阿拉斯加航空 (ALK) 2007 Q3 法說會逐字稿

Good afternoon.

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

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

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

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

(OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the call over to Shannon Alberts, Managing Director of Investor Relations.

Ms.

Alberts, you may begin.

Thanks, Francis.

Hello everyone and thank you for joining us today for Alaska Air Group third quarter 2007 earnings conference call.

Alaska Air Group Chairman and CEO Bill Ayer; CFO, Brad Tilden; and Horizon Air CEO, Jeff Pinneo, will provide an overview of the quarter after which we'll be happy to take questions from analysts and then from journalists.

Other members of the senior management team from Alaska and Horizon are also present to help answer your questions.

Today's call will include forward-looking statements that 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 some non-GAAP financial measures and we 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 www.alaskaair.com.

As we reported earlier this morning, Alaska Air Group earned GAAP net income of $85.8 million or $2.11 per share versus a net loss of $17.4 million or $0.44 per share in the third quarter of 2006.

We should note that the 2006 GAAP results included several unusual items including fleet transition costs, a charge associated with a voluntary severance program and a significant mark-to-market fuel hedge adjustment.

Our 2007 results include a small mark-to-market adjustment.

After adjusting for these items, Alaska Air Group reported a net profit of $82.8 million or $2.03 per diluted share in the third quarter of 2007 compared to a $77.9 million or $1.93 per share for the third quarter of 2006.

Beating the first call mean estimate of $1.92 per share.

On a year-to-date basis again adjusting for the unusual items in each year, Air Group's net income for the first nine months was $114.2 million versus $141.1 million in 2006.

Please see pages 9 through 11 of our earnings release for a reconciliation of our GAAP and adjusted results as well as additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures, and fleet count.

Now I will turn the call over to Bill Ayer.

Thanks Shannon and good morning everybody.

We're very please to report improved year-over-year consolidated financial performance this quarter.

This accomplishment is a tribute to Alaska and Horizon employees around our system who working hard to improve both our customers experience and our financial results in the fees of operational challenges and continuing cost pressures.

Brad and Jeff will elaborate on the Alaska and Horizon numbers on a few moments.

I do want to point out that I am focused on consolidated Air Group results.

I am asking the leaders of the both who are operating companies to make changes that will improve stand alone profitibility and ensure each airline can justify the capital being deployed in its respective operation.

Looking ahead to the fourth quarter, we're quite concerned about the effect of rising fuel costs and how damaging those increases can be on our results.

To provide some perspective, for each dollar increase in the barrel price, the Air Group fuel bill increases $10 million per year and just to remind you are our barrel price was $63 in May compared to the current mid 80's price which means unhedge fuels costs have gone upward on $200 million on annualize basis and as just since May.

While we're on the subject of fuel in addition to our hedges we have benefited from the substantial changes in our fleet over the last twelve months, and you can see this benefit in our fuel consumption.

Looking at Alaska, we flew 3.3% more capacity this quarter than in 2006 but our fuel gallons consumed were actually down on almost 1%.

We have accomplished this by reparing nine MD80's and 6-737200s and bringing in sixteen new 6-737800s since September of last year.

This benefit is not only in reduced fuel consumption and in reduced emissions as well.

As you may have seen last week our employees and customers literally took sledge hammer to say a portion of our traditional ticket counter as the airport of the future came to Seattle.

The new patent the process allows passengers to drop their bags on their way to the security check point.

If wait time is reduced by just 30 seconds per passenger, our Seattle customers will save 40,000 hours annually.

The new process reduces stress for our passengers and in improves productivity and it accommodate many more customers in the same real estate footprint.

This new process garnered quite a lot of attention.

You may have seen the Wall Street journal spread last month.

In speaking of real estate footprints, we recently reduced by half the amount of space we use at our Phoenix reservation center as part of a move to a new location.

This space reduction was made possible as a result of programs at both Alaska and Horizon that allow agents to work from home and from other remote office locations.

Our home agent program has been very successful and very popular with our employees and we're finding to triple the number of home agent from 20 to 60 at each of our three reservation centers.

Our ticketing and check-in activities continue to shift to electronic distribution channels.

This quarter 99.4% of the tickets issued by Alaska and Horizon were electronic, and about 44% of those were purchase on our company website.

Almost 65% of our customers are now checking in electronically via the web or a kiosk, and that's up 7 points from in prior year.

On October 12th, we realized another much-anticipated accomplishment when we launched Alaska's first flight to Hawaii from Seattle.

We started with service to Honolulu and will soon add Seattle-Hawaii and Anchorage-Honolulu routes.

These destinations represent exciting editions to our network and I want to thank the many employees who are responsible for bringing this to fruition.

Customers can identify our ETOPS certified aircraft by the fact the Eskimos on the tails of those airports are now sporting waves.

On September 13th, we announced that our Board of Directors had approved a $100 million share repurchase.

To date, we have repurchased 800,000 shares or about 20% of the authorized amount at an average price of $24.58 per share.

We'll keep you updated regarding further purchases via our regular SEC filings.

The recent decision to buy back some of our stock is consistent with our 2010 transformation plan which is design to benefit employees, customers, and shareholders in a balanced fashion.

The recent decision demonstrates our recognition in investors require a return on their capital and then we need to either provide an adequate return or reduce the capital we employ.

On our related topic, we received a number of questions from investors about how we decide whether a potential investment is likely to produce enough return to justify its cost.

We've talked for a long time about targeting a 10% return on invested capital.

An important promise of our 2010 plan is that we want to make investments only if they are expected to provide this level of return.

So as Brandon Peterson, on Air Group's VP Finance and Controller to explain further.

Brandon.

Thanks, Bill.

