阿拉斯加航空 (ALK) 2007 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Alaska Air Group's first quarter 2007 earnings release conference call.

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

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS) During the question and answer session, you will be limited to one question plus one follow-up question.

Follow-up questions will be permitted after all individuals have had opportunities to ask their questions.

As a reminder, today's conference will be recorded for future playback at www.alaska-air.com.

I would now like to turn the call over to Shannon Alberts.

Thank you.

Shannon, you may begin your conference.

Thanks, Frederica.

Hi, everyone, and thank you for joining us today for Alaska Air Group's first quarter 2007 conference call.

Speaking today will be Chairman and CEO, Bill Ayer, CFO, Brad Tilden, and Horizon Air CEO, Jeff Pinneo.

And here to answer your questions are Alaska EDP Marketing and Planning, Greg Saretsky, EDP Operations, Kevin Finan, Senior VP Customer Service, Glenn Johnson, Air Group Vice President Finance and Controller, Brandon Pedersen, Horizon Air VP Finance, Rudi Schmidt, Air Group Treasurer, Jay Schaefer and Alaska's Managing Director of Corporate Communications, Caroline Boren.

Our agenda includes a management overview, after which we will be happy to take questions from analysts and then from the news media.

This call does include forward-looking statements, and these statements may differ materially from our actual results.

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

Our presentation includes non-GAAP financial measures, and we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release, which can be found on our website at alaska-air.com.

As we reported earlier this morning, Alaska Air Group reported a net loss of $10.3 million or $0.26 per share in the first quarter of 2007 versus a net loss of 79.1 million or $2.36 per share in 2006.

The first quarter of 2006 included an $81.9 million after tax impairment charge related to our decision to phase out our MD-80 fleet earlier than planned.

Excluding this impairment charge and adjusting for fuel costs to state them on an economic basis, Air Group reported a net loss of 15.8 million or $0.39 per share for the first quarter of 2007 compared to a first quarter 2006 net profit of 2.8 million or $0.08 per share.

Please see pages 8 through 11 of our earnings release for a reconciliation of our GAAP and adjusted results, as well as additional information about capacity changes, unit costs, fuel hedge positions and expected fleet count.

With that I will turn the call over to Bill.

Thanks, Shannon, and good morning, everybody.

Needless to say we're disappointed to report a loss for the first three months of the year, especially after the modest adjusted profit we posted for last year's quarter.

However given the seasonality of our business it is not unusual for us to have a loss in the first quarter even in a good year.

Although a lot can change as the year plays out our forecast still has us on track for improved profitability for the full year in spite of the current quarter's results.

Higher fuel costs and softening revenues played a big role in our results.

Alaska's passenger revenue per ASM was down slightly for the quarter as small yield increases were more than offset by a [2., 3.

decline] [sic -- see press release] in load factor.

Horizon also had a load factor decline for the quarter.

Alaska's passenger RASM for January and February was within about a point of the domestic industry, but we had a half point decline in March compared to an industry improvement of 2.8%, resulting in a PRASM decline for the quarter of 1% for Alaska compared to a .8% increase for main line domestic carriers.

We attribute our load factor decline to somewhat softer demand, to temporarily flying all passenger aircraft in some Alaska markets due to the delay in deliveries of our first two modified 737-400 Combi Aircraft, to competitive encourages in select markets and some self imposed frequency and timing changes to depeak our operation.

Looking ahead, we see continued flattening in demand in some of our markets evidenced by somewhat lighter advanced bookings on modestly increased capacity which has prompted us to participate in a number of fare sales during the quarter.

Load factors have begun to build back to prior year levels in response to the sales.

In contrast to our flat unit revenue performance, Alaska's unit costs excluding fuel came in slightly better than forecast for the quarter.

We expect the second quarter to show a more significant year-over-year cost improvement as a result of continued fleet transition benefits and improved operational reliability combined with some ASM growth.

You will recall that when we a announced Alaska's transition to a single fleet type a year ago we anticipated approximately $130 million in annual savings assuming fuel at $60 a barrel.

We're already realizing a portion of that benefit in terms of lower maintenance costs and fuel savings as MD-80's have left our fleet.

Our transformation to a single fleet is on track to be completed at the end of 2008.

We recently reached a milestone in our transformation we now have just as many 737-800s as MD-80s.

Over the balance of 2007 we plan to take delivery of 8 more 800s and retire an additional 6 MD-80s.

By year end 101 of our 116 airplanes will be 737s.

Although we've been among the industry leaders in fuel hedging we believe the best long-term hedge is a fuel efficient fleet.

As a result of our fleet transition our 2006 passenger miles per gallon improved by 37% from 1996.

And if you compare to 15 years ago, the improvement tops 100%, which we believe is among the best in the industry.

Now if you assume an average car burns 750-gallons of fuel each year our annual savings versus 10 years ago is enough to fuel 120,000 cars per year.

Airport costs continue to be a problem for us and for the industry.

We've joined other carriers in a formal complaint against the City of Los Angeles.

The extreme disparity in rates between the carriers operating at LAX results in airport rents that is are unreasonable and unjustly discriminatory.

And if not overturned this will increase our total terminal charges at LAX by $33 million if not more over a five-year period.

In February Alaska's on time performance placed 7th among 20 U.S.

airlines.

