阿拉斯加航空 (ALK) 2006 Q1 法說會逐字稿

Good afternoon.

My name is Angela and I will be your conference operator today.

At this time I would like to welcome everyone to the Alaska Air Group First Quarter 2006 Earnings Release Conference Call. [OPERATOR INSTRUCTIONS] Today's call is being recorded and you may access the recording from our web site at www.alaskaair.com.

Thank you.

Miss Alberts you may begin your conference.

Thank you, Angela.

Hi everyone and thanks for joining us for Alaska Air Group's first quarter 2006 conference call.

Speaking today will be Alaska Air Group Chairman and CEO Bill Ayer;

CFO Brad Tilden; and Horizon Air CEO Jeff Pinneo.

We also have with us Alaska Executive VP of Marketing and Planning Gregg Saretsky;

Senior VP, Customer Service, Glenn Johnson;

Horizon Air VP of Finance Rudi Schmidt;

Air Group Controller Brandon Peterson;

Treasurer Jay Schaefer; and Alaska's Managing Director of Corporate Communication Caroline Boren.

Our agenda for today includes a 20 minute or so -- overview by management.

After which we'll take another 25 minutes to answer questions from analysts.

Following that, we're adding a new segment and have set aside the last 15 minutes to address any questions from our journalists.

I will begin with a reminder that this call does include forward-looking statements that may differ from our actual results.

Additional informational risk factors that could affect our business can be found in our periodic SEC filings.

To the extent our presentation includes non-GAAP financial measures, we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release, which can be accessed via our web site at alaskaair.com.

As we've reported earlier this morning, Alaska Air Group had a GAAP net loss of $79.1 million or $2.36 per share in the first quarter of 2006 versus a net loss of $80.5 million or $2.39 per share in 2005.

There are several notable items that affect the comparability of our results, including an impairment charge related to our strategic decision this year to retire our MD-80s early and in 2005 fuel hedge mark-to-market gains, a change in our method of accounting for overhauls and a charge for restructuring items.

Rather than go through all the details now, I would like to refer you to the table on page 10 of our earnings release.

After adjusting to these items, Air Group reported a net profit of $2.8 million or $0.08 per share for the first quarter of 2006, compared to a net loss of 41.7 million or $1.54 per share in 2005.

Now, it is my pleasure to turn the call over to the Bill Ayer.

Thanks Shannon and hello, everyone.

Let me start by saying that we are extremely happy to report a small first quarter adjusted net profit today.

As you know our business is very seasonal and this quarter is almost always our weakest, with most of our profit being produced in the second and third quarters.

The last time we posted an adjusted first quarter profit was in 1999, so we're off to a great start and now we've had year-over-year improvements in our results, excluding special items, in 11 of the last 12 quarters.

Our goal for the past several has been to reposition Alaska Air Group to compete successfully in this rapidly changing industry, and in doing so, improve the position of all of our stakeholders.

These results indicate that we're clearly moving down this path, and the bottomline reason for our success is the hard work and dedication of our people.

When we look at the situation three years ago, we realized that depending on what we did, we could end up in a downward spiral of deteriorating financial health or a virtuous cycle where one improvement leads to another, building to sustained profitability.

Thanks to the terrific people at Alaska and Horizon, we are making good progress in reducing unit costs, improving the quality of our service and optimizing revenues consistent with our long-term transformation plan.

Combine these accomplishments with a fare environment that is allowing us to recover a greater portion of our high fuel costs, and that virtuous cycle is gaining momentum.

This quarter's performance is a result of reduced unit costs, combined with higher than expected revenues, driven largely by improved yields.

Yield was up 8.8% at Alaska, making four consecutive quarters of yield improvement, while Horizon's yield was up 6.3%.

Even with higher ticket prices, our load factors are increasing, a testament to the loyalty of our customers.

Alaska now has about a two-year string of record load factor improvement and Horizon had record load factor for the first quarter.

Both Alaska and Horizon reduced unit costs this quarter.

Alaska reported non-fuel unit costs of $7.97 per ASM, which represents the largest year-over-year decline in five quarters.

And a significant improvement from the $0.0855 we posted last year.

Horizon also had a slight decline in non-fuel cost.

I can't emphasize enough how important our strong balance sheet has been to our progress.

Late last month we called our $150 million convertible bond for redemption and based on our current stock price we expect that bondholders will convert their bonds into common stock.

That would decrease our debt by $150 million and save about $11 million a year in interest expense.

At the same time, our equity would increase to approximately 900 million and our share count would increase by 5.8 million to approximately 39.3 million shares.

At the end of March, we had just over $1 billion in cash and marketable securities on our balance sheet.

Now that's a very substantial cash position, but we think it's appropriate given the 1.9 billion in capital expenditures we have planned for the next three years as well as our debt and pension obligations.

Of the 1.9 billion 750 million relates to the investments to transition out of the MD-80s.