Air Group's return to its $3.3 billion of invested capital has been approximately 7% over the last twelve months, about equal to our 7% to 8% cost of capital but well short of our target ROIC of 10%.

We've set our target ROIC above our cost to capital to ensure that we invest an equipment or projects that build value over the long term.

Our long stated goal of earning a 10% pre-tax margin over the cycle is tied to meeting this ROIC goal.

We think we need about a 10% margin to reach our 10% ROIC hurdle.

We recognize that the ROIC calculations can be done in different ways, so I will take a moment to explain our approach.

Our calculation is relatively straight forward.

To calculate return, which is the numerator in our equation, we start with the trailing twelve months of net income excluding special items.

To that, we add back after-tax interest costs related to on balance sheet debt and operating leases capitalized at seven times annual rent and using annum and put an interest rate of 7.5%.

The denominator, invested capital is simply the average of book equity plus the on-balance sheet debt and the present value of lease commitments over the last twelve months.

If there are questions I will be happy to elaborate further in the Q&A.

Thanks, Brandon.

We have a conviction about achieving our targeted ROIC, so we're making sure this requirement is understood broadly by our management team and making it a standard part of our decision making process at both operating companies.

So, with that I will turn the call over to Brad.

Thanks, Bill, and good morning, everyone.

Looking at Alaska Airlines now, excluding unusual items we reported record adjusted pre-tax income of $129.7 million for the third quarter of 2007 compared to $215.3 million in 2006.

Growth in main line passenger revenues of $37 million and solid main line nonfuel operating performance helped us overcome a $208 million fuel bill which represents the highest quarterly economic fuel expense in our history.

Our main line adjusted pre-tax margin was 16.3% for the third quarter compared to 15.1% last year.

Because we're quite seasonal with the third quarter being our strongest, we expect the end of the year [inaudible] of our 10% pre-tax margin goal.

Nonetheless we're showing good momentum and are making progress towards providing our investors with appropriate financial returns.

Alaska's main line revenues increased 4.9% this quarter on a 1.3% increase in PRASM, and a 3.3% increase in capacity.

The quarterly PRASM increase was driven by 0.8% increase in the yield and a half point increase in load factor.

Yields generally held up across the system with a notable exception of our Mexico markets where yields were down to 7%.

These markets continue to be under competitive pressure although it is important to note that they represented only 8% of our capacity on the third quarter.

Sequentially our PRASM was down 1.4% in July, up 4.8% in August and up 0.8% in September.

We under performed the industry by about 4 points in July and August and by 2.7 points in September.

We talked last quarter about how we changed our fare structure, fare rules and fare levels over the last couple of years to enhance our customer value proposition.

In August we added important functionality to alaskaair.com where customers can now request refunds or change their tickets online for the vast majority of [inaudible] including unuse and partially used tickets and tickets for travel on the co-chair partners.

You might have seen we followed the industry last week by increasing our fares either $5 or $10 one-way.

The increase was $5 up and down the West Coast and within the state of Alaska and $10 in the Alaska long haul routes on [inaudible] and in Mexico.

This increase has been matched by the majority of our competitors with the exception of southwest.

We're optimistic that this increase will be helpful.

Looking forward our advanced book load factor is flat to down slightly for October, up 4 points for November, and up 2 points for December.

Our yields for the first half of October are up by a little over 2%.

Advanced bookings to Hawaii are strong, but the long stage length and the promotional fares sold early on will have a negative impact on system yields in RASM in the neighborhood of 1% when we ramp up to three flights per day on December 9th.

Our fleet transition is progressing nicely.

We retired 3MD80s during the quarter in $0.01 then, bringing our current count to just 16 aircraft.

We'll end this year with 116 total aircraft, just two more than at the end of 2006.

In 2008, we plan to take delivery of 17 new 737-800s, retire 15 MD80s and return two leased 737-400s, leaving the fleet count unchanged and giving us an all 737 fleet by the end of the year.

We anticipate the higher seat count in utilization of the 737-800s will increase capacity by 4% to 5% and departures by less than 1%.

We told you back in January that we did not expect our 2007 hedge benefit to be material given that oil was trading at $55 per barrel then.

However, given the increase in prices, air group has benefitted by more than 24 million over the first nine months from hedging.

We maintained our prices as steadily adding fuel hedges in advanced supplying consumption and as a result our 50% hedged at $64 per barrel for the fourth quarter and 32% hedged at $63 per barrel for 2008.

$85 a barrel oil implies a raw fuel price of 2.60 per gallon for the fourth quarter although our hedges would bring this down to 2.40 per gallon for Alaska.

Our main line operating costs other than fuel increased slightly during the third quarter but on the unit basis declined 1.1%.

This continues a long string of year-over-year reductions in CASM ex-fuel and further evidence that our many initiatives are working.

We recently seen some significant reductions in selling expenses which have been down in absolute terms in all three quarters of this year.

Although maintenance costs rose a bit in the third quarter, they're down 11 million for the year-to-date as a result of our fleet transition program and great work by our people in the maintenance and engineering division.

Listening to the fourth quarter, we're currently forecasting main line CASM ex-fuel of 7.8 to 7.9 cents, down 1% to 2% from 2006.

If we achieve this, we would have a full-year payor of just over 7.5 cents, well within the 7.5 to 7.6 cents range we've been talking about all year.

We're not ready to give too detailed 2008 cost guidance yet, but we will provide this along with capacity growth by quarter on our year end call.

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

Thank you Brad and good day everybody.

Horizon Air posted an adjusted pre-tax profit of $7.5 million for the third quarter.

This compares to the $15.1 million pre-tax profit we posted during the same period last year.

This profit declined reflecting impacts of the fleet and fare structure transitions as well as the required unplanned Q-400 landing gear inspection in September.