Thanks to the efforts of our employees and based on the information we've seen to date, it looks like we may improve on this standing for March, and April is also tracking solidly ahead of last year, I think a full 5 points for April month to date ahead of the same period last year.

Baggage delivery to carousels has improved as well despite constraint facilities in some of our airports.

In February Alaska had the lowest number of miss-handled bags among the major airlines, and it looks like we will retain that ranking in March.

In Seattle our average time to carousel has been under 15 minutes each day for the last three months.

A lot of people have worked very hard to make these improvements including Menzies Aviation who is our contract ramp handler.

Our strategic plan includes a number of changes that are aimed at making flying easier for our customers.

We've now eliminated all Saturday night stays, made all of our fares one-way, and substantially reduced the difference between our highest and lowest coach fares and lowered first class fares.

Additionally, Alaska was first airline to offer one-way mileage plan awards this winter, a feature that makes our mileage plan even better, and judging from initial response our customers are quite pleased with that change.

We recently retired the last of our 737-200 Combi Airplanes and we are replacing that capacity with a dedicated freighter and specially modified 737-400 aircraft which are even better suited to serving the small communities in Alaska due to their lower cost, better reliability and high tech flight decks.

In the next few days we'll take delivery of our third 737-400 Combi, and it will be joined by a a fourth later in the second quarter, and we just announced the conversion of a fifth 737-400 and that's tentatively scheduled for completion in December.

In keeping with our strategy of serving the destinations our Pacific Northwest customers want to go to, Alaska Airlines is looking forward to the start of service from Portland to Boston and Orlando in September.

In addition, we recently passed another hurdle to obtaining [E-TOP] certification when the FAA approved our E-TOP's maintenance manual.

This will open the possibility of markets that we would otherwise be unable to serve.

Jeff will talk more about this in a minute, this summer Horizon is putting to good use its new Q-400 aircraft and the CRJs that have returned to the fleet by offering more flights, many with larger aircraft to meet the expected summer demand.

Horizon's new service to Sonoma County was an immediate success.

We're clearly seeing increased competition.

Delta is building up LAX, and is now competing with us head to head in most of our Mexico destinations out of L.A., adding new or increasing service to eight out of ten of our cities.

While load factors are down in most of these cities, Mexico represents just over 12% of our capacity during the winter and about 7% in the summer.

And the L.A.

flights to Mexico, represented roughly 40% of our Mexico business in the first quarter.

We're committed to maintaining our dominance in these Mexico markets and are prepared to do whatever it takes to protect our franchise.

We said for some time that we expect increase in competition along the West Coast and in fact our 2010 plan is based on that assumption.

In addition to Delta's growing presence in L.A., we're also expecting new Southwest service out of San Francisco, the likelihood of Virgin America starting service also out of San Francisco, the ramp-up of Express Jet and some of Horizon's markets, and we just saw an announcement about Sky Bus flying from Bellingham to Columbus, Ohio with fares as low a $10.

In addition, other carriers will start new nonstop service between Seattle and Milwaukee, Kansas City and Austin this summer.

Our people have a proven track record of successfully competing against both low cost and legacy carriers, and the proliferation of these airlines in our market simply under scores the need to execute our plan to improve costs and take really good care of our customers.

We're receiving a number of questions regarding our pilot contract, which becomes amendable on May 1st.

We began formal negotiations in January, and we've made progress on a number of sections.

However, we currently have a significant gap on some of the key remaining items, and we do not expect to have a new agreement by the amendable date.

Our intent is to reach a negotiated agreement, and we plan to continue to work toward a deal that recognizes both the important role our pilots play as well as the economic and competitive realities of our business.

So that's the high level overview for the quarter, and with that I will turn the call to Brad.

Thanks, Bill.

Excluding the MD-80 impairment charge in 2006, and against aiding fuel on an economic basis, Alaska Airlines reported a pre-tax loss for the quarter of $14.3 million compared to a pre-tax profit of $7.6 million last year, a negative swing of nearly 22 million and an amount essentially equal to the increase in our economic fuel costs.

Our total main line revenues increased by $17 million, our adjusted nonfuel main line operating expenses increased by $7 million, and nonoperating items improved by $2 million.

Alaska's main line improvement was offset by a $10 million loss from regional flying that I will discuss more in a few minutes.

Alaska's main line passenger revenues for the quarter increased 1.7% on a 1% decline in passenger RASM and a 2.8% increase in capacity.

The higher passenger revenues were driven entirely by a 2% increase in yields as our traffic was flat on the heels of a 2.3 percentage point decline in load factor.

We saw yields weaken as the quarter progressed with January, February and March increasing 2.8%, 2.1%, and 1.3% respectively.

We're focused on revenue trends and the possible impact of what appears to be a more difficult West Coast environment.

As Bill just said, we see new competitive capacity that, when combined with our increases in yield we saw through most of 2006 will make our comparisons more difficult in 2007.

In the first quarter we saw one limited fare increase that was sustainable but can point to a number of failed fare increases or outright fare reductions.

We expect April's load factor to be 1.5 to 2 points below 2006, while May and June's advance book load factors look flat at this point.

Our yields for the first half of April are down a little over 1% as well.