And we're anticipating approximately $115 million per year in operating savings in connection with that transition.

And at Horizon, we're acquiring 14 additional Q 400s over in the next 18 months.

A single fleet type has proven to equivalent effect at other successful airlines.

And we're very excited that Alaska is in a position to make this transition.

And we plan to make sure we take advantage of all the potential savings associated with a single fleet.

Besides the obvious advantages of having a younger and more fleet -- and maintenance efficient fleet, t here will be economies in maintenance, inventories, training, facilities and staffing.

And we're starting to process now to capture all of these deficiencies.

And our Executive VP of Operations Kevin Finan is leading a team that's charged with this important initiative.

Before I ask Brad to take you through Alaska's P&L, let me say a few words about our people.

In March, we announced a tentative four-year agreement with the Association of Flight Attendants.

Our employees are currently voting on that and we expect to get the results next week.

We're also in midst of negotiating with the IAM, who represent our customer service, reservations, ramp and store agents and we're hoping for a good result on that front as well.

We know there's a lot of work ahead, but we are very encouraged by our progress to-date.

We're grateful for the efforts of our employees as they work through the many difficulties that are associated with the scale of change that we've undertaken.

Our people are taking great care of customers and they're providing the true differentiation in service that has set us apart for 75 years.

I want to thank them for their focus as we continue to make the necessary changes to achieve our goals.

And with that, I'll turn the call over to Brad.

Thanks Bill.

Looking at Alaska Airlines now, excluding the unusual items, we've reported A pretax income of $7.6 million for the first quarter of 2006, compared to a pretax loss of 54.9 million in 2005.

This equates to a pretax margin of 1.3% in '06 versus a negative margin of 10.5% in 2005.

In dollar terms, the improvement amounted to 62 million and it's the result of a $67 million increase in revenues and a $21 million decrease in wages and benefits, both of which were offset by a $29 million increase in our economic fuel costs and small changes in other line items.

Passenger revenues for the quarter increased 14%.

Our unit revenue performance was very strong in all three months, up 7%, 12% and 9% in January, February, and March respectively.

The revenue increases were driven by an 8.8% increase in yields and a 1 point improvement in our load factor.

Reasonably, yields were particularly strong in Canada, the Bay area, Southern California, and Alaska, while they declined slightly in Mexico.

In addition to the fare increases in the second half of 2005, we participated in several fare increases during the quarter.

These increases resulted in our average revenue per passenger increasing from $122 last year to $137 this year on a 3% longer trip length.

Our advance bookings for the second quarter are reasonably strong.

At this stage we're showing increases in advanced book load factors for the next three months of approximately two months for -- two months each in April, May and June -- 2 points each in April May and June.

Turning to fuel, you might have noticed that we changed the classification of our fuel hedging gains and losses from the non-operating section of our P&L to the fuel expense line.

We think the new presentation is preferable since it puts all fuel related amounts in one place on our income statement.

Because this line includes mark-to-market gains related to hedges that settle in future quarters and last year we had a very large mark-to-market gain, you see a very significant increase in our GAAP fuel costs.

To see a calculation of our fuel costs excluding profit from hedge contracts that settle in future quarters, you'll need to go to the table on the bottom of page 8 of our press release.

If you look at that table, you'll see that our economic fuel expense was $141 million for the quarter, which is up by 29 million from last year.

We again benefited from a hedge program with subtle hedges lowering our economic fuel expense by 26 million for Alaska and by 30 million for Air Group.

At $70 per barrel, we estimate that our hedges would lower Air Group's fuel costs by 77 million for the remainder of 2006, bringing the annual benefit of our hedging program to about $107 million.

Looking forward, 45% of our remaining consumption in 2006 is hedged at $43 per bearer, 20% of 2007 is hedged at $45 per barrel and 7% 2008 is hedged at just below $50 per barrel.

The majority of these contracts are caps or call options, meaning that we would benefit from any decline in fuel prices even on the hedge portion of our consumption.

During the first quarter, we made no changes in our hedge positions.

After three consecutive quarters of year-over-year unit cost increases, we were happy to see our unit costs ex fuel special items declined by 6.8% for the quarter.

Looking at some of the specific line items from our press release, wages and benefits were down 21 million or 11% compared to 2005.

Wages were down 13.6 million due to lower pilot wage rates and the contracting out of the Seattle ramp.

And benefits were down by 7.7 million due to lower pension, group medical and workers comp costs.

Our productivity was up 4% for the quarter to 145 passengers per FTE, giving us 15 consecutive quarters of productivity improvement.

We had 80 employees per aircraft compared to the first quarter of 2005.

Looking at the next three quarters, we expect wages and benefit costs excluding variable pay to be comparable or slightly higher than the prior year as we begin to anniversary some of the wage reductions and contracting out changes made during 2005.