In addition, the timing of scheduled maintenance events has resulted in a significant expense bubble for 2007 which will continue into the fourth quarter as some check and overhaul work that was planned for Q1 '08 is brought forward.

Our review these in greater detail in a moment, but I must note that in spite of the unusual challenges of the quarter, we recognize that our fundamental performance has yet to achieve satisfactory levels of return and we're committed to taking the actions necessary to accomplish this.

Our total revenues for the quarter were up 11.7% or $20.6 million while operating expenses including economic fuel were up 15.2% or $24.6 million.

The 14% increase in ASMs coupled with good cost controls in the quarter brought our CASM excluding fuel to 13.5 cents, down from 13.8 cents in the same period last year.

Excluding the $3.9 million quarterly impact of our fleet transition expenses, our CASM ex fuel was 13.2 cents, down 4.8% from last year's third quarter.

The increase in ASMs is contributed to a 2% increase in system RASM during the quarter.

As a reminder our year-over-year RASM and CASM numbers will continue to be impacted by changes in fleet mix, most notably the in-flux of Q-400s which tend to drive RASM and CASM down and the return of nine CRJ 700s from their [inaudible] jet assignments to our native network which drives both measures up.

Continuing replacement of our 37-seat two Q-200 fleet with 76 Q-400s, we took delivery of two new Q-400s during the quarter completing our current order of 13 aircrafts.

As planned, we delivered three subleased Q-200s to [inaudible] bringing the total least we sent their way to eight with eight more to be delivered by the end of the second quarter 2008.

The progress of our fleet transition coupled with the very favorable economics of the Q-400 as allowed us to expand the rollout of new simplified pricing structures design to protect our markets and stimulate new traffic and drive markets.

We've been able to use the capabilities of the Q-400 to accomplish many things, accommodation of spill traffic, stimulation of incremental local traffic and enhanced support the AAG network among them.

While assurely, we're encouraged by the positive market response in markets as varied as western Montana and the Seattle Portland shuttle where Y class their useage has increased dramatically.

After the call, take a minimum to it check out our special website i-5slog.com to see the fun and innovative way we're promoting our shuttle service.

On September 12th, we temporarily grounded 19 of our 33 Q-400 as a precautionary move following the two SAS incidents in Europe.

The next day in response to a transport Canada airworthiness directive, we granted the entire Q-400 fleet and began the required landing gear inspections.

Over the 13 days that followed, we canceled 5% of our planned September capacity and estimate that our revenue loss totaled between $4 and $5 million.

While our customers were significantly affected, the impacts were mitigated by the incredible professionalism and resourcefulness of our teams.

Through it all, our people performed heroically, posting an 80.7% on-time arrival showing for September against incredible odds.

I can't thank them enough for their character and hard work.

Turning to product lines, our mix changes are detailed in the press release.

So, I will focus on the performance of our brand flying where we had a 9.5% increase in passenger revenue on a nearly 20% increase in capacity.

Traffic grew over 17%.

However, our traffic performance came at the expense of yield which is down 7.5%, a function of significantly increased competition in our Pacific Northwest markets particularly our Spokane to California markets from 50-seat regional jets.

Our resolve to defend our position is to prefer regional carrier in the Northwest remains high, and we believe that our fleet of more efficient 76-seat Q-400s and 70-seat CRJs coupled with our award winning customer service puts us in an excellent position to do just that.

Admittedly, the very competitive environment has made the profitable reintegration of our Frontier CRJs a more challenging prospect than we first anticipated.

In spite of that, we remain committed to making the adjustments necessary to be sure our capacity is profitably deployed.

Our operating expense increase was driven primarily by a $9.5 million rise in economic fuel costs, a $3.4 million increase in depreciation expense on new Q-400s, a $3.9 million sublease loss related to transition outward Q-200 fleet and a charge of approximately $3 million on Q-200 parts.

Maintenance costs were up $3 million for the quarter, but the increase was mitigated by our success in implementing lean process improvements.

For example, our teams have reduced the average dwell time on our turbo C check line from 21 days down to 14 days, producing $2.8 million in cost savings from our plan this year while increasing by a week the time our aircraft are available for revenue service.

Beyond lean we continue to work diligently on many other cost-saving initiatives and in improving near-term results and providing momentum for efficiency gains in the future.

Looking ahead to the fourth quarter, we're forecasting an 8% increase in ASMs and CASM ex-fuel of 14.9 cents compared to our previous guidance of 14 to 14.1 cents.

This expected cost increase is due to the retiming of planned maintenance activity into the fourth quarter that I mentioned earlier.

In light of the shift in timing, we expect our 2008 check and overall costs to be down by approximately $13 million.

Excluding fleet transition expense, our CASM ex-fuel forecast will be 14.6 cents which represents a 1% reduction versus fourth quarter 2006.

For 2008, we anticipate a 4% reduction in AFMs driven by the sublease of six Q-200s to commute early in the year partially offset by two Q-400 deliveries late in fourth quarter of away.

Now, let me call back to Brad.

Thanks Jeff.

If you take the third quarter results which we did discuss for Alaska and Horizon and add them to the first and second quarter results, we're at a year-to-date profit of $114 million or 2.79 per share for 2007 versus a profit of $141 million or $3.56 per share last year.

Given the current very high level of fuel prices and our seasonality, we currently expect a loss for the fourth quarter so our expectation is that 2007 full year results will be lower than 2006.

Turning to the balance sheet, air group end the quarter with 888 million in cash and short-term investments, down 126 million from balance at the end of 2006.

We generated about 375 million of cash flow from operations in the first nine months of 2007 and have proceeds from new financings of approximately 200 million both of which were offset by net capital spending of approximately 600 million and debt repayments of 100 million.

Almost all of the capital pending during the first nine months of the year was related to aircraft and advanced deposits in support of our MD80 phaseout at Alaska and our effort to simplify Horizon's fleet.

