阿拉斯加航空 (ALK) 2007 Q4 法說會逐字稿

Good morning.

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

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

(OPERATOR INSTRUCTIONS).

Thank you.

Now, I would turn the call over to Ms.

Shannon Alberts, Management Director Investor Relations.

Please go ahead, ma'am.

Thank you.

Lupita.

Hello, everyone and thank you for joining us today for Alaska Air Group's fourth quarter and full year 2007 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 are also present to help answer your questions.

Today's call will include forward-looking statements that may differ materially from 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 alaskaair.com.

As we reported earlier this morning, in the fourth quarter 2007 Alaska Air Group earned GAAP net income of $7.4 million or $0.19 per diluted share, versus a net loss of $11.6 million or $0.29 per share last year.

We should note that the 2006 GAAP results included a favorable adjustment to the restructuring reserve and both quarters included mark-to-market fuel-hedge adjustments.

After adjusting for these items, Air Group reported a fourth quarter net loss of $17.9 millions or $0.46 per share, which compares to a first call mean loss estimate of $0.32 per share and to a 2006 loss of $0.08 per share.

For the full year, again, adjusting for the unusual items in each year, Air Group's net income was $92.3 million or $2.28 per share, versus $137.7 million or 345 per share in 2006.

Our fourth quarter results include a $3.75 million adjustment that resulted from our recent decision not to capitalize the investment we've made in row 44, our technology partner with whom we're developing on-board broadband connectivity given early stage nature.

As a result, it was not included in our most recent guidance.

The adjustment was $2.3 million after tax or $0.06 per share.

Please see pages 9 and 10 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'll turn the call over to Bill Ayer.

Thanks, Shannon.

Good morning, everyone.

We're continuing to make good overall progress on our transformation, but our adjusted results for the fourth quarter and full year fell short of our plan and lagged our 2006 performance.

The primary reason was the significant rise in the price of fuel, combined with our inability to recoup the added costs through higher fares in the current competitive and economic environment.

In addition, Horizon had a difficult 2007, and our capacity purchase market performance did not meet our expectations.

Jeff and his team along with our planning group are hard at work to improve these results.

We faced several challenges in 2008 including fuel costs, the economy, and some new competition.

But as we start a new year, I think it's helpful to put these challenges in the context of what we already achieved.

We have many things going for us.

Two great brands, loyal customers, a strong balance sheet, strategic plan that recognizes the needs of all of our stakeholders, progress toward simplified fleets at both carriers and employees at Alaska Airlines and Horizon Air who are the best in the business.

As evidence that our plan is working, for the fourth quarter ended September 30th, Alaska Airlines had the second best pretax margin in the industry and we expect to again make a strong showing for the full year 2007 once other carriers' results are all in.

These results reflect the fact that Alaska Airlines achieved main line CASM ex fuel of $7.5, which is at the low end of the guidance range that we gave you last January.

We have achieved meaningful CASM decreases in five of the last six years, these unit cost reductions are saving us $298 million per year based on the ASMs that we flew in 2007.

It's hard to imagine that we would be here today, had we not made these reductions and I really want to thank our people who have worked hard to achieve these savings.

On last quarter's call, Alaska's VP Finance, Brandon Pedersen, explained how we calculate our cost of capital and return on invested capital or ROIC.

And for the full year 2007, adjusting for the unusual items, Air Group's ROIC was 6.1%.

That's well below our target of 10%.

So, while we're pleased with our performance relative to the industry, we know that we have more work ahead to improve our absolute performance.

We understand that it's critical for capital providers to earn a reasonable return on their investments over time and our strategic plan is built on this premise and of course we'll keep you apprised of our progress on future calls.

In keeping with this goal, our Board of Directors approved a share repurchase program last September and to date we've repurchased almost 80% of the $100 million authorized.

We also have a conviction about the necessary relationship between profitability and growth.

And that is that growth only makes sense when profits support it.

Brad will talk more about our 2008 capacity plan in a minute.

And it's important to note that over the coming years, our Boeing order around lease agreements provide a lot of flexibility to regulate our growth.

Let me talk about some of the specific initiatives that give us confidence about our future.

In 2008, our most important objective is to improve our Seattle operation which will help our system-wide performance.

A better operation builds customer loyalty and lowers our costs.

We recently made some organizational changes aimed at improving performance.

Our decision in 2006 to move Alaska to a single fleet type will become a reality by the end of this year.

And there's no more impactful initiative for achieving simplicity, standardization, and long-term cost savings.

This represents the culmination of three years of work and Horizon is also in the midst of simplifying its fleet and Jeff will talk more about that a moment.

Our new fuel efficient 737 800s provide a long-term fuel hedge which has become even more important, given current fuel prices.

A combination of our fuel hedging program, fuel efficient fleet, direct flying using RNP, flight guidance technology, and wing what's on next Jet aircraft give us a sustained competitive advantage and significantly reduced emissions.

We have several initiatives aimed at improving our customer's experience.

In addition to a simplified pricing structure already in place, we're increasing our real estate productivity through our airport of the future check-in process.

We're working with row 44 to be the first U.S.

airline to launch satellite based in flight Internet connectivity and we recently enhanced alaskaair.com to make it easier for our customers to find mileage plan a [word space] and to make online ticket changes.

e've also just announced more convenient schedules in some of our Seattle and California of our markets and Brad will provide more details on those in just a moment.

Speaking of markets, during the fourth quarter, we initiated service to Honolulu from Seattle and Anchorage, as well as service directly to Kuwait from Seattle.

This move was received with great fan fare by employees and customers alike and demand in this new market is strong and the trends look good.

For 2008 is going to be a challenging year with continued high oil prices, a likely softer economy, and increased competition in some of our markets.

Our healthy balance sheet, a young single fleet at Alaska and solid brand reputations put us in an excellent position to compete in this difficult environment.

We have a good understanding of what's needed strategically and we have the right plan and the right people to succeed.

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

Thanks, Bill and good morning everyone.

Excluding the unusual items, Alaska Airlines reported an adjusted pretax loss for the quarter of $18.8 million, compared to a loss of $1.9 million in 2006.

For the full year, Alaska reported an adjusted pretax profit of $172.7 million, down from $200.5 million in 2006.

Our full year result equates to a main line profit margin of 7%, versus 7.4% in 2006.

Main line passenger revenue increased 7.4% this quarter, on a 4.6% increase in capacity, and a 2.7% increase in passenger RASM.