We expect the second quarter wages and benefits will be about flat with the third and fourth quarters up 5% to 6% over the prior year.

Our variable pay programs are sensitive to the profitability of the company, but our current expectations are that their costs in the last three quarters of the year will be approximately the same as their costs in the first quarter.

Aircraft maintenance costs decreased by nearly 6 million or 12% compared to the first quarter of 2005, which is significantly different than the 6 million increase we were expecting three months ago.

We had fewer air frame overhauls than planned and materials expense was also better than expected.

Right now we think our total maintenance cost for 2006 will be about 10 million lower than in 2005

Finally, at the Air Group level, our tax provision was favorably impacted by a $2.5 million adjustment to a tax contingency accrual.

In connection with our net growth of three aircrafts in 2006, we're anticipating ASM growth of about 5% for the year, which is down a bit from the 6% guidance we gave you last quarter.

Our estimates are that we'll grow 5% in both the second and third quarters and 8% in the fourth quarter.

There is still some uncertainty surrounding the certification data for the 737400 combi which could further affect ASM growth for the year.

Our current expectations are that unit costs will be down 3% in the second quarter to $0.079, down marginally in the third quarter to $0.075, and down about 5% in the fourth quarter to $0.075.

Our full year plan is for unit costs of $0.0765 cents.

We're currently feeling the pressure of higher expected costs for variable pay and credit card commissions, which are a function of higher expected profits and revenues along with possibly lower ASMs and we're working hard to find ways to offset these.

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

Great thanks Brad and good morning, everybody.

Horizon closed the quarter with a $1.6 million adjusted pre-tax loss, a significant improvement over the $7.7 million loss we posted during last year's first period.

Our revenues of 146.2 million were up 21% from last year and our adjusted operating expenses of 147.1 million were up about 15%.

The increase in our expenses was headlined by a 25% increase in our economic price of fuel, which impacted our pre-tax results by about $4.5 million.

On our native network, traffic growth continues to be the leading theme on the revenue side.

For the quarter, it was up 13.5% on a 10.8% increase in capacity.

This resulted in a record 70.8% load factor for the period, up 1.7 points from the prior year.

When coupled with the yield improvement of over 9% that we achieved through participation in industry fare increases, our native network RASM for the quarter was up 10.2% to $0.20.

January also marked the beginning of our third year of Frontier JetExpress operations.

The nine CRJ-700s that we have assigned to this important fee based program represent about 24% of our system capacity and 9% of our passenger revenue, numbers that are pretty consistent with the prior year.

Turning to the cost side, our operating expenses for the quarter, excluding fuel, were up $13.3 million or 12% over last year's first period.

About 84% or $11 million of the year- over-year variants is in aircraft maintenance, wages and benefits and variable pay incentives.

Our maintenance expenses were up nearly $6 million or 52% due to the spike in planned engine overhaul events for 2006 that we've previously briefed you on.

For the full year, we expect to spend about $31 million more than in 2005 in the overhaul category due to the planned timing of events.

Under wages and benefits, we restructured our variable compensation plan in 2005 to reward employees when we meet or exceed our profitability and operational targets.

The new plan, together with our improved performance levels, drove a nearly $1 million increase over last year.

You'll find this item, variable incentive pay, listed separately on our income statement.

Wages and benefits expenses were up $4.6 million or 11%.

This included a one-time expense of about $600,000 for converting our maintenance employees from a vacation to a paid time off program.

Excluding this conversion expense, wages and benefits were up $4 million or 9.5% on a 5.2% increase in FTE's and a 3.9% increase in the average wage.

All up on a unit basis, our CASM X Fuel was down just a $0.001 to $0.142.

Throughout the quarter, we have continued to focus on improving both the reliability and the efficiency of our game and we're pleased with the progress our team has made in both camps.

Our employees continueto do an amazing job of caring for our customers in this record load factor environment, improving our on time performance a full six points over the prior quarter.

In fact, if we were required to report results to the OT, our February performance of 82.8% would have placed us at number 2 in the nation.

Through it all, our employees continued to set new high watermarks in productivity, achieving a record 138 passengers per FTE for the quarter, 3.8% over the prior year.

The same trend was evident with asset productivity, where we achieved a 6% improvement in system aircraft utilization.

I can't say enough about the tenacity and commitment of our people in working to consistently and efficiently deliver great experiences for our customers.

My hats off to that.

As you may recall, we took delivery of our 20th CRJ in January of this year.

This aircraft is now in service and has been assigned to the -- its AAG network development mission.

In March, we completed a transaction with Hainan Airlines to purchase two Q-400's.

The two aircraft are expected to be in service in June -- in July of this year.

For the year, we're still forecasting capacity growth of 6%.

However, our quarterly growth projections have changed due to fleet and schedule changes that we have recently made.

By quarter, our ASMs are forecast to increase as follows.