We took delivery of 10 737800s and 13 Q-400s on the first nine months of the year and expect to receive 4 373800s in the fourth quarter.

All of our third quarter deliveries were paid for with cash on hand.

As of September 30th, we have repurchased 210,000 shares of our common stock for $5 million and we have repurchased an addition 590,000 share so far on October reaching 19.7 million in aggregate purchases.

At this point, I will turn a call back to Shannon.

Thanks Brad.

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

Francis would you please go ahead and assemble the [inaudible].

(OPERATOR INSTRUCTION) Your first analyst question comes from Mike Lindbergh of Merrill Lynch.

Good morning, all.

I guess a couple questions here.

I just think, Brad, earlier when you talked about the fare increase, the five one-way and ten one-way that had been matched by most with the exception of southwest, are you still not -- are you still uncompetitive with southwest or have you rolled it back in their markets?

Hey, Mike, we have not rolled it back to this point.

We just put that fare increase out Friday.

So, we're just waiting, going to watch a little bit and see what happens to demand and what happens to our bookings.

It may be that we do make an adjustment down the road.

We'll just kind of wait and see.

Okay.

And then for next year, 2008, I think you said capacity was going to be up 4 to 5%.

Is that correct?

Yes.

Okay.

If it is up 4 to 5, what does that number look like if you exclude Hawaii and you exclude Mexico?

I am trying to get a true domestic number for you.

Yes.

Hawaii would be up 2.5%, so that's pretty easy.

It would be up 2.5, and I don't know that there is going to be a lot of year-over-year changes for Mexico in 2008 over 2007.

There may be a tiny bit, but of annualization of stuff we've done this year, but I don't think there is anything big there.

And when you say up to two and a half years, you're saying that Hawaii represents two and a half points of that 4 to 5% increase?

That's right.

Basically those are full airplanes, so the Seattle-Honolulu and Seattle-[inaudible] flights are an airplane each, so they're 2%, and Anchorage-Honolulu is service that we fly for daily part of the year and two days a week for part of the year.

And my last question is to Jeff.

You know, Jeff, you gave us what the revenue impact was for the Q-400 grounding.

Is that close to -- you know, that is similar to what the all-in impact would be number one, and then number two, you know, having seen the headline where SAS is seeking, you know, close to $80 million of compensation from barred air, and I realize they do have a bigger fleet than you, that said, is there an, you know, an opportunity there for you?

I don't know if it is opportunity is the right word, but [cut] --

(LAUGHTER)

Compensation?

Is there a request out there with a manufacturer and could we see something down the road where it goes up as, I don't know, a one-time gain?

You know Mike, well, my answer to your first question the number I provided was the revenue impact.

We're still in the process of tabulating the full-up expense impact.

Okay.

Incremental, some more structural, and diversion of attention, and all of those types of things.

Okay.

Obviously engage odd two fronts, we're following very closely developments between bombardier and the other one factor particularly SAS and secondly, we're continuing our long tradition of engaging them productively as well.

In fact, they're coming out, the CEO and his team next Monday and Tuesday to spend some time on this and other matters, so we have every confidence I think that the way we've been able to engage and work things out over our 25-year history with them will continue ongoing forward.

Okay, great.

Thank you very much.

Your next question comes from the line of Jamie Baker with J.P.

Morgan.

Good morning, everybody.

Good morning, Jamie.

Quick a couple of questions actually on Horizon.

Did you say Horizon Air would be down 4% next year or is it just that specific fleet type you are referring to.

Oh, that's Horizon capacity.

Jamie all up and a function of the way that the fleet transition works.

We have more airplanes going out early in the year, about six Q200s and we don't take any new deliveries until late in the fourth quarter.

Ok, let me ask you on that, I mean if you look year-to-date on Horizon, you know, you have lost a little bit of money at the operating level, and that's for the first time since 2002.

I know you don't like to give earnings guidance by entity, but could you outline directionally what it is going to take in 2008 to get Horizon back to an operating profit, you know, particularly in light of $90 oil?

Yes, no.

It's like every year in the business it will be a challenge, but there are some unique element to say this year transition.

I will try to outline.

First of all, we have, you know, several elements that are play this year that have to do with deliberate fleet transition, you know, the write down of the Q200s, the parts right downs, being among them.

We had of course the September events a very significant, and other things that we expect to be one-time enough present next year is a way up.

The most significant is the reduction in maintenance overhaul and engine expenses, engine overhaul.

That's just on the engine overhaul side alone, that will be down $22 million.

That's offset a little bit by some increased Sea-Tac activity, but the net of that was the $13 million reductions just in check and overhaul.

You take those one-time elements out, and I don't have the tally here, but it is a big number Jamie in terms of reduced expense structurally there.

Then, you look at what we're anticipating in terms of improved revenue performance with much more cost efficient platforms, a higher concentration of Q200s in the markets that we're introducing them in at reduced frequency levels, but again tailor to do the demand patterns, so we're expecting, you know, on the other side of margin the revenue side to see improvements as our promotion and penetration of that continue to say take place.

Covering all of that is just a full court press in every division on, you know, continued reduction of structural costs, preferred methods like lean or yielding great results, but there are other things as well, and, you know, in general our cost competitiveness issue is a function of a couple things.

One, our chosen business model.

It is unique among regional, so makes the [inaudible].

Secondly, you know, when you look at all the expense categories, our M&E expenses, our outliers largely because of the complexity of the three-fleet type situation that we're working to resolve, and of course our pilot costs which were engaged in active conversations with them.

So, with good efforts on both fronts, and everything else we think is where it should be, and continuous improvement covers it all.

Okay, a very thourogh answer.

Just one last follow-up.

You know, given the change in aircraft mix, do you have an approximate fuel consumption, not price of fuel but just a gallon consumption level for your horizon plan next year?