Finally ,although PRASM was down 1% for the quarter total main line RASM was flat compared to last year, reflecting higher miles [upon] revenue that resulted from strong award redemptions and commission income from the sale of miles to our bank partner.

Turning now to expenses, main line operating expenses, excluding last year's impairment charge and including fuel on an economic basis were up $31 million or 5.3% with more than three quarters of this coming from increases in fuel.

Although our consumption and end of plan costs were both flat compared to last year our economic fuel costs for the quarter increased nearly $24 million to 164 million.

Over the last two years we've had the benefit of hedge contracts that saved Air Group more than $100 million each year.

However, we no longer have hedges that are in the money to the extent they were resulting in gains from settled hedges of only $1.8 million for the quarter for Air Group compared $30 million last year.

Alaska's economic fuel costs per gallon was $1.95 for the quarter compared to $1.67 last year, and we might note that all of this increase is due to the lower hedge benefit as our raw fuel costs were virtually unchanged from last year.

While the hedges don't have the value they once did, we still believe hedging is an important strategy to manage the volatility of fuel costs and we continue to add new contracts to our portfolio.

For the rest of the year 48% of our consumption is hedged to $58 per barrel.

Nonfuel operating expenses for our main line business increased by $7 million or 1.6% on the 2.8% increase of capacity resulting in a 1.3% decline in main line unit costs ex fuel to $0.078 per ASM.

We're pleased with the decline.

We think it is evidence that our plan is working, and it sets us up on the right path to achieve our full year CASM ex fuel goal of something in the rage of $0.075 to $0.076.

Our first quarter cost improvement is tempered by the knowledge that costs need to be significantly lower so that we can offer our customers an industry leading combination of price and product and use this market position to reduce our vulnerability and grow.

I would like it quickly mention a few item that impacted our first quarter expenses.

First, wages and benefits were up $12 million or 7% on a 6% increase in FTEs.

We've intentionally added people at our airports to help improve our operation, and that's negatively impacted our productivity.

While we we're not happy with the decline, it is an important investment that we needed to make.

Second, variable incentive pay was up by $1.3 million.

The increase was driven by higher expense under our operational performance rewards program including a first ever payout for meeting our on time performance goal in February.

Because of this and strong on board customer satisfaction scores, each Alaska airline's employee will receive a $200 payment this month.

Third, our maintenance costs costs declined by $10 million or 22%.

This continues the great trend in our maintenance costs which were down 15% for the full year in 2006.

We're already seeing the benefit of lower maintenance costs from our fleet transition with all of the 10 million related to lower 737-200 and MD-80 maintenance costs.

For the second quarter we expect another favorable but smaller year-over-year improvement.

And fourth, landing fees and rents were up 9% or $3.4 million.

The increase was due to a credit we received from CTAC in the first quarter of 2006 and the very significant increase in our cost [value] acts that Bill referred to earlier.

Nonoperating income and the tax benefit were both positively impacted by a favorable resolution of an income tax claim with the state of California.

In the aggregate this resulted in an after tax credit of $2.2 million or about $0.05 per share.

You may have noticed that beginning in January of this year we changed our reporting format to break out regional revenues and costs from main line results.

I would like to spend a few minutes talking about our new capacity purchase arrangement or CPA with Horizon, which is now reported under regional flying on Alaska's income statement.

Under the new structure Alaska records the actual passenger revenue for travel that occurs on flights that arise and operates on behalf of Alaska and the expense that a contractual payment that Alaska makes to Horizon.

Horizon's P&L reflects the payment received from Alaska's revenue and Horizon's actual cost for providing the flying.

Earlier in the quarter we posted a why paper on our web site with more details on how this arrangement works.

In the first quarter regional expenses exceeded regional revenues by approximately $10 million.

The markets included in the regional flying arrangement are very seasonal and it's difficult to predict yields in traffic.

However, we currently think the full year's loss will be a bit larger than the loss for the quarter but not a multiple of it.

Of course this is flying that as either providing connecting traffic to Alaska Airlines or is improving the operating results in March that were formerly flown with main line jets.

Also, as I am sure you know, this is inner company activity that eliminates consolidation.

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

Great.

Thank you, Brad, and good morning everybody.

Horizon posted an adjusted pre-tax loss of $11.2 million for the first quarter.

This compares to the $1.6 million pre-tax loss we posted during the same period last year.

Our results this year were impacted by $3 million in fleet transition costs related to the subleasing of our Q-200s, a $7 million increase in our fuel bill, and about $7 million in added planned maintenance expenses, which I will review in more detail in just a moment.

Revenues for the quarter were up 11% or $15 million over last years first period while operating expenses including fuel were up 16% or $24 million.

This was on a 5.5% increase in ASMs, bringing our CASM excluding fuel to $0.154 up from $0.142 in the same period last year and slightly higher than our last 8-K guidance of $0.153.

Before getting further into the numbers I would like to focus on a recent development that will frame much of our plan and activities as we move ahead.

This past Monday we announced a firm order for 15 additional Q-400 turbo props along with 20 options from Bombardier Aerospace of Canada.

Deliveries of the new 76CQ-400s are scheduled to begin in October of 2008 and continue through August of 2009.

These 15 aircraft are in addition to the 13 we ordered in late 2005, 6 of which we've taken delivery of this year.