In the second quarter, 5%, and that compares to 3% in previous guidance; the third quarter, 4% compared to 6% in the year prior; and in the fourth quarter 5%, and that compares to an 8% previous guidance number.

And for unit costs our CASM X fuel forecast for the year remains unchanged at $0.14.

This is a 5% increase over the 2005 figure, driven entirely by the engine overhaul bubble, I mentioned to you previously.

By quarter, this breaks out as follows. $0.141 in the second quarter, $0.137 in the third and $0.144 in the fourth quarter.

Now, let me turn it back to Brad who will take you through the Air Group balance sheet.

Thanks Jeff.

Air Group ended the quarter with just over 1 billion in cash and marketable securities compared to 983 million at the end of 2005.

This increase is due to cash flows from operations of $85 million, proceeds from new debt, including the financing of two 737-800's and one CRJ of $122 million and capital spending of $173 million.

Alaska has taken delivery of three 737-800's so far this year and we expect to take nine more during 2006 for a total of 12 deliveries.

We've either financed or have commitments to finance all of these.

At Horizon, we've taken delivery of two Q400s and one CRJ-700s so far this year, and we're planning to take two more Q400s in December for a total of five deliveries this year.

We expect capital -- our capital expenditures to be about $635 million at the Air Group level in 2006, and approximately $655 million in 2007.

We're also planning to contribute $72 million to our defined benefit pension plans this year, which is up from our previous plan of $50 million.

Increasing our contribution helps us get our plans better funded and it will also help us avoid about $4 million in PBGC variable-rate premiums.

This will bring our total contributions to our DB plan since 9-11 to about $265 million.

Our adjusted debt to capitalization ratio, and net adjusted for operating leases is 76% as of March 31, up from 73% at year-end.

We anticipate that this will increase by a couple of points when we record incremental charges to buy out our nine long-term MD-80 leases and that it will decrease by about five points if we're successful in our attempt to force conversion of our convertible bond, which seems likely given our current stock price.

We'll know the results of this next week and we'll share them with you when we have them.

At this point, I'll turn the call back to Shannon.

Thanks, Brad.

At this time, we'd like to take any questions that you might have.

Just a reminder everyone, the first Q&A session will be limited to questions from analysts.

And we've set aside approximately 25 minutes for your questions.

Angela, could you please provide instructions for those who'd like to ask a question.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Ray Neidl of Calyon Securities.

Good morning everyone.

Hi, Neidl.

Going forward, as you've sped up the process of switching to an all-Boeing fleet, I'm just wondering, is there going to be additional costs involved with that, and as result will you have to do debt financing to finance some of these aircraft.

And if that's the case, if you want to keep your debt to capitalization ration around 76%, will you have to do -- then do some maybe equity offerings?

Yes.

Ray, the plan all along with this transformation is to get us to a level of profitability where we can grow at a sustainable basis and have the balance sheet actually gets stronger as we grow, not weaker.

And so, as we're making good progress, I think if you look at today's results and it shows good progress against our transformation initiatives.

And we feel pretty optimistic about the rest of 2006.

And so long story, I guess our hope -- we will have to do debt financing as we take these aircraft on, but our hope is that we don't find ourselves accessing the equity market the whole lot more, that we are able to produce equity through internally generated profits.

Okay.

Great.

And Brad, the second part of that question you talk about your pension program, which I assume they're all defined benefit programs.

As the industry moves more towards defined contribution programs or 401-k, might Alaska Airlines have to consider doing something like that in the future?

Yes.

We're actually making good progress with that, Ray, our pilot attendants have always had a defined contribution plan.

With management and dispatchers now, the existing employees had a choice of having further credit in a defined benefit plan or an enhanced match in a defined contribution plan.

And all new hires are going into an enhanced defined contribution plan.

We're talking right now with the IAM about moving towards a new structure, and we're anxious to sit down with the pilots at some point and talk to them about moving at least new pilots in -- transitioning into a new structure.

So absolutely, this is something we've been concerned about.

We've been talking about it for two or three years.

And, yes, maybe, Ray, in terms of the funding level of the current plan, we do have four employee groups that are in plans.

And we just released our 10-K for 2005.

At the end year we had $680 million in assets for these plans and depending on the liability measure, either 909 million or 989 million in liabilities.

So we're a bit underfunded, but we're -- relative to the Company's cash position, I think we're in better shape than most other airlines and we're trying hard to move to a new structure and at same time get the current plans better funded.

Good.

Thank you very much and excellent quarter.

Hey, Ray, this is Bill.

I might just add on the airplane side, this 737-800 is just the best darn thing for our route system in terms of its fuel efficiency and its mission characteristics range and payload.

And as we've grown transcontinentally here, we have a need for long-range airplane, obviously, and this -- the whole -- the way that airplane operates in our system is really, really good.

So we're going to get some great efficiencies out of the airplane.