We don't know if we have the full consumption.

I have a staff that's pretty cool relative to fuel.

Maybe ASMs per gallon, something like that or [cut]?

Yes, we have just for a third quarter this year, Jamie, to give you an example with the integration of more Q-400s in our fuel costs or fuel gallons per thousand ASM is down 6%.

We're down from 18 -- 19.31 down to 18.22, and we expect the full angle in addition to that next year to take it even further.

Jeff, maybe something we can put into an 8-K.

Because I think there is a lot going on with Horizon's fuel with [inaudible] the fuel is on our nickel and now it is.

So, there is a lot of change with the fleet.

Maybe we can put information in the next [cut] --

That would be great.

It would help us in the modeling.

Thanks a lot, gentlemen.

Appreciate it.

Your next question comes from the line of Frank Boroch with Bear Stearns.

Good morning.

Brad, I was hoping maybe you could talk to us about, you know, what's leading the fourth quarter unit cost guidance, the the nonfuel cost guidance up from the last time we talked?

Sure.

If you can give me a minute, Frank, I will pull that open here.

If we look at the fourth quarter we have got capacity up about 3%.

I am not sure what I said last time.

That maybe pulled in a little bit since then, Frank.

And then if I just look down the lines, it looks like try to -- aircraft rent could be a factor.

I am not exactly sure what the time of the guidance we gave you that you're referring but rent may be up due to MB80 leasebacks.

Yeah.

Okay.

And perhaps maybe you talked about yield there in the Mexico markets.

How about up and down the West Coast given the Virgin entry and responses by southwest and company?

Sorry, Frank, we were going back to the CASM.

I am not - to my knowledge we actually haven't given fourth quarter guidance, and my sense of the third, just to provide a better answer to that question, my sense is third quarter we came in inside of guidance, and we just reiterated that full year we're going to come in -- we believe we're going to come in at the low end of 7.5 to 7.6 cents range, so people may have deduced a fourth quarter number based on the fourth quarter and full year but I am not sure that we've actually given guidance, and our second question was yields up and down the West Coast?

Yes.

Just what the outlook is like or ?

Yes, exactly.

Yes, you know, we were encouraged by our September numbers.

Our yields were up about 3%.

I think month to date in October we shared that we're up 2.

They are, we are trying to get through a very significant fare increase and so anxious to see what impact that has.

Like everyone and I think our general sense is that things are actually holding up okay right now, but I think like a lot of our competitors we are concerned about the economy, high fuel, what our effort to increase fares does to demand, and, you know, our practice with this stuff has been to not talk a lot about things we don't know about, but to share our RASM figures with you as soon as we close them up and we will obviously do that in our 8-Ks.

I appreciate.

I was just referring to the CASM guidance from July 26th where you gave third and fourth quarter [cut] --

Did we provide fourth?

I am sorry.

It was 7.6 to 7.7 since.

And now we're 7.8 to 7.9.

That's all.

I appreciate it.

Thank you.

Your next question comes from the line of Peter Jacobs with Ragen McKenzie.

Hello.

Can you hear me?

Yes.

Good morning.

Brad, could you first start by walking us through the cash flow in the third quarter?

I believe at the end of the second quarter there was nearly a billion dollars of cash, and now 888 billion, so could you just walk us through some of the expenditures and the intakes there?

You know, I don't actually have that detail in front of me, Peter.

What I can tell you is that in the third quarter we took three airplanes in and we have got a year-to-date cash flow in front of us but not a quarterly.

We took three airplanes in and we would have paid at Alaska and we would have continued to pay significant purchase deposits for those 17 airplanes that we have coming in 2008, and we actually kind of a funny quarter for us.

We didn't actually close any debt financing at all during the third quarter.

So, the three airplanes that you took in you would have paid the balance in cash and then you had progress payments on the other aircraft, correct?

Exactly right.

Okay.

Secondly, maybe just a question for Jeff.

With the reintegration of the CRJs from Frontier, and some of the issues there, are you finding difficulty kind of finding the right homes for those airplanes in your system now?

Is that one of the issues in terms of what is the right route, where do the economics make sense, and then would you entertain maybe getting rid of some of them if they don't make sense in your system?

Yes, great question, Peter.

I think, you know, the smaller the aircraft, the greater the challenges in any low yield environment, and it is certainly played out here in the west.

If you look at changes year-over-year, and particularly with all the competitive in-flux we've seen, the yield pressure has put more pressure on profitibility of the 70-seat platform, much more pressure on 50-seat platforms, but nonetheless, you know, it makes achieving our ROIC targets more of a challenge, so our obligation is to take a balanced and forceful approach.

One, we have market that is we work hard to build over a lot of years, and in putting the tools we have to work in active defense and, you know, measures in that category has been a smart thing to do.

Over time, of course, our way of doing that has to produce as well, and we are, you know, making the adjustments necessary both with each new delivery and each new outflow to try to balance the equation.

When we get to a two-fleet type opertion, the Q-400 and the CRJ, we'll have, you know, a better more economic platform overall.

If it does leave the question, though, of the CRJ lines we're flying how many of those might be better as Q-400s, and we're actively looking at that, and then the remaining lines, you know, what's the right long-term answer.

In the short run, though, we're very glad we have them on the level.

I mean, they're allowing us to maintain strategic presence in a number of markets at much better economics than we were with strictly Boeing equipment, and we're able to fight some of the brush fires competitively as well in way that is we otherwise wouldn't have so.

We're fortunate in the short run.

In the long term, we understand with that, you know, an issue to reconcile if the economic environment remains the same.

Great.

And two more housekeeping questions if I could, please.

First of all, Brad, could you give us a sense of what the average fare increase would be in the West Coast and in the TRANSCON markets if you are able to get that $5.10 per ticket?