The quarterly RASM increase was driven by 1.3% increase in yield and one point improvement in load factor.

Regionally, we saw unit revenues strength in Alaska, Canada, and in our trans con markets but continued softness in Mexico.

Our 2.7% unit revenue increase was lower than the industry's 5.9% increase.

As you know, we've increased the amount of long haul flying that we're doing and in fact almost all of our capacity increases for the quarter is represented by about six new long haul flights.

Two trans cons out of Portland, three new Hawaii flights, and increases in our Seattle-Cancun service.

We calculate that these long haul flights to pressed our system yield and figures by about two and-a-half points.

If you adjust for this, our numbers would have been much closer to the industry average.

We expect to see this effect through the next three quarters as we annualize flight recently added.

Although, we see some modest yield increases, I think everyone in the industry recognizes that domestic fares are not high enough to cover fuel at $90 per barrel.

We recently calculated that a one-way fare for our average 11,000 mile market needs to increase by $15 to cover the increase in raw fuel costs since May.

Our revenue management folks have been working deligently to realize fare increases but to date we've had mixed results.

Our advanced book load factors are strong and have been bolstered by very solid Hawaii bookings.

January and February are up three points while March is up a bit more than that due to the early Easter break.

Our yields for the first couple of weeks, January are down by half a percent.

You may have seen that we recently realigned our schedule between Seattle and six California cities to make our service even more convenient for business travelers and to improve our operational reliability and efficiency.

We're moving to hourly service between Seattle and Los Angeles with southbound departures leaving on the hour and northcound departures leaving on the half hour.

For service between Seattle and our three Bay Area airports as well as Orange County and San Diego, we've also timed our departures to leave on the hour or half hour with flights scheduled in two hour intervals.

With these changes, Air Group will offer 78 flights each weekday between Seattle and California this summer versus 74 last year.

We started 2008 with 14 MD-80s, all of which will be retired this year.

Seven before the summer and seven in the fall.

The extra dates for two of these aircraft has been advanced by almost 12 months giving the high fuel prices we're seeing.

We also plan to retire two 737 400s on October.

We're looking at the fall schedule now to see if there are further opportunities to pear unprofitable flying and perhaps retire some of the MD- 80s a couple of months sooner than currently planned.

These 16 retirements will be offset by the addition of 17.

The higher seat count and utilization of these airplanes will result in an increase of our main line capacity of about 3%, but a decrease in our departures of about one and a half percent.

Fair seated were very excited about having a single fleet of modern, larger gauge fuel efficient 737s by late fall.

For the year, Air Group's economic fuel expense approached $1 billion, a number that would have been unimagineable just a few years ago.

The fourth quarter was no different with economic fuel costs of $261 million, up $62 million from 2006.

Our fourth quarter fuel expense was positively impacted by $29 million of hedge benefit.

We believe we have the second best hedge book in the industry with 42% of our 2008 consumption hedged at $69 per barrel.

To provide some perspective on the impact of Alaska's fleet modernization, we flew 4% for seat miles in 2007 than in 2006 and burned exactly the same amount of fuel.

At current raw prices of about 280 per gallon, this equals annual savings of $40 million.

This represents only one year of a multi-year transition and it is an annuity that we will enjoy for many years.

Our cost efforts have been helped by a number of technology.

First, as we told you last quarter, we unveiled the first pod of our airport of the future in Seattle in October and we look forward to opening the next two pods in February and June.

We had our first 50% month in alaskaair.com in October and we now regularly check in more than 65% of our customers at our kiosks and over the web.

Looking at 2008, we expect our CASM ex fuel to be about flat at approximately $7.5 were ASM.

This number could change modestly as a result of our fall schedule review.

We expect costs to be flat rather than decline, because we're seeing pressure in wages, contracted services and maintenance, as we enter a period where we'll have significant airframe overhaul work on our 737 400 fleet, and engine work on our older next generation aircraft.

Fortunately, we'll continue to realize the benefit of our fleet transition which should hold maintenance cost increases to about 5%.

We also expect to see a 14% increase in depreciation, as a result of the new 737 800s.

For the first quarter, we're currently forecasting main line CASM ex fuel of $7.08 again, about flat compared with the first quarter of 2007.

I'll close with a few comments about our capacity purchase flying, the majority of which is covered under an agreement between Alaska and Horizon.

Revenues in these markets fell short of cost by $8.8 million during the quarter, bringing the full year deficit to $21 million.

The markets included are both flow markets, which provide connecting traffic to Alaska, and local or harmonization markets where Horizon's recent jets were used to maximize returns or minimize losses for Air Group and allow Alaska to deploy its larger jets on other routes.

Generally speaking, revenues in the flow markets are close to cost, but revenues in many of the harmonization markets fall short of cost.

We are evaluating several alternatives to improve the performance of these markets, including reducing the size of CRJ fleet, moving some of this flying to the Q400 fleet and having a portion of the harmonization flying down by a third party with larger, more efficient units.

To give you a sense of scale, we have 20 long-term CRJ700s and approximately 12 of these are deployed in capacity purchase markets.

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

Great.

Thanks, Brad and good day, everybody.

Horizon Air reported an adjusted pretax loss for the quarter of $11.2 million compared to a loss of $500,000 in the fourth quarter of 2006.

For the full year, we reported an adjusted pretax loss of $19.5 million compared to a profit of $23.2 million in 2006.

Contributing to the losses in both the quarter and the full year were extraordinary costs associated with our fleet simplification, record high fuel prices and a highly competitive fare environment in many of our brand markets.

Adding to the burden was an increase in planned engine overall activity that added about $16 million in expense over the prior year, as well as the challenge of integrating several CRJ back into our native network on their return from frontier jet express service.

While we knew going into the year we'd encounter many such headwinds we're clearly not satisfied with these results and have a sense of urgency to make the changes needed to turn off performance around to achieve adequate levels of return.

We believe the major changes we made in 2007 to our fleet, our fare structure, and our business model were appropriate and necessary to lay the right groundwork for our future success.

We remain focused on improving our cost performance and on further developing markets to improve profitability.

As we shifted capacity away from the low CASM, low RASM frontier flying to higher RASM and CASM flying for Alaska in our own brand, we began to report changes in capacity, load factor, yield, and RASM by line of business to provide more transparency.

You'll find information about our product mix changes in our lines of business section of the press release.