By August of 2009 we'll have 48 Q-400s in our fleet, the most of any airline in North America.

Our goal is to use the majority of these new aircraft to retire our remaining 37-seat Q-200s by the end of 2009, thus ushering in a newer, much simplified fleet with dramatically improved operating economics.

As you know our Q-400s feature state of the art flight deck technology, high crew speed, superb customer comfort and very low operating costs, all of which allow us to deliver even greater value to our customers in the future.

When combined with our 20 CRJ 700s, Horizon will have one of the youngest, most efficient regional fleets in the country.

The first quarter was a very busy kick off period for what will be an extremely active and important year in the continuing implementation of this fleet plan.

During the quarter we not only took delivery of the first 6 of 13 new Q-400s, as noted above, we also began the transition from CRJ 700s from Frontier JetExpress back to our native network with two aircraft returning in January.

The remaining 7 will be coming back in the third and fourth quarters of this year.

We also delivered the first 2 of 16 Q-200s we're subleasing to Commute air with 9 additionally deliveries scheduled for the year and the remainder in early 2008.

Also, as Brad previously mentioned, we developed and introduced a new capacity agreement with Alaska, since all of these items affect our year-over-year comparisons I will take time as we go through the number to explain their effects.

Taking a closer look at revenues, our 11% increase was driven primarily by the addition of capacity through Q-400 deliveries and the 2 redeployed Frontier CRJs in the native network, which includes our brand flying and the Alaska fee based flying.

During the quarter our native network capacity increased 14%.

Revenues from our Frontier JetExpress flying were down nearly 20% and on a JetExpress capacity reduction of 22%.

This line of business now accounts for 6.5% of our total revenue and 18% of our total capacity.

In light of these changes, I will focus on the revenue performance of our brand flying where we had a 7.2% increase in revenue on a 12% increase in capacity.

Our traffic gains of 6% weren't enough to keep pace with the added ASMs resulting in a drop of load factor of 3.6 points in this line of business for the quarter.

Like Alaska our brand flying is very seasonal.

We're already seeing indications of year-over-year load factor increases in the high season months ahead in spite of the added capacity.

Yield in this line of business for the quarter remained relatively steady increasing by about 1% which, when combined with a load factor decline, produced a fall-off in RASM of 3.9%.

As we continue our fleet transition from Q-200 to Q-400s we expect to see the fundamentally efficiency drivers of this transition continue to emerge and positively impact our performance.

The Q-400 can carry twice as many passengers as the Q-200 with only a 30% increase in trip costs, allowing us to offer much better value to our customers while improving our profitability.

A case in point is our service to Bellingham, Washington where we marked our 20th anniversary of service to the market by introducing an all Q-400 pattern in conjunction with a much simplified lower fare structure focused on expanding the market and attracting customers back off the interstate.

Early indications from this and other early ventures are positive all around.

As a result we see tremendous opportunities both to improve the economics of our flying and shore up our presence in markets throughout our territory both incumbent and new that are a good match for this kind of service with the Q-400.

A great example in the new market category is our new service to California's wine country, which got off to a very strong start on March 20th with an open house at Santa Rose County Airport, that attracted nearly 4,000 people to see our Q-400, sporting our special 25th anniversary [lib ring].

Our load factors to both Los Angeles and Seattle have been very strong, and we're most grat fined by the reception of the customers in the region.

During the quarter we also announced several new CRJ 700 flights that will begin this summer.

Effective July 1st we'll be introducing non-stop service from Boise and Spokane to San Diego, and adding frequency between Spokane and both Los Angeles and Sacramento.

Currently we are seeing a bit of a dip in our April advance book load factor versus last year with modest increases in May and June.

All of this is forecast to come on on a significant increase in native network capacity as we continue to replace Q-200s with new Q-400s, and employ the 2 CRJs that have returned from Frontier to our system.

Our system wide operating expenses including economic fuel were up 17% or $24 million with $7 million of this variance attributable to our forecast increase in scheduled maintenance activity.

This continues the build that first emerged in 2006 and which is expected to peak this year before receeding in 2008 and beyond.

In the first quarter, we completed 13 overhauls compared to 4 in the same period last year and are expecting this quarterly year-over-year trend to continue through 2007.

Additionally, landing fees and rents were up 21% or $2.3 million driven largely by significant rate increases at several of our largest airports including Seattle and Los Angeles.

Turning to our operations, our total schedule reliability was 97% for the quarter, while flights arriving within 15 minutes of schedule came in at 78.5%.

These figures are heavily weighted by weather events in January and early February with strong improvement posted in the last half of the quarter.

Our on time performance in February placed us at number one among all airlines that report to the DOT, excluding the Hawaiian carriers.

It is in this category where our people's focused efforts to deliver on our promise to customers have really shined brightly, and it is exactly the sort of thing that led to Horizon being named Air Transport World Magazine's 2007 Regional Airline of the Year.

We're extremely proud of this honor, even more so of the incredible job our people do every day to deliver exceptional experiences to our customers.

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

Thanks, Jeff.

Air Group entered the quarter with [$907] million in cash and short-term investments, down $44 million from our balance at the end of 2006.

We had cash flows from operations of $60 million and proceeds from new financings of $163 million, and these two items were offset by capital spending of $253 million and debt repayments of $25 million.