The average impact on our it system would be?

Yes, what the average impact for the price increase if you are able to get that $5 to $10 either in the West Coast and/or the TRANSCON market.

You knowI think it would be 6 or 7% of our revenues.

If you have all that far increase through on every single fare with no diminution and demand, it would be a very substantial percent of revenues, but I think as you know we have lots and lots of fares, and there there are lots of changes in fares, and there is normally some sort of a reaction interplay between demand and fare, so we wouldn't expect that.

Okay great and lastly fuel prices.

Can you give us a sense of what you're paying at the pump?

Ask Jay Schaefer to do that.

(LAUGHTER) Thanks.

So I appreciate that.

Right now if you assume $88 a barrel of oil, it would be essentially 2.63 unhedged and 2.38 hedged.

Okay.

That's not -- that's actually what you're paying.

That's not actually a calculation right?

That includes the crack spread and the West Coast [inaudible].

That's right including taxes and then the plane seats as well.

Okay, West Coast jet right now is about 2.42 excluding all the interplay in taxes as well.

Okay.

Thank you gentlemen.

That concludes my questions.

Thank you.

Your next question comes from the line of Gary Chase with Lehman Brothers.

Good morning, everybody.

Good morning, Gary.

Just a quick question.

I knew you said you didn't want to go over the cost guidance for next year which I understand.

If you could just give us a sense, though, you know, I am talking on the Alaska side of what's in play qualitatively.

What should we be thinking are going to move the numbers up or down.

You noted some productivity improvement in the airports.

I understand the longer haul and the Hawaii growth and of course the regauging, but in terms of actual change in dollar costs, are there places where you've got opportunity to drive those numbers down?

You know, Gary, this is Bill.

I might just start on this.

Probably the single biggest thing is improvement on our daily operation, and we are still not where we want to be in terms of on-time performance, reliability and baggage performance, and we know that drives a lot of extra costs, so we've got a continued high level of focus on curing some of those problems.

Beyond that, the fleet is huge obviously and we're seeing some of the benefit today, and there is more to come, and that's both fuel and maintenance costs, and I think the initial plan that we had and the fleet transition and the capital commitment I think we're pleased with the results that we're seeing so far with that, and we end up with all the MD80s out of the fleet by the end of next year, and that's very very important we continue to track that along and do well with it.

The airplanes come in and go out and the all the maintenance work is done in preparation for return on the MD80s and so forth.

There is Jeff mentioned this, but we are becoming bigger and bigger fans of this whole lean process endeavor, and it is still very much in its infancy here.

But we're learning more about it every day, and we're having a bigger and bigger group of people that are involved in streamlining procedures, increasing quality, reducing waste, improving efficiency, and reducing costs, and it is all wrapped up in the same stuff, and the neat thing about it is it involves front line people deciding what they're going to do differently in their job to make things better, and for us it is a real break through, I think it is a kind of break through at Booing and Toyota and all the famous studies you have read about.

We're applying that to Customer Service and we're just gaining momentum.

This is our third year or so into this, and it is still very, very tiny, but we have a lot of hope for it in terms of continuous improvement every year, and in pushing down our unit costs and improving the quality of our product.

There is a bunch of other things in procurement supply chain, how we buy things, and distribution costs, we continually look at all aspects of our product, and as we said before one of the good things about being a smaller airline is we can be in more immediate touch with our customers with the understand what they care about, what they're tolling pay for, and we can move more quickly to match up the product with what they're willing to buy.

So, that's it at kind of a high level.

And by the way commend you for spending the time outlining your ROIC objectives and the way you're thinking about that.

If I calculate right this year, you'll run something like a [inaudible] pre-tax margin instead of the ten you target.

And that's with the benefit obviously of some fuel hedges.

You know, as you look forward and you look to that goal, how much of the improvement that you target or plan to implement is on the cost side of the ledger?

Hey, Gary, first of all, I think you're pretty close to where we would be in terms of your forecast for the full year and ours in terms of the margins and so forth.

As we look forward, you know, we've been at this for a long, long time now and profitibility has gotten better and costs have come way down.

I think the really important thing is that we know where we need to get and everything we're doing at both company is around only bringing the capital and if we have of these or a belief we can make returns and then run into the business in a way, we can get those returns.

Historically, a lot of our focus has been on the cost side.

We've kind of accepted the revenues.

We think there is a lot more opportunity on the cost side.

You know we talked about 725.

We talked on other calls about getting sub7.

We think as we clean up the fleets and I guess simplify the fleets might be a better word at both companies.

We do think that we're going to get more effecient, more productive, better maintenance costs, better pilot costs, so we think there is big opportunity there, and we're interested in pushing the needle a little bit on the revenue side.

We talked about that a little bit on the last call.

We're going to try to increase the level of focus on that and a little bit in 2008.

We feel like as we said last time, we've done a lot over the last three or four or five years to really improve the value proposition for our customers.

Our first class fares are way down.

Our walk-up coach fares are way down, so the gap between our high and low fare is 2 to 1 or 2.5 to 1.

The fare rules are a lot easier.

We don't require an over night stay.

We feel like we have a really compelling value proposition, and we actually fell like we're in a position where we should be able to realize over time a $5 or $10 increase in our average ticket price.

Whether we can get that or not time will tell, but we're going to work both sides of this equation as we continue to try to drive the returns up.

Okay.

Sounds great, guys.

Thanks for the call.

Thank you.

Your next question comes from the line of James Higgins with Soleil Securities.

Yes, hi.

Good morning, everyone.

Good morning, Jim.

There has been a lot of buzz around the industry of about the value of frequent flier programs as free-standing entities.

Have you given much thought to that related to your program?

How - you know, can you give us share any high level thoughts on that issue?