Our total revenues for the fourth quarter were higher by 14.5%, or about $23 million, on 10.3% growth in system capacity.

Approximately half of the revenue increase came from our brand flying with which ASM growth of 30%, produced a load factor that was four points lower than in the prior year period.

This combined with a 7.7% yield decline to lower our RASM by 13.7%, which was offset to a large degree by our 13.4% decline in brand CASM ex fuel.

The growth in our brand flying was driven by upgauging from Q200s to Q400s and by redeploying some of our returning frontier CRJs to longer haul competitive markets.

ASM's dedicated to our Alaska capacity purchase flying increased 40%, also as a result of upgauging and integrating CRJs.

Some of these assignments served to pre Alaska jets to pursue the expansions Brad just mentioned.

Currently, 61% of our capacity is assigned to brand, with the remainder dedicated to Alaska CPA.

On the expense side of the quarter, $30 million increase in adjusted operating costs represents an 18.9% jump over last year's fourth quarter.

Nearly $18 million of this increase was in fuel, most of which was rate related, but a portion of which stemmed from increased consumption associated with our migration away from frontier flying.

You may recall that fuel and some other expenses were covered by frontier in that arrangement.

We also incurred $3.5 million in additional Q200 fleet transition costs and $4 million in non-fuel expenses associated with moving CRJ flying from frontier to Horizon.

Despite the product mix changes and charges associated with the Q200s, our CASM ex fuel was lower by almost 1% and down by 3.2% if you exclude the fleet transition charges.

This was a bit better than the guidance at our last 8-K.

During the quarter, we saw a progress on a number of major initiative launched earlier in the year.

As you'll note from the table in the press release, fleet simplification was a key activity driver for us in 2007.

All up, we transitioned 11 Q200s out of the fleet and took in 13 new Q400s in addition to reintegrating the 9 CRJ700s that had been assigned to frontier.

Over the next year and a half, we plan to transition our remaining 17 Q200s and make way for the remaining 15 Q400s that we have on firm order.

These fleet changes allowed us to simplify and lower our fare structures in the third quarter to stimulate local traffic and expand our ability to accommodate fleet for Alaska and our other partners.

We expected RASM would decline, but that CASM would decline even more leading to higher unit profitability on capacity growth.

In general, The early returns are promising.

Some markets responded immediately.

While others are taking more time and promotional investment.

We continue to monitor each market's response and have been actively adjusting fare levels, schedules and capacity where appropriate to maximize market profitability.

Also during the quarter, we also received approval to begin operating in Mexico which we put to work in the L.A.

[leredo] market last week.

In 2008, we expect our overall capacity to decrease by about 4% as a result of six planned Q200 retirements and return of one CRJ on a short-term lease.

However, the year-over-year changes in mix will drive capacity increases in both our brand and CPA lines of business.

Accordingly, we've already taken steps to further trim and redeploy capacity to maximize profitability within our network including reductions in Boise and Spokane to support.

2008 promises to be a much quieter year in terms of operational change.

Retirement charges are estimated to dekeys by $20 million respectively.

Another item was the estimated $5 million revenue loss associated with the Q400 landing gear inspections in September of last year.

Still, our goal remains achieving and sustaining returns that are appropriately compensate our investors and that fund our future.

Our plan reflects the urgency and importance of that commitment with numerous major cost reducing and revenue optimizing initiatives under way in all divisions.

On the expense side, we're focusing on areas where expenditures are high and improvements are highly leveraged across the organization, applying lean process improvement, technology applications, and best practice benchmarking to drive costs down and productivity up.

On the revenue side, our efforts will add rigor to our revenue management processes and some marketing efforts targeting market specific RASM improvements.

These efforts to improve passenger revenues are supplemented by plans to grow cargo and contract service revenues.

Looking further down the road, we're mindful of the challenges but confident in our plan, our people and the groundwork we're laying for the future.

The investments were making just simplified fleet, will position us to be more competitive in this new era of high oil prices and customer demand for value.

As we continue to track the performance of the Q400 as a replacement for Q200s, we believe the Q400 also what has the potential to improve the economics as much of the flying we're currently doing with the CRJ700, particularly in the current environment of high fuel costs and downward pressure on yields.

Early indications are compelling, with the emerging thesis being that the economic benefits to Horizon of further fleet simplification, moving from a mixed fleet of CRJ700s and Q400 to a single type Q400 fleet may outweigh the benefits and flexibility that our current mix affords.

Accordingly, we're actively investigating the pros and cons of a single fleet concept in coordination with a broader AAG capacity planning efforts that Brad referenced earlier.

For the first quarter, we're forecasting a 1% increase in ASMs with CASM ex fuel of $15.6, up 1% versus 2007 first quarter.

This expected unit cost increase is a result of the product mix shift I described earlier, offset by a reduction in engine overhaul activity and by the improved economics of the Q400 versus the Q200 stair replacing.

Now, let me turn the call back to Brad who will take you through the Air Group Balance Sheet.

Thanks, Jeff.

Air Group ended the quarter with $823 million in cash and short-term investments, down about $190 million from our balance at the end of 2006.

We generated $482 million of cash flow from operations during 2007, and had proceeds from new financings of approximately $280 million.

Both of which were offset by capital spending of $770 million, and debt repayments of $130 million.

Almost all of the capital spending this year was related to advanced deposits and delivery payments for the 14 737 800s and 13 Q400s we took delivery of.

We currently expect our capital expenditures to be $570 million in 2008 and the good news is that by end of this year, our $2 million fleet transition will be complete and our required capital spending will decrease materially.

During the year, we made contributions to our defined benefit pension plans totaling $52 million, bringing our contribution since 9/11 to $368 million.

On a PBO basis, which is the most conservative measure, we're now funded at approximately 86%, up from 80% in 2006, and 65% in 2002.

On an ABO basis, we're approximately 97% funded.

Through December 31st, we repurchased $2.6 million shares of our stock for $63 million and through yesterday we have repurchased $3.3 million shares for approximately $80 million.

These purchases were made in an average price of $24.06 per share.

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

Thanks, Brad.

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

Lupita, would you please assemble the [ros] for us.

(OPERATOR INSTRUCTIONS).

Your first question comes from the line of Ray Neidl.

Good morning.

Good afternoon.

Hey, Ray.

Basically, I think you said that demand in most of your sectors still looks like it's pretty strong going to the first quarter, Mexico was weak.