And one thing I might add to Brad's comments on the [DBDC] question is that done correctly, I think that this is a transition that most employees are going to welcome, especially new people coming into the Company who are much more oriented toward defined contribution plans.

So we're not thinking we're going to end up with a big conflict over this, if we do it correctly, with the labor side.

Good.

Thank you.

Your next question is from Mike Linenberg of Merrill Lynch.

Yes.

Hi, good morning.

I guess two questions.

I think, Brad, you briefly touched on maybe a certification issue with the 737-400 combi.

You mentioned something about how it could impact ASMs.

Could you maybe give us a little more detail on that?

And is there also a potential revenue shortfall in the sense that you have planes maybe on the ground or not in business carrying cargo, as these older 737-200s come out of the schedule?

Mike, this is Bill.

I might just give you a little bit on that and then Brad or Gregg can fill in.

We're getting one-freighter, one 737-400 converted to an all-freight airplane.

And that's the first airplane that we're going to be flying in revenue service, currently planned for a June 8, start date.

And that has slid a little bit.

Not surprisingly, certifications of converted airplanes like this sometimes take a little bit of extra time with the FAA certification and so forth.

This freighter has flown.

There are no big red flags in terms of getting it on line, it could slide a little bit from that June 8, day.

But we certainly think we're going to have better airplane available for most of the summer.

And then there's four combis, which are the combination of cargo and passenger airplanes to replace the 737-200s that we have in Alaska.

And the plan will be -- by the way that's -- those -- the first of those airplanes is currently slated for late summer or early fall.

And it has the same kind of certification uncertainty, although, again, no red flags, but it's just something new and may take some extra time on the certification side.

The plan will be to extend 200s in Alaska so we're not impacting markets in terms of our lift -- of our cargo and passenger lift up there.

And that's where we get into some uncertainty on total ASMs, because the 400 combi is a bigger airplane than 200s typically -- as they're typically configured.

But we're not planning on any shortfall in terms of revenue or service quality to the small communities in Alaska.

Okay.

And then, I guess my second question, if Gregg Saretsky's there, I'm curious just with where demand is and where pricing has moved.

I know one of the laments of the industry over the past year or two has been the shortness of the booking curve.

And I mean, we continue to see some fare sales here and there, but there's a lot more 14-day and 21-day advance purchase.

I'm curious if you're at all starting to see people, maybe, rethinking about booking last minute, given maybe the lack of availability?

I mean, are we starting to maybe see the booking curve stretch out?

Any thoughts on that?

Yes.

I think that's a good observation, Michael, because we are starting to see more advanced bookings in advance.

I think people may be want to hedge against potential future fare increases.

At some point, as we continue to file fare increases to partially offset the rising cost of energy, we do expect to see some reduction in demand.

And to counter that, and also recover some of our increased expense, I think our game plan going forward is to do some squeezing of our lower buckets rather than rely on increasing additional fares -- going with additional fare increases.

And Gregg, that point about you expect to see some reduction in demand -- that is, people just backing away from the higher fares, and yet, I think that that's been brought up on a couple of other calls, and other carriers have indicated that demand thus far is good and maybe they expect to continue to -- maybe up to a point and it's hard to determine what that threshold is before people start to book away or back away.

Are you actually seeing in some markets, maybe pushback from your customers given some of the recent fare increases?

Not yet.

Demand continues to be robust, and we are forecasting as far as we can see, certainly through the second quarter and into third quarter, our advanced book loads are very strong even at these higher fares.

So we haven't seen it yet but we're sort of holding our breath, because there's a supply and demand curve and elasticities.

As we push prices up, at some point we're going to see demand decline.

Okay, every good.

Thank you.

Your next question comes from Gary Chase of Lehman Brothers.

Good morning, guys.

Hi, Gary.

Just a couple of cleanup questions.

The first is -- and I apologize for this one, Brad -- I just want to make sure that I understood what you said.

You mentioned something about variable compensation expense and how it was sensitive to profitability, and then you said something about it being the same in the rest of the year as it was in the first quarter.

And I guess, all I really want to know is are we supposed to read anything into what you're trying to convey about anticipated profitability into that statement?

I mean --

No.

Okay.

We know that you guys are trying to model our results for the full year.

So we're trying to find a way to give you a little bit of guidance.

At Alaska we booked 6.4 million in the first quarter, at Horizon we booked 2.1.

And those -- both of those estimates are one-fourth of our estimate expectation for the full year.

That's all we were trying to say.

Got it.

Okay.

That makes a lot more sense.

Sorry about that.

Yes.

The other question is your cost performance came in even a decent amount better than guidance you gave - it wasn't that long ago.

I don't have the exact date on this 8-K.

But I'm just curious for color on how that happened and what caught by surprise?

I'm speaking to your CASM X fuel at Alaska.

Yes, the point is well taken.

We started -- our guidance, I think, when we were on the phone three months ago, our expectation for the quarter was 835.