Yes, Jim, this is Bill.

Let me start a little bit.

I guess the first thing is that as we walked about on this call and previously we are really focused on increasing shareholder value for the long-term.

I think our share repurchase demonstrates that and more broadly the whole 2010 transformation plan is very shareholder friendly in that we avoided bankruptcy through, you know, putting that plan together, and heading down the path to execute it.

So with shareholder value in mind, if different ownership of different pieces of the business has created additional shareholder value, then we would want to consider, you know, those alternatives, but the component pieces of the business are really integral to the whole, and strategic to our plan and to our success going forward, and our focus really is on improving each piece of the business and that's where we're spending our time.

Okay great.

And then drilling down to a much more detailed kind of question, as you think about your Hawaii service, do you expect that to be primarily local market traffic or do you think you will be getting a fair amount of connecting traffic on that?

I think we expect a a lion's share that far to be local traffic, Jim.

There would be some connect, but that the Lions Share would be local.

Great.

Thank you very much.

Yes.

Thank you.

Your next question comes from the line of Dan McKenzie with Credit Suisse.

Hi.

Good morning.

Good morning, Dan.

Hi, Dan.

I would like to just come at the return on invested capital from a slightly different angle here.

You know, the transparency behind the goal is great, but, you know, a big part of an airline's ability to earn its ROIC of course is the fuel and the economy, but another big part is really at the discretion of the competitors who either deny or allow you to capture the revenues you need, and so I guess with that, you know, what if anything can Alaska do to improve its [inaudible]?

Execute our plan really, really well, and what we always said is we focus on the right parts of the business.

That will drive earnings, and the stock price ought to take care of itself based on our earnings history.

Okay.

I guess just a second question, here, given the a mendable contract with the pilots, what has Alaska's experience been with the National Mediation Board?

How quick are they to release the two sides and what typically goes into their thought process?

We're nowhere near that in our upon, and our intent to to get a deal at that works for the Company and the shareholders and the buyouts, and where we are specifically on that is continuing to meet with the negotiating committee and I think I characterize the progress as good.

We have an ongoing schedule.

We're making progress, and really getting into the probably the more contentious areas, healthcare, retirement, wage rates and scope, and over the next several months, we'll be addressing those things, and optimistically we'll get a deal that meets, you know, everybody's needs and is synced up with the competitive realities of our business.

Okay.

Thanks, Dan.

Your next question comes from the line of Ray Niedl with Calyon Securities.

Yes, I guess the growth projections you gave us for the later part of this year, they seem like they're reduced from earlier guidance at least from what I had in my model.

I take it that's mainly because of higher fuel prices.

I think you said each gallon, each dollar increase in gallon of fuel equates to $2 million extra cost per quarter per year.

A dollar per barrel is $10 million a years.

I think a penny per gallon is $4 million per year.

Those are both unhedged figures.

I think capacity is down in the fourth quarter.

It is maybe a little demand based, but it is also operational based, things that we needed to do just to basically have a schedule in place we knew we could operate with the kind of performance metrics we wanted to have.

Okay.

Great.

And despite some of have been has going on with Alaska Airlines with the yield and so forth.

It seems like Horizon has become a real drag on company profitability and I guess maybe it might be time to visit and review if Horizon should really be part of Alaska.

Horizon is more independent than your typical regional airline, and I am just wondering if Horizon was spun off would that help a less airlines or is Horizon is still an integral part of Alaska Air as you developed new roots.

I think the latter, Ray, and I think Jeff and his team have a good plan.

The Q-400s presented an exciting opportunity for us, as Jeff described, stimulating some new traffic and meeting, you know, both local and connecting demand and network, and that's Jeff's focus.

It is our focus to all work together on this and see Horizon return to profitability.

Okay great.

Thank you.

Thanks.

Your next question comes from the line of Robert Barry with Goldman Sachs.

Hi, guys.

Good morning.

Good morning.

Did you say that Mexico was about 8% of ASMs in the quarter?

Yes.

And as we moved into the next couple of more winter quarters, what percent might that go up to?

I think 12%, Rob.

Okay, And --could you talk about the cadence of maintenance events excluding the ongoing benefit I guess you're getting as you migrate to more ___6243?

Were there main line maintenance events that were significant this year that won't recur next year?

Or asked another way should maintenance expense be an absolute level down next year?

You know, we're still pulling that together.

Rob, I want to say something that would sound good, but I think the truth is we're still putting our 2008 plan together.

When we have information we'll share it with you.

I think in terms of the -- you know, you know, how maintenance is.

The big drivers are engine overhauls and air frame overhaul that is happen every six to nine years.

They are lumpy, and we have good experience in the first and second quarters as we were able to target MD80 retirement dates and avoid checks based on how we scheduled the retirements and we had more events in the third quarter, but in terms of looking forward in 2008, why don't we get our budget down and we will share information with you when we have it.

Okay and then just finally, I guess you expect to record a tax benefit in the fourth quarter in order to kind of get to your 6%.

I am having a little trouble getting to your 6% EBT for the year if you're going to have a loss in the fourth quarter?

Yes.

We would certainly record a tax benefit in the fourth quarter.

When ___6400 have that, you know.

No, but no, but yes, there would be a tax benefit.

Okay.

Yes.

Okay.

Thank you.

Thanks, Rob.

Yes.

We have time for one more question, and if there is anyone in the queue, and then Alaska's Managing Director of Corporate Communications, Caroline [inaudible], will conduct the media portion of the call.

Thank you.

Your final analyst question comes from the line of Peter Jacobs with Reagan McKenzie.

One last follow-up question.

And that is Brad, when you discuss the advanced bookings, and you refer to the 4% increase that you're saying in November than 2% or something like that in December, are you referring to year-over-year?

Do you adjust that for your expected ASM growth in the fourth quarter?