I'm just wondering what you're seeing as far as the competition looks on the West Coast, particularly in the key Los Angeles market.

Ray, this is Brad.

Maybe I'll start and see if Greg wants to chime in.

I think the basic point you're making is the right point.

Demand does look fairly good for us.

As we look forward, I think advances are up by three points in January and February and a bit more than that in March.

Regionally, there's strength in Alaska, in our trans con markets, in Canada, in Vegas and Phoenix and there is some weakness in Mexico, as you point out.

If we talk about competition, there are both increases and decreases.

Out of Seattle, I think everyone is aware that virgin is going to start four Los Angeles flights this spring, three in April and one more in May, and three San Francisco flights and there are some other modest increases.

Southwest has got a couple of frequencies into San Jose and Sacramento and they've got new service into Denver.

Those are year-over-year comps.

I think the important to point out there are a lot of decreases as well.

You know, in the L.A., United is one less flight.

They have one less flight into San Francisco.

In Denver, both united and frontier are dropping a flight.

Competitors are dropping a couple flights into Chicago.

They have a flight down Dallas.

They have a flight down.

Can you get the picture?

So, there is an increase in capacity into San Francisco and LA.

These are very, very important marks to the company that we are going to defend.

But I think, apart from that I think the picture is not particularly bad.

Greg, is there anything you could add to that?

No, I think it's worthwhile repeating the fact that 25% of our capacity to and from California and the Pacific Northwest.

And so, as Brad said, these are important markets for us to defend them and we're going to do that adress everly.

You only have to look back at history and see the mistakes that were made in Atlanta perhaps a decade ago when one airline didn't do much to defend its turf when a second carrier entered.

We're not going to allow history to repeat itself here in Seattle.

Okay, great.

Regarding Horizon, seems like it's still being a heavy drag on the company, even though you're making major adjustments.

Is there any thought of doing something more radical.

know you don't want to sell it because it's part of the Alaska Air Group, but have you ever thought of selling part of it off to a SkyWest to give it greater economics of scale and maybe give it a little bit better chance of competing across the whole spectrum.

Ray, this is Bill.

We really haven't.

I mean, our focus here, as you said, Horizon is an integral part, it's a strategic part of Air Group and the relationship with Alaska is really important, both from a flow traffic perspective as well as these harmonization markets and the focus is on making all that work and that's got 100% of our attention.

This is Jeff, Ray.

I think it's really important to point out that, you know, strategic as the arrangement is, it's [incouple bent] on Horizon to be a competitive partner in the whole process here too.

So, all of the efforts we cited are supported by short-term, you know, just blocking were continuous improvement on cost, efficiencies, and then the structural stuff we talked about as well.

A huge effort in maintenance and engineering is going on this year as well that is partly related to simplification and lean, but all in all, that's where our attention is focused.

Great.

Brad, did you give us a fuel cost estimate by quarter?

Might ask Jay Schaefer to handle that.

Are you looking historically, Jay or are you looking for the future, or Ray.

The future.

Okay.

Hey, Ray.

That's a hard one.

I know.

You know, Ray, we have the same forward curve you have.

So, I won't give it to you by quarter.

I'll give you what we put in our forecast, which is $87 a barrel.

That will be wrong.

I just don't know whether high or low.

But let me give you our fuel hedge positions by quarter.

Then maybe you can work from there.

We're 50% hedged for Q1, at almost 67, $66 a barrel.

Q2, 50% hedged at $72 a barrel.

Q3, 30%, 3 -- excuse me, 33% hedged at $68 a barrel and Q4, 34% hedged at $68 a barrel.

Great.

Thank you.

Ray, in terms of our crude assumption for our plan for whatever it's worth, we assumed $95 a barrel in the first quarter, going down by $5 a barrel each quarter after that.

So, 95, 90, 85, 80.

That gets to the $87 figure Jay mentioned.

You next question comes from the line of Christopher Cuomo with Goldman Sachs.

Hello, everybody.

Hi, Chris.

Just wanted to have a cost question here.

First, could you just remind us of your goal, your 7.25 main line CASM ex fuel goal, what's you're timing around that and how confident do you feel in sort of meeting that goal?

Yeah, Chris, maybe I'll start, maybe we can get Glenn Johnson to chime in here.

But I guess we look at this as what is going to be required for this company to be successful and have an answer to all of our competitors and we started five of six years ago when our costs were $8.73 and put a goal out of $7.25 and nothing has happened to change our belief that we need to get to 725.

In fact, we still think that we probably need to get lower than that.

So, we just kind of start with that requirement.

And then, you know, we didn't file for bankruptcy.

So, the idea of defaulting on our pension plans or -- we took charges through our P&L when we got out of the fleet transition.

So, the improvements that we're getting come from procurement efforts or efficiency or better real estate utilization.

That sort of thing.

So, maybe directionally, the 725 is still a goal as we set the goal for 2008 is flat.

We can talk about why that is.

We're not giving a specific time frame for 725.

But that's -- maybe that's a little bit of a big picture sense of where we need to go.

Glenn, maybe you could chime in on some of the things, the opportunities we have in front of us to get costs down.

Sure, I'll be happy to, Brad.

So, I guess we look at this from kind of a couple different perspectives.

On the CASM ex fuel, I'll talk about fuel in a second but there's really two may focuses kind of our supply chain management efforts and our lean manufacturing principles.

Just to remind, we've been on this lean journey for a couple years.

We really are trying to remove waste in any form, time, effort, dollars, material.

And that's a journey that we've been on.

We now have specialists in every division working on those projects.

Some of the areas that we're going to be specifically focused on this year, to be looking for lean efficiencies would be in our engine maintenance, agreements prior by the air type agreements, our ground service handling contracts, our real estate footprint, our efficiency of real estate usage, both from a square foot usage as well as rates and with particular focus on our Seattle and Portland hubs where we think we have particular opportunity, airframe overhaul efficiencies from a cost perspective.

Our operational improvements that Bill mentioned in terms of improving our operations with a real focus on Seattle.

We think we'll bring cost down in the areas of passenger enumeration and employee overtime.

There are significant benefits to be realized as we complete our single fleet transition, both from the pilot efficiencies in training and reserves and in the fuel line clearly because of the MD's or the -- being out and the more efficient 800s replacing those.

We continue the leverage in terms of our airport of the future that Bill mentioned, 40% improvement in through put of our customers in Seattle and alaskaair.com improvements as well.