Almost all of the capital spending during the quarter related to aircraft and advanced deposits.

We took delivery of 6 737-800s including a record 4 deliveries in the month of March and 5 Q-400s.

Following Horizon's announcement of the order for 15 additional Q-400s, we now expect our capital expenditures to be $740 million in 2007 and $530 million in 2008.

We financed 5 of the 6 Alaska deliveries so far this year and paid cash for all of the Horizon deliveries.

Looking forward, we have financing arranged for 14 of the 25 firm Alaska deliveries through 2009.

We've also recently reached an agreement with our banks to increase our credit facility from $160 million to $185 million and to extend the term by 2 years to March of 2010.

We still have no plan to say draw on the line, but we like the increased flexibility and security that it offers.

We contributed $17.5 million to our defined benefit pension plans during the quarter bringing our total since 9/11 to $330 million.

At December 31, 2006, our plans were approximately 80% funded using the projected benefit obligation measure of the liabilities, which is the most conservative accounting measure.

Our debt to capitalization ratio adjusted for operating leases was 73% at March 31st compared to 72% as of December 31, 2006.

At this point I will turn the call back to Shannon.

Thanks, Brad.

We're happy to address questions from analysts at this time.

Frederica, would you please go ahead and assemble the roster?

Yes ma'am.

(OPERATOR INSTRUCTIONS) Our first question comes from Robert Barry.

Hi, guys.

How are you?

Good morning.

Good, Rob.

A few questions.

One is, given you're seeing some weakening in the demand, is it possible, or have you considered pulling back on some of the capacity additions?

Rob, this is Greg Saretsky.

Most of our growth in ASM does not come by additional frequencies but through the upgrades in our fleet.

You will recall every MD that goes away is replaced by 737-800 with 12% more capacity.

So a lot of of the ASM growth you see reflected in our second, third and fourth quarters is a function of the fleet change.

And even if the load factor drops, the economics of the 800 are far superior to the MDs that they're replacing.

We're not looking at pulling capacity at this point.

If demand continues to significantly deteriorate, obviously, we have the opportunity to park some MD-80s earlier.

In terms of the higher fees you're seeing at LAX, we heard about that from a number of other carriers as well.

Have you tried to pass those onto customers or is there an opportunity to do that?

I think there are some other carriers that are just adding a surcharge now for LAX.

We have done that as well.

We successfully took several attempts.

But the market appears to have taken a surcharge to LAX to offset those increased costs.

Fares are up $10 on a round-trip basis to points from L.A.

to Canada and U.S.

domestic points.

Got you.

So that's just an offset in revenue, the lending fee line will see some pressure, but there will be offset in the revenue line?

Exactly.

That's right.

Finally, I was curious about the plan to cut fares on first class.

What percent of the customers pay the full first class fare in your first class cabins, and how has that changed since you've been cutting the fares?

Our first class demand for full fare first class is up 200%, but remind everybody it is off a pretty small base, since the majority of the customers that sit in that cabin are folks who paid premium coach fares and then use their mileage plan to upgrade, and I am just looking for the percentage by the class of service.

Looks like it is somewhere between 3 and 4% of our total demand is first class.

Full fare first class?

Yes.

Total demand that means the whole airplane not just the front?

Correct.

You know, Rob, this is Bill.

We did a pretty thorough analysis of sort of the real estate on the airplane a couple of years back, and recognized at that point that we weren't getting the revenue per square foot out of first class that we needed to, and so that drove some of these changes with trying to bolster demand through potential fare decreases, which has helped, with full fare revenue, but also changes in the mileage plan upgrade, so passengers that upgrade are paying a higher fare in coach.

For awhile we had a lot of people paying the lowest fare and being able to upgrade because of their mileage status.

I think as we look at it now we feel good about first class as a solid contributor on a square foot basis in the airplane.

I think we have the right mix in the configuration on the airplanes.

Okay.

Sounds good.

Thank you.

Thanks, Rob.

Our next question comes from Ray Neidl.

Sounds like there is a lot of competition coming in on the West Coast here.

What is Alaska Airways plan?

You had a relatively dominant market share there competing with Southwest and United when they were in bankruptcy.

Sounds like there's going to be a lot more airlines, especially low cost start ups in your territory.

What can you do to kind of balance that?

I'll start, maybe, Ray, this is Bill.

Nothing changed about our determination to have a dominant position in all of these West Coast markets.

I think people that study this industry know that every carrier has got to have a certain amount of geography that they kind of own, and for us that's the Pacific Northwest, it's Alaska, it's the West Coast emanating from Seattle and Portland.

And so we are adamant about our continued dominance of those points, and we're going to defend the turf, and we'll do whatever we need to in terms of the marketing competitive moves to ensure that.

And the ASM growth going forward to the next couple of quarters, I missed that.

What's that going to be?

Ray, we added a -- we actually didn't share that verbally.

We added a table at the back of our press release, and I am just trying to page to it quickly here.

It is page 10 of the press release.

So second quarter for Alaska is ASM growth of 4 to 5%, third quarter 3 to 4%, fourth quarter 6 to 7 and the full year 4 to 5, and Horizon just moving forward by quarter it's 10, 18, 9, and 11% for the full year.