That's the advanced book load factor.

It is adjusted for the ASM change in the fourth quarter.

So, it is basically saying that as of Monday the advanced book load factor per November was 4 points higher than similar point in time last year.

Okay that's what I thought.

I just wanted to double check.

Thank you.

Yes.

Caroline [inaudible] we may now have time for questions from any journalists participating today.

Francis would you please remind our callers of the procedure for asking questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Susana Ray with Bloomberg.

Hello, Susana.

Hi.

Good morning.

I just wanted to verify with Brad you said that 2007 earnings will be lower than 2006.

Do you mean that your loss will widen, then?

Is that likely?

Susana, are you talking about fourth quarter or full year first of all?

Full year.

Okay.

So, yes.

Yes we are talking about adjusted earnings.

When you adjust, when you put fuel hedging on an economic basis and exclude MD80 charges and VSI charges, and so we do expect a profit for both 2006 and 2007, but a lower profit in 2007 than we had in 2006.

Okay.

Do you happen to have the 2006 adjusted figure handy?

I do.

It was $3.35 per share.

3.35.

Okay.

And then, for the fourth quarter would the loss be wider or narrower?

You know, Susan, we did not make a comment on that.

All we really said is we are currently expecting a loss for the fourth quarter.

I think we probably want to leave our comments at that.

Okay.

And then I also just wanted to verify, did you say that you would or would not be speaking compensation from bombardair.

Hi Susan.

Hi!

So this is Jeff.

Yes, as what I said is we're engaged with bombardair in the review of the matter and in discussions on appropriate remedies right now.

So, it that does involve some compensation for the extraordinary expense, but we're still in the process of tabulating the full impact and were kind of doing that concurrently with our discussions with them.

Okay.

But, some compensation is expected, then.

Okay.

Yes, so far for direct expenses.

But I think if you're comparing that to the SAS situation, we're only monitoring progress on that front.

We're just engaging in our normal collaborative process with bombardair to get to a good [inaudible] solution.

Okay.

And then my last question is whether or not you guys are expecting the fires in California to hurt bookings this quarter?

Boy, you know our first thought there is for the people that were impacted, and what a sad situation.

So far we haven't seen and I am looking at Greg here.

I don't think we have seen any particular impact, but that's so far that doesn't appear to be.

But I sure hope that that gets better and people are taken care of there.

What a sad situation.

Okay.

Thank you.

Your next question comes from the line of John [inaudible].

Good morning gentleman.

I just wanted to followup on the fourth quarter expectation.

Is this mainly or mostly or how do you qualify that due to fuel.Good morning gentleman.

I just wanted to followup on the fourth quarter expectation.

Is this mainly or mostly or how do you qualify that due to fuel.

Hey John.

We were trying not to revive a time [inaudible] on the fourth quarter.

We're really saying that fuel is very very high right now.

It's $87 and $88 of barrel.

The impact to that compared were with three or four months ago, is $200 million a year on edge, $100 million would be the edge, kind a closer in impact.

We have put to a significant fare increased and we don't really have a lot of information yet on how the market is gonna respond to that, but feels there is a fair of certainty up there and our--the comment that we made is, we currently expect the loss for the fourth quarter.

And, at this point, I think we do want to limit our remarks to that statement.

Okay.

Enough.

That's your Air Group haul, correct?

Total?

Right.

Yes.

Okay.

Thank you.

Yes.

Your next question comes from the line of [inaudible] with Associated Press.

Hi.

Good morning this is a question for either Brad or Jay.

Brad, you mentioned that given the fuel price increase, so far air group has benefited more than $25 million from your Hodgin Program for the first time month of the year?

Is that correct?

Yes correct.

Do you have that broken out for the quarter?

Yes, yes.

This is Jeff, so far Q1 it was about under $2 million, Q2 was about $6 million and then Q3 was almost $17 million.

You said $17 million?

Correct.

Okay.

Okay and do you have any projection for Q4?

You know, we're as Brad mentioned, we're trying enough to get too much into the wedge for Q4, even the [inaudible] of oil.

It is very hard to project where to-- has benefit will be.

Okay.

Thanks.

Yes.

(OPERATOR INSTRUCTIONS).

Your next question comes from the line of Ted [inaudible] from the street.com.

Thank you.

I just had a quick thing on a revenue aside the revenue increased for the fourth quarter, for the third quarter seems kind a low 1.5 and that kind of weak is that just because of competitiveness on the West Coast and is there further pressure expected in the fourth quarter on revenues.

Ted, I think there is a couple of things going on.

One is just had been terms of a longer contacts, appears on revenue on the West Coast.

I don't think went down as far as they did on the East Coast.

So, maybe is things were improving how we pressed on that as much as to come up.

The other thing in terms of us specifically when you're looking at else to give the other airlines are revenue increased came on a capacity increased where they think most of the airlines that released for the third quarter have revenue increased that they have reported came on ASM decreased.

So, you knew it, consider that very successful as you both increased in capacity and going [inaudible].

I know, but they are successful but we're basically, we're satisfied with our revenues of performing but all be good to make better in the fourth quarter to deal with this, the real run of fuel prices that we seen recently.

Okay.

Thank you.

Yes.

There are no more questions at this time.

Okay.

I'm now turning back to the presentors.

And if, Rob Barry happens to still be listening.

If he did have request, I think about the margins and comments that we made in that 6% is probably a better number for Alaska Airline than Alaska Air Group, but the Air Group is probably gonna be shorter that number forward, for 2007 based on the comments we made about the fourth quarter.

Okay.

This is Bill.

Thanks for joining us everybody and we look forward to speaking with you again in the next quarter.

Take care.

This concludes today's Alaska Air Group third quarter 2007 earnings release conference call.

You may now disconnect.