Chris, I might just add.

Our initial plan back in late '06 had growth around 6%.

We're now planning 3% growth for this year.

That puts pressure on CASM obviously.

The other really big picture thing that I think Brad said was once we decided we weren't going to do this via bankruptcy, that by definition mean it takes longer to get the costs down.

In some respects, I think it's harder.

Hopefully, you know, we're doing it more with our people, working together to find these savings and make process changes and it's longer than any of us would like, for sure, in terms of realizing the CASM reductions but we're on a steady path, we've got a very nice trend line and we intend to keep moving down that trend line on CASM.

I appreciate the detailed answer.

Then, let me just throw one out on a popular topic of consolidation.

If we were to assume that Alaska is not directly involved in consolidation, just curious how you believe your airline is positioned, you know, what are the challenges, what are the opportunities presented to you in a -- if the U.S.

industry were to -- airline industry were to consolidate?

Chris, Bill again, I think everybody knows our position on consolidation which is for us, we think our best future is to remain independent.

We think that's best for all of our stakeholders and particularly for the state of Alaska where we have a mission that's beyond just economics there.

It really is a community effort to provide service, passenger, and cargo service to a lot of communities that otherwise wouldn't have it.

We all feel that's pretty darn important and probably wouldn't be continued if we were bought by a big carrier.

But we also understand that we have to perform, otherwise somebody else might make that decision about our remaining independent.

Having said that, the world may very well be changing and we need to follow what's happening closely and keep track of events.

So that's -- in terms of positioning for other people making changes, I think we feel pretty good about that.

I think that to the extent there are domestic -- industry-wide, I think we are also of the belief, as most of you are, that some consolidation could be healthy to this industry, to the extent that it results in less capacity.

Capacity is sort of the root of all evil.

Too much capacity is a fundamental problem with this industry and has been for a long time.

So, we're in favor of some industry movement.

We just don't think it's right for us.

We do think we're well-positioned with our partnerships that we have, our alliances that we have with some of the big carriers, and the extent that they may be relooking at their networks, both domestically and internationally, there might be some opportunities for us in that.

Great.

Thank you for your time.

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

Hey, good morning.

Good morning, Jamie.

Bill, I appreciate the 10% ROIC target.

I've actually been trying to pin down many of your competitors as to what sort of return, they target and how they measure that progress, but I haven't had much luck in that regard.

I'm not going to hold you to this number, but do you have a plan and maybe it's not the plan that's in front of you right now, but a plan that nonetheless gets you somewhere close to this return in an $85 soft -- $85 oil soft economy type environment.

It's a good question.

And we're certainly -- I think the first thing to say is that we recognized the need, the need to strive for 10% and so we've got a lot of pressure coming to work every day to keep working both the cost and revenue side of the equation.

So, I think that's really important.

I feel really good about the fact that our team understands the importance of that goal.

Then you get to how do you execute on that, how do you actually get there and what are the things you can do and we don't have all the answers right now.

We're certainly trying to work both sides of this.

You know, as hard as we can.

We are frustrated with the yield side and with the prospect of a softening economy here in '08, you know, yield improvement is going to be tough.

We've got to continue to work on that.

We've got to understand the segmentation of our markets, business and leisure traffic mix and all that how can we get an extra dollar or two in various markets.

At the same time, we've got some new competitive incursions and we're going to take those very seriously to [grace] point of value.

You don't just pretend that somebody isn't there and they are and they could be growing in your backyard and we're not going to let that happen.

So, that aligns up to say , I think we can taklk about LA we talk about - let's have good relative performance to the industry but certainly as you go out beyond '08 we understand that you have to have not only good relative performance but good absolute performance and make progress against this 10% goal.

We don't know exactly how we're going to get there but we're intent on doing it and we're going to find

I appreciate that.

As a follow-up I guess to the earlier consolidation question, you know, the deals that are being popularly discussed today are of a magnitude that are almost certain to result in at least in my opinion DOJ mandated divestitures.

So I'm not asking you about our participation in a sort of deal making perspective.

You already answered that question thoroughly.

But with a stronger Balance Sheet than most, should we assume that you are both capable and interested in stepping up to the plate, if sufficiently lucrative assets are put up for sale?

You know, we're going to stay awake here.

If there's opportunities, over our 75 year history there's been opportunities, we're going to look at those things and do things that are in the best interest for our long-term for all of our stakeholders.

Okay.

I appreciate the clarity.

Thank you very much.

Your next question comes from the line of Mike Linenberg with Merrill Lynch.

Hey, good morning, all.

Hi.

Just two questions.

Brad, when you were going through the forward book you indicated that advanced bookings were running up, call it three points but largely due to Hawaii.

I'm curious if you were to strip out Hawaii, what does that number look like and maybe sort of as a corollary to that, you did indicate that yields were running down a half a percent.

Presumably the Hawaiian service while [having] the bookings, it's probably also pressuring you.

So if you could just pull that piece out.

Sure.

You know, bookings, Mike, are okay.

Hawaii books earlier than the rest of our markets.

So Hawaii is changing the nature of our booking curve.

o, I guess we wouldn't right now, if we were up, three, three and more than three for March, we wouldn't currently forecast that we would end up that good because Hawaii books early.

But if you look around, I think I already mentioned that we see strength in the Alaska long haul.

We see strength in both Phoenix and Vegas.

We see strenth from the trans cons.

And candidly, we dont see big negatives anywhere in terms of our market, in terms of teh bookings.

On the yield side I think you make a fair point.

The yield on a 2500-mile flight is considerably lower than our system average.

The long haul flights do put downward pressure on yields.

Okay.

And then just my second question, you know, you spent some time highlighting a lot of the macro issues.

I mean, it's coming up on a lot of these calls.

You know, you are growing at a decent clip in the first quarter, although it looks like it's really a lot of this new long haul stuff kicking in.

It wasn't in place a year ago.

As you move through the year, your supply does come down.

You did hint several times, I think Brad and Bill, that you were going to look to the fall, maybe as an opportunity to pair further.

I want to explore that a little more.

Is the proper interpretation that basically the schedule for the most part is set in stone for the next six to nine months and that's largely a function of the fact that you have a lot of airplanes coming in and it would be more difficult for the sizable amount of airplanes that are also going out maybe to accelerate that.

What sort of flexibility such that if things really slowed that forget about the fall, you could address it, you know, within the next couple months, you know, call it a March, April time frame?