We brought it down to 825, and then 81, and then we actually came in at 797.

Right.

I think the big variance there, Gary, was maintenance costs.

We were thinking that maintenance costs were going to be up year-over-year three months ago.

They ended up being down.

It's mainly the timing of -- and may be the cost of both airframe and engine event.

We also got a $2 million recovery from the Port of Seattle related to a settlement.

A lot of times those adjustments at our airports are negative.

This year it happened to be positive so that was $2 million.

It may also be possible that we were a little bit conservative as we put the first quarter together.

I think we're sensitive to the fact that we had missed on the wrong side for three quarters in a row.

And so there may have been some of that in the finance department at Alaska and there may also have been some of that in our operating divisions.

Okay.

Thank you.

Your next question comes from David Strine of Bear Stearns.

Thank you.

With respect to, Brad, your comment on wages and benefits being flat, I assume you were not speaking on a unit basis when you made that comment in your prepared remarks.

Exactly, the right new --

Okay.

-- absolute dollars.

Yes.

Okay.

And then, I think you gave some characterization about how yield was performing through the first quarter.

Can you speak about the second quarter and how it's progressing relative to the growth you saw in the first quarter?

Maybe I'll ask Gregg Saretsky to do that.

Yes.

David, we don't see any material change in our second quarter outlook on revenue performance by region or for the company as whole.

So we expect units revenue improvement of roughly the same order of magnitude that we just reported for Q1.

Okay.

Thank you.

Your next question is from Peter Jacobs of Wells Fargo.

Good morning, guys.

Hey, Peter.

Hey, first, Brad, could you give us an idea of what you're seeing out there in spot fuel prices at the airport?

Yes.

It's very high right now.

The crack spread is wide it's -- in fact, Jay you've got some figures on that.

Can I ask you to take --

Yes.

Absolutely.

This is Jay Schaefer.

So right now, I'm hedged, based upon yesterday's prices, $2.36 per gallon.

We're really seeing crack spreads move up as Brad said $0.52 on West coast.

Of course with our hedged positions, we got -- we'd be looking at -- if you used $72 a barrel, maybe $1.71 is the economic --

Jay, how does that compare to a week earlier or just to give folks a sense for the volatility?

Yes.

These numbers are moving quite a bit.

And right now, at least in the wrong direction.

So if we just looked a week ago, our economic was $1.63.

And that's a combination of [multi] crack moving up.

Yes.

But that -- when you say economic that includes the hedge, right?

That's right.

Okay.

And then -- but the crack spread is, since I recall, as usually runs around what $0.20, $0.10 maybe up to 30 somewhere in that -- is that busy?

Those are the good old days.

I mean the spreads now are as high or maybe even a bit higher than we saw during the hurricane season last year.

Okay.

And we do have some protection on our cracks right now.

And we do expect, as we renew our fuel contracts starting in May, we'll have the potential for additional protection.

Jay, you say we're at $0.52 now.

Peter, I think a more normal planning figures would be $0.40 of crack spread in the -- for over the last year or two.

Okay.

And bookings -- forward bookings at Horizon.

Jeff, could you give us just a sense of what you're seeing there, please?

We're seeing really strong patterns.

Peter, we -- April is going to end real strong on load factor, probably because of the timing of Easter.

And then, moving forward, we're seeing advanced load factors either on par or two to three points ahead of where we grew last year, which also has a record.

So -- and the same comment that Gregg made with respect to unit net revenue patterns.

Hey, so that -- would that be relative to the ASM growth, about three points higher then the ASM growth, is that how I should interpret that?

Well --as far as for the year ASM growth, 6% yes, roughly.

And then, just - lastly, any sense of or can you give us any sense of some new markets that you might be looking at now?

You talked about that little bit last quarter, and you're kind of mum on that, and I was wondering if you could give us any new thinking there, things you'd share with us, please?

If I can disappoint you, we have the possibility of one new market in the fourth quarter, but it depends on what happens with competitive capacity in other markets and how we might -- want to respond to that versus starting in new market.

So at this point, we have not made any decisions on any new markets there.

And I think the same is true for us at Horizon - we're thinking in terms of one additional markets announcement this year.

And Peter this is Bill.

We are going forward with our ETOP certification on the 800, and -- which gives us just flexibility to look at some different markets over time.

No commitment on anything, but we are going to have the capability.

I shouldn't go out and buy my lei yet? .

Not yet.

Okay, thanks.

That's all I got.

Okay.

Thanks Peter.

Your next question comes from Helane Becker of the Benchmark Company.

Thank you very much operator.

Hi, everybody.

Hi Helane.

Hi Helane.

So just with respect to the markets that -- the demand that you've seen so far in some of the markets that you added last year, can you just talk to your thoughts with respect to the long-haul market specifically and how that's been working?

Yes.

Helane I'll take that.

This is Gregg speaking.