Again, that's on page 10 of the press release.

Great.

Thank you.

Our next question comes from Mike Linenberg.

Hi.

Good afternoon, everyone this is Lily standing in for Mike.

My first question is regards to, could you give me a breakdown of your ASM, say by the end of 2007, what percentage of it would be in Alaska, the state of Alaska?

What percentage in the west and what percentage is sort of even trans con and the things that you do outside the west?

Lilly, generally, and I actually don't have -- I am not looking at anything that shows the full year, but generally I think you could say that for 2007 the state of Alaska will be 20, 21%, something like that.

The new markets that we've been adding, all of the trance cons, as well as Denver, Chicago, Dallas, all of that stuff, probably in the range of 16 to 18%, something like that.

Mexico, 8, 9%.

Just going historically, Nevada is 5%, Arizona is 5%, California and Canada roughly 5% and California is probably the balance which should be around 40%.

Great.

I guess the question is, getting out a little bit, are you looking to further diversify the network if you look ahead?

Are you thinking of more strengthening, your position in the west, which I know you have to fight against the new entrants coming in, but also to perhaps, get your network a little bit more well rounded and balance out this percent a little bit more.

Just wanted to get your thoughts on that?

Lilly, this is Greg Saretsky.

Our focus has really been on the Pacific Northwest, and that would be Seattle and Portland.

And you've seen our growth over the last couple of years be very centric to Seattle, and Bill announced earlier the service we're adding in Portland to Boston and Orlando, which will start in September, as evidence of our desire to continue to add that type of flying from Seattle and from Portland.

There is a lot of markets that we're not into yet and our ability to diversify will be to add new markets from Seattle and Portland.

I see.

I see.

And if I may have a follow-up for Jeff.

Jeff, I know Horizon is growing very, very quickly.

We just got off the Republic call, and they definitely highlighted the issue with pilot attrition and having to incur lots of training expenses to keep up with the growth.

Are you seeing similar issues in your operation?

Yes, Lilly.

We're seeing a similar trends but of less magnitude for I think a couple of reasons.

First of all, our growth is coming more in the form of gauge and not units, so the impact on volume is less.

I guess you could say it is one of the probably the only distinct advantage of having the highest regional pilot costs in the country our wage package is pretty attractive for people coming into the industry right now.

So, heard that.

We also have done great work over the years in cultivating the relationships with outlets like University of North Dakota and such, to create a development program that's fed us pilots from the beginning, others are starting to go take notice of that of course and do similar things, but the dividends of those investments over the years are really coming back to roost right now in terms of feeling pretty well set up as far as we can see going forward.

Great.

The other thing we might add, Lilly, this is Bill, is we are from a hiring standpoint at Alaska, paying more attention to Horizon applicants, and there is no guarantee, there is no flow-through agreement but certainly they've been just a great source of applicants and pilots for Alaska.

So the extent that that gets to be known across the industry then there is that additional career progression that might be available to some people.

It's great.

We are actively promoting that, that the sort of some of the Air Group hiring decision process starts at the Horizon point and we're coordinating with Alaska on that, and their involvement is at that point as well.

Great.

Thank you so much.

Our next question comes from Kevin Crissey.

Hi, everybody.

Hi, Kevin.

Two questions for you.

The extent to which you think the timing of Easter explains any of the April weakness?

Kevin, this is Greg.

I don't think it was a significant impact.

There isn't as much north/south business at Easter along the West Coast as their is on the East Coast so I think our network is less impacted.

We'll wait and see once April is wrapped up.

Right now in your view the softness is primarily just economy slowing as GDP, et cetera?

That's our view, and it is regionalized.

It is not across our network, but there are pockets of softness.

We've talked about the capacity additions on the West Coast.

When I look at your total capacity in your markets and whether by seats or available sea miles it looks like there is actually some carriers pulling out some capacity.

Can you talk about where you're seeing less competition?

I know overall you're saying it is up on the coast but where with you seeing less competition?

I don't know what you're looking at.

I don't see less competition anywhere.

Okay.

Looking at the numbers I thought that there was some pullback from United and American in some of the your markets.

I am sure they're probably not the most important markets for you, but I will double check that.

There has been some small capacity reduction in Seattle to Dallas and Denver.

Those carriers obviously as new entrants start carrying pointed to point traffic from Seattle to places like Milwaukee, Kansas City, Baltimore, there will be less available to connect over places like Denver and Dallas.

I think what we have seen is some pullback by American and United in those two hubs, but those are larger carrying flows that are not on our network to begin with.

Got you, thank you very much.

Our next question comes from Robert Toomey.

Hi.

Good morning.

I just had a follow-up question also on the issue of competition.

You talked about that early in the call, and I am trying to get a sense of better sense of gauging what you're seeing there.

Is it -- can you talk about it as a percent of your total ASMs in the California market?

I am trying to get a sense of how much you might be being impacted on an ASM basis?

If I could look at it that way.

Our biggest load factor declines in the first quarter were in Mexico, Canada and the trans con and they were all declines for different reasons.

Obviously Bill talked about the impact of Delta on LAX, also the liberalization of the Mexico U.S.

bi-lateral which caused a flood of capacity off the West Coast not just at L.A.

and Mexico.

So we're seeing load factor declines and yield declines in Mexico.