Yeah, you know, one thing to keep in mind, Mike, is we are more seasonal than most of the airlines out there.

Even in a pretty lousy year, which I don't think we're currently seeing for 2008, our company does very well in the summer months.

I'm not sure that we think it's profitable to talk about a lot of capacity reductions for the summer months, which are really bread and butter months.

So that's one of the things that pushes us to the fall.

The other thing is we do have the seven MDAs that will fly through the summer and they currently are scheduled to be phased out of our fleet kind of on a pro rate basis in September, October, November, December.

So, if you want to make a capacity reduction, that's an easy place to look instead of doing a scale down through the fall to do them a little bit earlier.

That's maybe the main thing we're thinking about at this point.

Okay.

Very good.

Thank you.

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

Good morning, everyone.

Bill, I know in the past you talked about -- you've given sort of your outlook on profitability and sort of factoring in some the cost guidance and new competitive incursions and changes, I guess it looks as though '08 could be another down earnings year for Alaska, second in a row.

I guess how -- what's your early read you feel -- would you want to comment on that?

Do you think it's -- that's unreasonable to -- that that could happen?

You know, we don't obviously give earnings guidance per se.

We've given you some of the pieces of the puzzle and some of the color around it.

We're just all focused every day on doing what we can to run a great airline and optimize revenue and keep downward pressure on costs and I think that's all the guidance we should give you right now.

Okay.

Brad, in the CASM ex fuel guidance, does that assume any changes to labor contracts?

You know, we don't -- Frank, we don't normally get into details like that in terms of the CASM guidance that we provide.

So we should assume it's sort of steady state, current contracts?

Bottom line is we don't normally give guidance in terms of assumptions like that that underlie the guidance.

Okay.

A lot of the other airlines do talk about that.

You know, I think in the second quarter of '08 you have a new policy change on the mileage expiration for the frequent flier plan.

Do you expect that to have a RASM benefit in 2Q?

Brandon Pedersen, our Controller to address that.

The expiration change will take place in April and at this point, we expect that probably three to 4% of our miles could expire.

There's some initiatives under way to make sure we reach out to customers and try to re-engage them so that may change.

If we do expire that number of miles, there would be a benefit that comes through in RASM, although that might be coupled with a change in our breakage assumption, so we're really not sure of the net effect.

We're kind of looking at that right now.

Okay.

Great.

Thanks.

Peter Jacobs with Ragen McKenzie has the next question.

Thank you.

Good morning, gentlemen.

Good morning, Peter.

Brad and Bill, when I think about the fuel costs or the cost guidance ex fuel for 2008, I guess I'm a little surprised and a little disappointed that there won't be continued progress made on that front and the take-away from the last couple calls has been, at least my interpretation is that progress could probably still be made there in 2008.

So, perhaps if you go through the three items that you talked about in terms of wages, maintenance and contracted services and help me understand if there's been anything now that has come to light as you're looking at 2008 that maybe wasn't there mid-year 2007 that has kind of put the brakes on progress on that front, please.

Sure.

Maybe I'll start and see if Brandon or somebody wants to jump in here and help Peter.

As we look at it, wages, you saw a significant reduction this year if the variable incentive pay.

We would probably budget that at more of a targeted level as we look forward.

On the wage line itself, there isn't major changes in terms of our assumptions but many of our people do get step increases and some of our benefit lines are having increases so there's increases aren't really material to the wage and benefits line but they do nudge CASM up a little bit.

Contract services, basically all of our -- we are doing some -- essentially all of our growth is growth out side of Seattle where we don't handle ourselves.

So that's pushing the contract services line up a bit.

Maintenance, the 737 400s are entering.

I think our folks in maintenance have done a terrific job managing those costs down over the next several years and we're much more competitive today than we were a few years ago.

But we are looking at a year next year where there's a high level of overhaul work for their 737 400 fleet and also engine overall work with our older 737 next gens and finally depreciation I mentioned is up 14%.

That's $20 million or almost a tenth of -- 10 basis points of CASM.

So those are the increases.

I think the big thing is we look at it and say why isn't that going down, it's probably not those increases.

It's just the lack of other decreases that are funding it.

So, Glenn got to some of that stuff that we're going to be looking at.

We're going to be looking at the procurement at the supply chain, what can can we do with engine agreements, what can we do with airport costs.

I guess another big thing to talk about is that a primary focus for our company in 2008 is on improving our operating numbers, so improving our completion rate, improving our baggage rate, improving our on-time arrival rate.

o, we are making investments across the board on that and i guess our views with that short-term investment and long-term payoff.

I don't know, I think all of us can see the payoff of those improvements down the road but we're not budgeting them in 2008.

Okay.

Two other quick questions.

First, raw fuel prices that you're seeing at the airport now?

This is Jay.

So, if we assume sort of 87 to $90 a barrel, that would -- with hedging would put us at about 253 to 255 a gallon.

Do have you a number,Jay?

I'm sorry?

272.

272.

Thank you.

And then for Jeff, when I look at the higher fuel consumption per ASM at Horizon which you did speak about in your prepared presentation, is that a good kind of rate to think about going forward now?

Well, we're going to continue to have some year-over-year shifts in mix as we get to the point where the frontier experience is completely behind us, Peter.

By the end of the year we'll be there.

But the difference is, of course, we purchase and consume the fuel on our books for brand and CPA versus what was there for frontier.

You'll see that you have to do the math on both rate and volume and then we'll -- the volume part of that will continue to Peter out.

The fuel burn per ASM, are you saying that could continue to step up as we go through the year?

Well, the fuel burn per main line ASM for Horizon should continue to come down as we introduce more Q400 in place of 200s.

They were looking at just as last year about a 4% efficiency gain on CASM, fuel CASM and we expect that to continue going forward.

All right.

I might have to take that offline with Shannon or you.

I'm showing that the fuel consumption per ASM was up about 16% year-over-year.

I'm just kind of curious on how that would move forward for the entire operation.

Just to be clear on that, we didn't -- when those airplanes were flying for frontier, we didn't buy the fuel, we didn't show the gallons and the come back, the mix changes and so we were buying the fuel and showing the gallons for those airplanes.

The '08 plan, all of the airplanes are flying for us.

In '07 they weren't.

I guess the question I was driving at was the rate that we saw in the fourth quarter, is that the appropriate rate then to be using in 2008 or could it continue to step up until to the transition is completely done?

