscher.

Good morning.

I think Delta, in conjunction with their recent fare restructuring talked about adding some capacity -- some trans-con capacity out of Seattle.

I think it was Delta.

Have you heard that?

And if so, do you see that affecting any of your trans-con business right now?

They currently serve New York's JFK from Seattle with twice daily service.

And effective this summer, they're going to be building that to three times daily with 757's operated by Song.

So it's a single city paired from Seattle.

We have twice daily service ourselves in the New York Newark market.

There is some overlap there, but as a percentage of our total, it's insignificant.

So you don't see that having a big impact right now?

No.

Okay.

And my second question is -- I was on the Frontier Airlines conference call earlier this morning -- and their management thinks that air fares -- if you look at the key leads from what they see, their management thinks that air fares have possibly bottomed.

And I wondered if you could make any comment on that.

You seem to be still pretty -- I've heard a lot of comments about being fairly (ph) bear still on the outlook for improving fares.

I wonder if you could make any comment on that.

We're certainly not seeing that.

In fact, we're seeing a deteriorating trend, which is largely driven by increased discounting at the very bottom of the fare structure.

And you see that typically when airlines are struggling to fill capacity.

Capacity isn't changing.

In fact, industry capacity continues to grow as we look into 2005.

So I don't see any relief on the pressure at the very low end of the fare ladder.

The only hope you might get is some improvement in the business climate, which would drive more demand into the middle buckets.

But my sense is that there is no pricing power.

There will not be in 2005 and I expect zero improvement in yields.

Can you comment at all on -- did you comment on forward bookings?

I may have missed that for the first quarter?

Yes, we did.

We're tracking slightly ahead in book load factor, and our capacity in the first quarter is up somewhere between 4 and 5 percent, which means our bookings would be up something in the order of 5 to 6 percent.

Thanks very much.

What you have to believe about all of this competitive environment is that if carriers are profitable, they'll grow.

And the more profitable they are, the faster they'll grow.

And that certainly only applies -- the profitable word -- only applies to the LCCs right now.

So we look forward and we say not about this quarter or necessarily this year, but long-term, there's going to be increased pricing pressure because there's going to be increased capacity by LCCs all over the place.

They're focused more on the East Coast right now because there are some more obviously opportunities.

But at some point, they're going to come back out west in a bigger way and we have to be ready for them.

Thank you.

Daniel McKenzie of Citigroup.

Thanks, operator.

Following up on a question earlier, I think it was Jamelah's -- you were talking about long-term growth possibilities.

And one of the possibilities that I thought I heard you acknowledge was doing more connecting the dots.

And does that suggest that you would shift from more hub and spoke type of flying to more point-to-point flying?

I guess I was just hoping to clarify that.

And then secondly, the other long-term options -- you sort of lumped it into other.

Many of your larger peers are focusing on international flying right now rather than domestic flying.

And assuming that Alaska gets a pilot deal, do the specific opportunities -- would they work for you?

Or asked differently, does Alaska have the critical mass at this point to do some of that longer haul international flying?

So wondering if you can just clarify those two longer-term growth possibilities.

We are -- as we look forward and we look for our expansion opportunity, largely, are focused on our Seattle hub.

And it's much different than the rest of the industry who operates hubs.

Our hub is actually a weak one in terms of connecting traffic.

We're about a 70 percent OND (ph) carrier at Seattle and 30 percent connecting.

And I think if you look at Dallas or Minneapolis or other hubs, you'd see the exact opposite, where its 30 percent originating 70 percent connecting.

So our expansion at Seattle is really one which is more point-to-point expansion.

And you might go down the top 25 domestic city pairs and see the ones that are missing, and those are the ones that we're likely to provide service to as we look forward to expansion.

With respect to international, we are launching new service to a new point in Mexico next month to Laredo (ph).

And we see expansion opportunities for us internationally -- probably being focused more on Canada and Mexico than on Asia-Pacific and Europe.

We don't have a point-of-sale internationally that would support that kind of growth.

But we see there being plenty of opportunities in the Mexico, Central America and Canada arena.

Okay.

And mechanics aside, it seems like United is making progress on its cost initiatives.

And how are you seeing the competitive dynamic with United involved at this point?

And I wonder if you could also comment on Southwest as well, that would be interesting.

They have -- with the exception of my risk comments, our yield in Mexico for the year has been up, largely stemmed by strong loads.

And there's been a strong growth in pleasure vacation business to the beaches of Mexico.

I think the America West and United particularly have also seen that and have mounted some competitive capacity from the West Coast to those points.

But for that, we've seen United contract in many of our overlap markets, and in particular from Seattle and Portland to L.A., Denver, and Chicago.

As a percentage of the capacity that we fly that overlaps with them, it's not a particularly big reduction, but nevertheless, it is a reduction, which may bring a little bit of pricing power to those markets.

Yes, okay.

And also Southwest -- if you could add some color as well?

Pretty much stay the course for them in the West.

I mean they've added a little bit of capacity to Phoenix year-over-year.

And they are going to be adding capacity to Chicago Midway, which will largely be replacement capacity as ATA moves out of those markets from Seattle.