That's 12% capacity in the quarter and 8% roughly on an annual basis.

Canada, load factor declines, for a different reason.

There is a new passport requirement imposed in February, and we're seeing, I would actually in our point of sale U.S.

to Canada as a result, and there is a fair amount of new charter competition from Canada flying nonstop to the beaches in Mexico, and that was traffic that we used to connect over our L.A.

hub.

On the trans con the load factor decline is really driven by our up gauging.

We're flying 737-800s where last year we had 700s.

We have 27% more capacity there.

We started a Boston service a couple months earlier, we've got 81% more seats flying Seattle Boston than the same time last year.

Those are just big, big chunks of capacity to absorb in a relatively slow quarter.

We expect that as you move through Q2 and Q3 those planes will be full.

Can you comment also to what extent you think the there is some softness in the California economy or softness in the U.S.

economy in general?

Can you comment to what extent that might be affecting traffic and loads?

I suspect like you, we're watching things like housing starts and the impact of the subprime loan collapse, and we are seeing softness largely in the Bay Area and in some intra-Cal flying.

Some of that driven, perhaps by the softening California economy and some of it driven by a flood of additional capacity in markets like San Fran and L.A., and we started new service from San Fran to San Diego, which hasn't penciled out frankly, and as a result we're going to be making some changes with our schedule in the fall.

One last comment if I might, is that, as you talked about defending your West Coast turf pretty much at all -- not at all costs but you will do whatever it takes to defend your market, can you elaborate on that a little bit?

And can you comment on what you see as a potential for either RASM growth or RASM dilution over the next several quarters?

Thank you.

Well, we're very proud of the strong franchise we have along the West Coast, and we have a very strong frequent flier program.

We have their names and addresses, and so they're an easy group to market against if we need to, and clearly we're going to be price competitive.

We have a very strong schedule, we've taken extra steps this summer to make sure that any holes that we had by time of day in our schedule had been filled, so we're operating a very strong commercial schedule with a very strong mileage plan program.

As a result I would expect our unit revenue trends to not be dissimilar from what you've seen in the first quarter.

I don't think we're expecting any further erosion.

Thank you.

Hi, Rob, this is Bill, our philosophy is when we have a competitive attack like this, you don't look at the short-term.

You look at the long-term, and you do what you need to do to make sure you come out the other side with the same kind of market presence.

It is very, very important to us.

We will do whatever we need to do to fend people off and make sure we remain the dominant carrier in these markets.

You faced these before?

Sure have, yes.

Thank you.

Our next question comes from Frank [Burrock].

Good morning, everyone.

Two quick questions.

One, Bill, if you could maybe clarify or Brad what the spot fuel assumption is for the rest of the year in your internal model?

And then, the other question is, thinking about the 2010 plan and the goal of getting down to 7.25 CASM ex fuel for Alaska, given the new competitive encouragement, is there any need to bring that forward from 2010 time frame and how realistic is that?

Frank, it is Jay Schaefer.

I will take the fuel question.

As we look forward, we are looking at 63 to 65 as we model.

As you know the volatility in both the raw, oil, as well as the refined margin is pretty big.

We're pretty pleased that we have the fuel hedges in place and will moderate that but especially on the cracked or fine spread we've really seen a tremendous amount of pricing it recently.

Jay, we're modeling in terms of economic cost per gallon, it's slightly over $2 a gallon.

That's right.

2.02.

$2 essentially.

Frank, on the CASM question, one good thing is that the entire 2010 plan has been based on a premise that we are going to see a lot more low cost competition, we are going to see legacy airlines going through bankruptcy and coming out with significant cost reductions and improved balance sheets.

So, we haven't known the names, haven't known the city pairs and all of that, but everything we've been doing has been around putting together a plan to ensure that this company can compete successfully against whoever we have coming at us.

That's a plan.

That's what we're all working on.

This year we gave guidance that we think our unit costs ex fuel will be between $0.075 and $0.076.

I think I'd tell you there is a tremendous spirit of cooperation.

There is tremendous buy into that objective.

There is lots of folks working very, very hard on it.

And you know that we do have this goal of 7.25 and we've talked about getting even the bleep that we need to get even below 7.

I guess we haven't given a time frame or that yet.

I would say given the competitive stuff that you're talking about, and given the fleet transition, which will basically come home next year, we'll get through that, we should be thinking about moving forward to this 7.25, a little bit sooner than maybe we had been thinking.

We have many, many things going for us.

We've got the fleet transition.

We've got a huge opportunity with real estate to make better use of it.

Our operation is improving and we absolutely know that as the operation improves our cost per seat mile gets better.

We've got lots of initiatives on the customer side, in terms of reservation and sale process, the two-step at Seattle airport.

So, there is lots of things in the pipeline that should help us deliver this improving cost trend.

Great.

Thank you.

Our next question comes from Dan McKenzie.

Hi.

Good morning.

Just a follow-up I guess I think it was Bill's question.

Given the intense competition, this is a broader big picture question, which is how can you distinguish whether the impact is economic related versus competitors adding more competition?

I guess another way to ask this is, what gives you the confidence that the drop in demand isn't just a function of competitors taking Alaska's passengers rather than the economic weakness?

You know, Dan, that's a great question.