Our transcon revenue improvement, this is absolute dollars, are up 23% in the first quarter year-over-year.

So we've definitely seen a strengthening both in the demand and also in the yield.

Mostly, a function of other carriers reducing their transcon capacity.

For the most part, we're unimpacted by capacity withdrawals by Delta and Northwest as a result of their restructuring and by the insolvency of Independence Air.

But the net-net of all of that is there's less total domestic long-haul transportation and we're benefiting from that.

Great.

Okay.

I think that was all my questions.

Most of my other questions have been actually asked and answered.

Thanks Helane.

Your next question comes from Jamie Baker of JP Morgan Chase.

Hey, good morning, everybody.

Good morning.

You seem to co-chair with just about everybody out there, which I think validates the relevance of your network.

You're transitioning to an all 737 fleet, which happens to be the most popular airplane in the U.S. fleets.

Are you dressing yourselves up to be an acquisition candidate?

Jamie, we're just focused on running the business here.

And my own view is is there aren't very many good examples of M&A activity in this industry that have worked for any other stakeholders.

So I think our order for 737s indicates that our intent is to grow this airline internally.

And that's our total focus -- is transformation, and the cost and the revenues and customer value and doing all the right things.

And that's our plan going forward.

Okay.

Very good.

Thank a lot, great quarter.

Thanks.

[OPERATOR INSTRUCTIONS] There are no further analyst questions at this time.

Miss Alberts?

Thanks Angela.

At this point I'm going to turn the call over to Alaska's Managing Director of Corporate Communications Caroline Boren for the media portion of the call.

Good morning, and I guess I should say good afternoon to folks calling from the East Coast.

I know we have several journalists participating on today's call.

Thanks for joining us.

We're trying something new this quarter by dedicating a specific portion of the call to questions from journalists.

We hope you'll find this opportunity to ask questions of management helpful.

Please let me or Amanda Tobin know after today's call whether you'd like us to continuing -- sorry to continue offering this opportunity on future quarterly calls.

Angela, would you please remind our media guests what they need to do to ask a question and then assemble the roster?

Yes ma'am. [OPERATOR INSTRUCTIONS] Your first question comes from Lynne Marek of Bloomberg News.

Hello, Lynne.

Yes, hi there, folks.

I may have missed this a little earlier in the call, but could you talk about your fuel hedges for the rest of the year?

Yes, sure.

This is Jay Schaefer.

For the rest of the year, we have approximately 46% of our positions hedged.

And I can break that out by quarter, if you'd like.

For Q2, we're 53% hedged at roughly $39, $40 a barrel;

Q3, 46% hedged at $43; and Q4, 35% hedged at $46.

Okay.

Great.

Thanks.

Thanks, Lynne.

Your next question comes from Steve Lott of Aviation Daily.

Yes, good morning, everyone.

Thanks.

I wanted to ask if you could give an update please on the relationship with Menzies and how that work is growing -- how it's going rather, after the crisis of a few months ago.

We'll have Glenn Johnson, our senior VP of Customer Service to airports address that, Steve.

Sure.

Thanks, Steve.

You know we did have some initial transition issues with Menzies.

But I'm pleased to say that in Seattle particularly, and you know they serve us at 50% of our locations across the system in terms of our departures, they're meeting their performance objectives for the most part.

We've seen them meet their -- the goals that we've set for them in terms of bag delivery times, first flight of the day departure times, overall on-time performance.

A little bit of challenge is still on baggage performance, but that has improved.

And I expect to see them meet their goals as we move throughout the year.

Okay.

That does it.

Thanks.

Your next question is from Paritosh Bansal of Reuters.

Hi.

Hi.

How are you doing?

Very well, Paritosh.

How are you?

I'm very good.

Just a quick question about -- can you give me a sense of what to expect the demand to be like in the summer -- in the coming summer?

This is Gregg Saretsky.

We expect demand to be very strong.

Certainly, our forward bookings are very encouraging.

We are tracking ahead even on increases in capacity year-over-year.

And absent a disaster somewhere in the world that might impact global demand, we're looking forward to a very strong summer.

Okay.

Thanks.

Thank you.

Your next question is from David Bowermaster of The Seattle Times.

Hi, guys.

Hey, David.

One follow-up just on that summer demand issue.

You probably saw the article in The Wall Street Journal even earlier this week citing some concerns at different airports around the country heading into a busier summer season, with TSA staffing capacity and potential increase in delays at security, et cetera.

And I'm wondering, SeaTac wasn't talked about but- I'm curious if you have any concerns among those lines about crowd -- that SeaTac as traffic ramps up?

TSA has indicated that they have some staffing challenges.

We haven't heard anything specifically with SeaTac, but with our anticipated loads, we are working with them to figure out the best way to process the most customers as efficiently as we can that SeaTac specifically did.

They do have the capability to open additional security lanes, so that's helpful to us.