That's the right answer, Peter.

He with had frontier flying going through November 28th.

Fourth quarter was affected by that.

Thank you.

That's all I have.

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

Hi.

Good morning.

I'm wondering what your thoughts -- maybe this is for Brad.

I'm wondering what your thoughts are about how much passengers would be willing to pay for on-board Internet service and then related to that, what that could potentially mean for Alaska and of course any timing.

Dan, this is Greg.

Maybe I'll take that, since row 44 is a project that my team is working on.

We're going to test what price sensitivity is to that type of a feature.

We're hoping for a first aircraft sometime in Q2.

And we're going to look at a variety of different pricing models, ranging from per use to a subscription model and we'll see how the numbers work best for us.

Okay.

And then I guess separately, it sounds like there are a number of potential changes here at Horizon and I'm wondering if you could provide some perspective with respect to timing to any decision about cutting RJs or outsourcing of flying and then related to that, whether labor input would be required for any change.

Dan, I think what we probably want to stick largely with what we said in our prepared remarks there.

Well, we basically said we're looking at that flying and we're not satisfied with the returns.

We're looking at the idea of helping Horizon move to a single fleet.

We're going to do an analysis.

That analysis is going to take all of these things into consideration, alternatives, what they would look like, all of the issues, the financial issues and I think probably what we would say is you should expect to hear more from us about this.

We'll at least give you an update on next quarter's conference call.

I see.

Okay.

That's it.

Thanks very much.

We have time for one more question and then Alaska's Managing Director of Corporation Communications, Caroline Boren will conduct the media portion of the call.

Your next question comes from the line of Robert Toomey with E.K.

Riley Investments.

Hi.

Good morning.

Number of my questions have been answered.

Just a follow-up to that last question for Jeff, really, you spent some time talking about the initiatives you're taking at Horizon to improve your operations and I know you can't go into a great amount of detail, more than what you said earlier, but can you tell us your relative level of confidence of how much you think you can accomplish in '08?

I mean, should '08 be significantly better or materially better operationally than '07?

You mean in terms of our operations costs, Bob?

In terms of your overall performance, bottom line performance.

Yes, yes.

I think the answer is yes for a couple reasons.

First of all, I cited the timing issues, the overhaul activity that's going to subside by about $20 million, the related benefits of moving more Q200s out of the fleet and sorting out investory, getting simplicity in that front.

That's going to drive it as well.

As we move toward two fleet type operation, we're starting to get better line of sight to the overhead reduction benefits that accompany that, in terms of inventory and training programs, et cetera, so we're confident that that's going to materialize as well.

In the look, though, we have recognized particularly in maintenance and engineering that we have relatively high costs related to complicated three fleet type of support operation.

We do an excellent job.

Our people are terrific.

But for spread across 65 airplanes, three fleet types, it drives a lot of cost that we'll take care of as we further simplify.

So we have a lot of confidence in that front.

Challenge on the unit basis of course is to produce on a declining ASM base.

We're coming down 4% overall this year, even though there's significant changes on brand and CPA because of the returning frontier aircraft.

So our budget for this year has many, many stretch elements in it to keep -- to even a flat CASM because of that decline.

Every division is participating.

They're all stretching hard and working very hard.

I think most of my confidence lies around the great work that's happening process-wise with a view to the future toward greater simplicity.

Great.

Thank you.

And one other question.

Other expense was 63 million in the quarter.

That was higher than what I had modeled and up quite a bit from the fourth quarter.

Was there anything in that -- can you explain what's in that number and is there anything that was sort of a more non-recurring type nature in that 63 million?

Yes, Bob, this is Brandon.

Let me get oriented here for just a second.

So you're looking at other expense on the Alaska side or I guess I didn't quite follow what you were asking.

I guess it's consolidated, look at the top, the consolidated number.

I believe it shows 63.

And that's up quite a bit from last year and quite a bit more than what I was modeling, up quite a bit from Q3.

So -- just wonder if there's anything in there of a non-recurring nature or why was it up so much.

It really was a a hodgepodge of things.

Did I say income?

I meant expense.

Other expense.

You know, I'm looking at the detail.

It really was a whole bunch of stuff.

One of the inflationary pressures that we've been seeing all year is in the area of crude hotel costs.

That was up 15%.

That's been as I said something all year.

We had a number of consultants and they are working on various projects.

Those expenses were up $2.5 million a year.

We've seen some cost increases in property taxes as we bring on new 800s.

But there's offsetting that, there's been some nice declines in liability insurance and a couple other things.

It really is a whole host of things.

Some of them were one-time in nature, some of them are ongoing.

And one last quick question, if I can.

And you mentioned that the competitive situation in I think Los Angeles was more difficult.

Can you kind of give us an update on what Delta has been doing in the LA to Mexico market?

Yeah, Bob, this is Gregg Saretsky.

They have been actually pulling back.

They've taken a number of their services out of LA from daily to couple times weekly.

I'm thinking specifically in La Paz, Orlando, and Manzanillo from Los Angeles.

Capacity's been shrinking year-over-year.

It's been shrinking.

Okay.

Thank you.

Alright, this is Caroline Boren.

We now have time for questions from any journalist participating today.

Lupita, would you please our callers of the procedures for asking questions.

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

Your first question comes from the line of Elizabeth [Glisten] with [Associate Price].

Hello, Liz.

Hello.

This is a question for Brad or Bill.

Brad, you mentioned that a $15 fare increase would be needed to basically cover your costs.

I'm wondering if you could describe what kind of resistance you're seeing from passengers.

Can you quantify like how much of a fare increase prompts a dropoff in ticket purchases?

I'm just wondering how you're trying to get to point where you can start to recoup some of those costs.

Sure, Liz.

I'm going to start.

Maybe we can get Greg to chime in here as well.

The first thing I would say is that this is an industry issue.

It's not just an Alaska Air Group issue.

$15 is pretty significant on a fare of roughly $140 that's pretty material.

It will be difficult without either a significant capacity reductions or a very strong economy.

In terms of what we are seeing, you know, we've had -- we've been working this really hard.

In terms of some of the things we've done, we've been working to structural fares, we've been kind of poking around, trying to get fares that we think are -- we want to keep the value proposition the company has but recapture the higher fuel.

So we do have $20 increase we got through in the Seattle Anchorage market.

Into Alaska we've got 5 or $10 increases.