It is something that we have to test constantly.

We're looking now at one of the biggest best indicators for us is the split in business versus leisure demand.

And what we're seeing is our business demand is actually building year-over-year our mix by bucket is better than the same period last year and the number of frequent travelers that are qualifying for tier status is growing.

So it tells me that business is holding, and what we're seeing is a softness in the leisure demand, which is more driven by competition than by the declining Combi, but clearly one feeds the other.

It sounds to me like the demand issue is not economic related, it sounds like it is more competition related?

Except the DOT data that we look at it does like, what, six months, Greg?

Yes.

We're not seeing any significant share shift in that data, and we don't see it with our mileage plan members when we look individually at their activity.

So there is no clear indication of share shift maybe in a couple of markets a relatively small amount I think, but it appears to be more softness that is reducing leisure demand I guess as we look at it today, but we look at it every day to see if there is something new.

Okay.

And then I guess just following up, Greg, on one other comment that I thought I heard you make is that you were looking at some capacity changes or anticipating some capacity changes in the third quarter.

I wonder if you can provide some perspective.

Is that additional capacity that would come on or potentially capacity that could come out?

Well, it's (Inaudible).

It is the same amount of capacity that we referenced in our outlook for Q4.

We're just finally buttoning up our winter schedule, and what we're looking at is a reallocation from some short haul inter-Cal markets to some longer hall flying.

I see.

Okay.

Great.

Thanks very much.

Thank you.

(OPERATOR INSTRUCTIONS) We have a follow up question from Robert Toomey.

Surprised there is not more questions.

I just had a follow-up, if you could, on the economics of the Q400s.

You went into that discussion of the transition at a pretty extensive level, and I am trying to determine if you could talk a little bit more about how the economics of this transition will help Horizon and the total company overall?

It sounded like from your comments that the economics are compelling, and I am trying it get a better understanding of this transition and how it will benefit you from an overall company standpoint?

Thanks.

Great question, Bob.

There are a number of facets to the answer to that question.

Most of them revolve -- if you break it out by revenue and cost, they each have multiple dimensions.

First of all on the cost side, you're obviously your doubling the number of seats, but you're only increasing your trip cost by about 30%.

And the way we fly the Q400 that has the effect of an increased block hour rate for the airplane of about 21%, but a decreased CASM of about 58%.

So you see how significant the moving parts there are on the cost side.

On the revenue side, when you look at how we're going to deploy them, we're mostly replacing Q200s that for the last few years that have been impaired in a couple of areas.

First of all, they have generally provided insufficient capacity for the market demand, which has resulted in yield management taking over and raising fares beyond what we feel comfortable with in terms of the right value proposition for these markets, and yet the demand continued to exist.

So, by introducing the higher capacity Q400 with its lower costs we'll have the opportunity to really do what we wanted to do all along which is rationalize the fare structure, have lower walk-up fares and in the process stimulate demand or welcome back people who otherwise had to go to substitutes which will drive traffic up.

We may see some softness in load factor.

But when you're doubling capacity, that's to be expected.

But, right now, as I said, in the next few months we're actually looking at pretty flat or modestly improved load factors even with significant capacity increase.

It is still early to say.

But, on the revenue side our hope is that we're going to -- total on board revenue is going to to go up significantly.

RASM will come down, abut CASM is going to come down dramatically greater than that.

I think the one thing that we're most grateful for as we step back and look at the suite transition is we never got into the 50 seat jets to begin with.

We don't have that problem to deal with, whatever historical events led to our being in 70-seat regional jets and the Q400 are fortuitous now.

Also remind you too, that we've gone -- we've evolved the Q400 from 70 seats to 74 to 76 seats, in very measured fashion, with focus groups with our best customers and have detected no drop off in customer preference for the airplane.

It is still a great ride.

Those are some of the moving parts, Bob.

I hope I answered your question okay.

It is great.

In the broader picture, then, strategically it all feeds into or plays into your dominance on the West Coast, the traffic flows feeding into and out of the major cities that you operate in on the West Coast.

It is that and specialized niche local markets, too, Santa Rosa has components of both.

But there is a very strong local affinity between Sonoma County and Los Angeles in particular.

That's important to note.

I should also note too that when we get to the end of the ride here and retire all the Q200s, we'll have a significant reduction in over head associated with that third fleet time, in terms of inventories, training programs, pilot bidding cycles, et cetera, et cetera, et cetera.

On the expense side that's a big component.

Does the Horizon operation and the whole regional operation become, I guess it becomes much more profitable once this transition is completed?

That is certainly the objective.

[laughter]

Trying to get a little comment.

Frederica, I think we have one more person in the call, and we just have time for one more call and then we need to move onto the media portion.

No problem.

We have a question from James Higgins.

Hi, guys.

Can you review for us the Express Jet overlap in their announced schedule.

I can take that, Jim.

We've begun service in several of our markets, Spokane and Boise in particular to San Diego, Sacramento, and emanating out of Ontario as well.

Of course, as we took a look at that, those are markets we already serve on a one-stop or connect basis.

And as we announced in July, we were able to move some capacity around to provide some nonstop service in several of those markets as well.

Okay.

Great.

Now, I'm going to turn the call over to Caroline Boren, and she will conduct the media portion of the call.