And longer-term, I think we're looking at how we can restructure our SeaTac facility to be a much more efficient process overall for our customers and our employees in that whole process of getting from the front lobby through to the gate and -- as efficiently as possible.

David, this is Jeff from Horizon.

I might point out how proportionately more vulnerable the short haul is to these effects.

I mean, we're watching it very closely of course.

One of the things that we're pleased to have in place and committed to protecting are our express lanes for shuttle passengers, those on the Seattle-Portland, Seattle-Spokane routes in particular, as we go through the summer, they can rest assured that we're going to keep that feature open to make it convenient for them to use the services.

David, this is Bill.

I might just add that we did have a good spring break.

We had some real peak loads with all the school breaks here.

And that worked out well for customers.

There weren't any big delays in TSA.

We have been working for a couple of years very proactively with TSA at all of our airports, particularly SeaTac because it's so important to us to share advanced load information.

So to the extent that they can vary their staffing to meet our peaks, both throughout the day and the week and if we have peak times like spring break, I think that's has been helpful.

And so we're working more closely than ever in terms of sharing that information so they can plan accordingly, But as Glenn says there are concerns across the country about the budget and the staffing at TSA and we're watching that very closely.

Okay.

Great.

And one follow-up on Menzies.

I know at the time of all these events in early January that they were planning to do a 90-day comprehensive audit.

And I was wondering if -- I assume that that's complete.

I was wondering if they or you guys are going to release any findings from that or if there was anything particular of note that came out of that.

Yes.

The 90 day period is just coming to an end.

And we're in the process of working with them on their final report out to us.

I don't know what we'll do in terms of any sort of final report out publicly.

But I'm very, very pleased with the work that they've done over the 90 days in collaboratively with us.

And I think we've just taken a huge step forward in terms of both the relationship and their production for us.

They came in with a comprehensive plan as you know, David and it appears to us that they have executed on that completely.

Okay.

Okay, thanks.

[OPERATOR INSTRUCTIONS] Your next question comes from Pete Carran of KINY Radio in Juneau.

Yes.

Good morning.

Thanks.

How may the first quarter results impact company operations in Alaska and in Juneau, if there's any reductions or additions to the fleet or workforce here as a result?

Pete, I'll try and take that on -- it's Gregg Saretsky.

Our schedule has been published for the summer impact through September already.

And so what we display on our website and in our distribution systems is what we'll operate.

And there's no planned changes to the schedule in Juneau or the rest of southeast Alaska.

And we are looking forward to the inauguration of service with the new 737-400 freighter and them combi airplanes to provide even more cargo and passenger luxury to Juneau.

Now that's going to begin later this year?

Yes.

June 8 for the freighter and then late summer or early fall for the combi airplanes.

All right.

Thank you.

Thank you.

Your next question is from Elizabeth Gillespie of the Associated Press.

Hello.

Hello.

I'm wondering about the potential for increased revenue in the freight and mail category.

I know -- both airlines posted small increases, and I know that -- how significantly is the company thinking that those numbers can go up in the future?

Yes.

Elizabeth, we are pretty optimistic about the long-term potential of the business.

If you look at this program that we announced some time ago now, to get out of the 737-200s and replace those with one 737-400 freighter and four combis, that was a substantial investment in that business.

Glenn, I think we were going to increase capacity dedicated to cargo by about 18% , 20% something like that.

At the same time we made that investment, we made an investment in systems that we're still in the process of implementing now.

But I think that amounted to somewhere near about $2.5 million or $3 million -- it has to do with capacity planning, schedule planning, pricing and all of that.

We're right now having considerable success with freight rates in terms of fuel surcharges.

I think those are very common in the shipping industry.

But we're getting about $400,000 a month currently increased revenue from that.

But I think all up we are - we've kind of got a target on that business to get the revenues up to $100 million.

It's questionable whether we'll hit that number this year or not.

But I think we're going to come close and I think we're optimistic as these new airplanes come online about -- in new airplanes, new systems about further improvements in that business down the road.

Anything you want to add to that Glenn?

I might just say that the bulk of our cargo business is the state of Alaska.

And it's just critical for those folks that know how Alaska operates there basically aren't any roads, and so everything gets flown in and out of those communities.

So for us to be a good community citizen and a part of what goes on and life in that state of Alaska, we really needed to upgrade these airplanes and make the commitment and the investment and move from the 737-200 to these converted 737-400s.

So it's going to provide better service.

It's better technology, it's lower costs from our standpoint, it's more capacity for the cargo customers and for the passengers.

So I think a win-win all way around and it should drive greater revenues and improve profitability for that segment of our business.

Okay.

Thanks.

Viability as well.

That's right.

There are no further media questions.

Okay.

Thanks everybody.

And we'll look forward to talking to you next quarter.

Bye-bye.

This concludes today's conference call.

You may now disconnect.