Some of the trans on markets we've got increases in the 10 to $20 range.

Other markets where there's really intense competition we've had less success getting through increases.

So it's -- I don't know.

I guess we think that we have the same problem that every other airline has that when fuel -- our fuel bill's gone from $300 million a few years ago to what will likely be over a billion dollars next year so the fares have to go up but for that to happen for the industry, I think we either need a strong economy or fewer seats flying around.

Gregg can -- do you want to add to that?

All I'd say is that we're seeing demand staying pretty strong and corporate accounts are telling us is they expect their travel in 2008 to continue at levels equal to what they were doing at '07.

But there is pressure on them to buy down, to shop in advance and take advantage of lower fares.

Getting an increase in a market place where our biggest corporate customers are telling us they're buying down and our fare structure is what actually moves us in the wrong direction.

One more question if I could.

Mexico has been such an important market for you.

Can you describe why you think it was soft this quarter and what changes you're making to improve performance in the coming quarters?

Yeah, Mexico was soft only because we have a case of supply exceeding demand.

Last year, the bilateral between the United States and Mexico was liberalized and we had they new competition entering every single market that was available under that bilateral liberization.

Now, what were seeing is some of the resources that rather were not successful.

Frontier is suspending service from Los Angeles to Los Cabos, and Delta has been pulling back a number of services off to West Coast and Mexico as well..

It remains to be seen what happens as a result of those bilaterals being vacated.

I think there are other airlines that are sort of taking up to take advantage.

So the situation of excess capacity will likely endure for the foreseeable future.

Thanks.

Maybe just to -- on to that fare increase question, this notion of fares need to go up 15 bucks to cover the increase in the price of crude, that $15 assumes that it all has to be made up on the revenue side.

One point we would make, and I think Continental Airlines made this point as well, when we replace an MB80 with a 737 800, our cost -- our fuel cost per passenger goes down by $15.

Obviously, way can't do that for 115 airplanes.

But in terms of where the company's positioned, it's not like we have to make up all of these problems on the fare side.

There are other things we can do to help our profitability.

Your next question comes from the line of Susanna Wright with Bloomberg.

Hello, Susanna.

Hi, there.

I know you guys have said all along that you prefer to stay independent.

But most CEOs have said they are at least considering consolidation or studying partner possibilities or language like that.

Are you guys in the mix anywhere or are you truly just staying out of the fray and watching it all?

Yeah, Susanna, Bill again.

I'd just reiterate what I said earlier.

Our long-held position on this is we think our best future is as an independent carrier.

We think there's a very viable position for us, given the nature of our network and especially the state of Alaska markets.

But also, you know, the world is changing.

We've just got to stay up to speed on what's happening around us.

But we think that's our best path.

The other thing is, as we looked at mergers in the past and maybe it would be different in the future and we hope it would for the industry's sake, but the actual integration of two companies, two airlines, is very, very difficult.

It's difficult from a technical standpoint with systems, for example, systems that need to talk to each other so the combined networks operate well for customers.

It's also proven be very difficult from a labor relations standpoint and the integration of pilots in particular and seniority lists and I think if you're staying abreast of what's going on at US air, you see, sample today of how difficult this is.

Typically, some of the planned synergies, the planned economic benefits of these mergers in the past, anyway, haven't been realized because of the difficulty in actually getting it done.

So we're kind of -- we watch that and we say boy, that's difficult.

But moreover, we think we have a good path remaining independent, but it does require that we continue to execute our plan and that's where our focus is.

Okay.

And you kind of looked at benefits that you would see if there were consolidation elsewhere in the industry.

Could you maybe expand on that, more so than just bringing down capacity which obviously would help everyone.

There's so many different combinations and possibilities, I really can't speculate.

e are an opportunity is particular carrier and when there are opportunities in the market place, we have a history of trying to take advantage of those, where it works for us, where it works for everybody involved, customers, employees and shareholders.

And so, you know, we're going to just continue to watch and where there are opportunities, if there are any, either in markets or whatever, we'll be evaluating those things.

It's not as though we are blinders on here and we don't want to hear about what's going on around us.

We understand we're part of the industry.

And we need to be aware of what's happening, if that does produce opportunities for us, then we'll be looking at that.

Okay.

Okay.

And then just lastly, a different topic, if you could just explain for me in sort of a layman's summary, if you're using less fuel and getting all these savings from the new planes and your hedging is second best in the industry and fares are up and all of that, can you just briefly describe why the adjusted loss by so much?

You know, Susanna, the fuel increases are -- I mean, I just would reiterate that the fuel increases are huge, that this industry has sustained over the last four or five years.

We've gone from fuel, if you go back a few years ago, fuel at $25 a barrel, for our company $300 million, to economic fuel that pushed a billion dollars this year.

So that's why we're talking about fare increases and that's why we're talking about the efficiency of our fleet and all of that.

I think we really do believe that this company is as well positioned as anyone to deal with this price environment but these increases are just very, very big.

I think Jay, do you have some more?

For the fourth quarter, in particular, and I think that's where you're asking about, for Q4 2006 on average, a barrel of oil was $60.

This is all raw.

And in Q4 of '07, it was $90.

So that's $30 per barrel increase and for Alaska Air Group that was, again, unhedged, an $81 million increase in expense and so even with the great hedge position, fuel efficient planes, it's very difficult to completely overcome that kind of a headwind.

That's in the quarter.

That's just for the quarter.

Okay.

Great, thank you very much.

Next question comes from the line of John Crowley with Reuters.

Hi, Bill and everybody.

Potential for divested assets was mentioned earlier and you said you would stay awake on that one.

I don't know if you can add any more perspective.

What kind of assets might make sense for you, you know, what could you swallow without changing your plans?

Yes, we don't have anything specifically, John.

There's just so many possibilities.

The basic point is that, you know, there may be opportunities.

Don't know what those would be at all.

But if anything makes sense for us, again, if it works for our customers and employees and shareholders, then we would be interested.

Whatever it is.

This is totally undefined in this conversation.

Don't know what it is, but we're just not saying no to everything in this environment.

We're saying we're going to be sensible and we're going to look.

If there are opportunities that would work for us long-term we would be of course evaluating these things.

Any company would.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS).

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

If there are no more questions, we can wrap up.

Why don't we do that.

Thanks everybody for their participation and we will talk with you all next quarter.

Take care.

This concludes today's conference call.

You may now disconnect.