I might mention one thing about fleet.

We are moving in the direction of a single fleet type for simplification and CASM purposes with the 737.

The 800 that we're taking here next week is actually going to come plumb for e-tops (ph), who are extended over water operations.

And that's with nothing specific in mind, but just to give us flexibility to look at some of these opportunities that might be out there over time.

So we'd have then all in one fleet type, we'd have flexibility to do some longer range over water stuff if the opportunity presented itself.

Understood.

Thanks very much.

Glenn Engel of Goldman Sachs.

Good morning.

A couple of questions, please.

First is Horizon -- the growth this year -- is this with Frontier or is this big growth in the at-risk flying?

The growth numbers we gave you are overall.

And I'm saying is that -- where is this growth being allocated to, Frontier or at risk?

Oh, I'm sorry.

At risk.

It comes from a number of sources, Glenn.

Part of it is the year-over-year normalization.

A greater percentage of our 70-seat activity in '05 is going to be on the harmonization markets, which are longer-haul by nature.

We're increasing utilization.

And we are also on the Q400 fleet; by April, we'll be adding 4 seats to that platform.

So that will be 74 seats for the better part of the year.

But it's all native network.

And this is all very inexpensive flying?

Yes, it moves toward greater efficiency.

You're taking one airplane.

We're taking one airplane.

It's going into a harmonization mission right away.

And you mentioned trans-con -- I thought that in the third quarter, the trans-con was down significantly year-over-year.

That's no longer the case?

It was actually up 2 points -- the RASM was up 2.2 percent in the fourth quarter, Glenn.

I don't have our third-quarter figures with me.

Do you, Gregg?

I don't got it.

But it seems -- despite them, it seems to have turned a bit.

And finally, I guess I'm a little bit puzzled.

I wouldn't think that there is a lot of supply being added in your market.

So why do you think there seems to be desperation pricing in the West Coast when there is not many seats to fill?

Well, I mean there -- as a percentage of capacity addition, where we're seeing it is West Jet on the trans-border to Canada.

They weren't there at all last year and now they've got daily frequencies in about half a dozen markets.

We've got America West in Alaska, announced expansion this past week from Anchorage to Las Vegas.

They're in the year-round market, Anchorage to Phoenix; they weren't there a year ago.

They've got a lot of -- America West Express, CRJ-900's flying trans-border to Canada and off the West Coast of Mexico.

And then small capacity changes by Southwest in markets that I've already mentioned.

So those are the adds.

The only reductions we're seeing are the few that are being flown by United to their hubs.

And you might look at that and say, well geez, those hubs are carrying traffic that isn't even part of Alaska's OND's.

And when we fly to Denver, we carry people to Denver.

When United flies to Denver, they're going all of the country.

So those aren't even OND's for which we compete at Denver.

Thanks.

Tina, if we could, if there is another question, maybe limit it to one more question given the time.

Jamie Baker of J.P. Morgan.

Right under the wire.

Good morning, everybody.

The comment about discount fare activity taking place at the bottom end of the fare structure was a somewhat interesting one to me.

Do you care to hazard as to which of your two primary West Coast competitors are more guilty of that?

In the fourth quarter, it was led by Southwest.

And historically, where we fly nonstop against a connecting opportunity that they serve only on a connecting basis, we've been able to extract small premiums.

And we've been able to do that because United has historically followed us.

And what we saw in the fourth quarter is the departure sort of in the pricing that we normally see from United and they eliminated any premiums in markets that they serve nonstop, which has forced our hand in those same markets.

Okay, very helpful.

And two quick questions on Horizon.

The fourth-quarter fuel expense per ASM guidance shows sequential increase;

I assume that's related to some hedge protection rolling off.

Could you just give us a little more color on what's going on there?

I'll let Rudy answer that, Jamie.

I'm not sure I understand the question.

Jamie?

Well, fuel expense per ASM on Horizon goes from 2.2 to 2.1 to 2.1 and then back up to 2.3, which, given the ASM projections just seems to -- the 2.3 just -- it suggests that your fuel expense is going to be higher in the fourth quarter than the third.

And I'm just wondering why that would be.

Jamie, I'm looking at that now.

My sense is that is exactly what you speculated -- hedges rolling off in the fourth quarter.

Okay.

And then finally, just because there's a lot of year-over-year noise, when we think about horizon RASM in the first quarter, and if we think about it against what you did in the fourth quarter, should we expect RASM, again, sequentially, to be up, down, or no change?

I believe pretty flat.

Yes, because we were fully vested in the Frontier program in the fourth quarter.

So really no change in mix per se.

And we're forecasting pretty healthy gains on the traffic at the load factor side, which will be offset we think by a continuation of the yield.

There's some limit to load factor though.

These are smaller airplanes to begin with and they've had a heck of a run-up in load factor.

So at some point, you're still going to result in declining RASM.

Okay.

That's very helpful.

Thanks for taking the question.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers.

Mr. Tilden, are there any closing remarks?

No.

We thank everybody for participating and look forward to chatting with you next quarter.

Thanks very much.

This concludes today's conference call.

You may now disconnect.