阿拉斯加航空 (ALK) 2008 Q1 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Alaska Air Group first quarter 2008 earnings release conference call.

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

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

(OPERATOR INSTRUCTIONS) I would now like to turn the call over to Shannon Alberts, Managing Director, Investor Relations.

Please go ahead, ma'am.

Hello, everyone, and thank you for joining us for Alaska Air Group's first quarter 2008 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 will be happy to take questions from analysts and then from journalists.

Other members of the senior management team are also present to help answer 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 on pages eight and 11 through 13 of our earnings release.

As we reported earlier this morning, the first quarter 2008 Alaska Airlines Air Group lost $35.9 million, or $0.97 per share, versus a net loss of $10.3 million, or $0.26 per share last year.

Excluding the impact of fuel hedge mark-to-market adjustments in both periods, Air Group reported a loss of $36.3 million or $0.98 per share which compares to our first call mean loss estimate of $0.97 per share and to our 2007 loss of $0.39 per share.

One of our fundamental objectives is to achieve an acceptable return on invested capital.

According to our calculations, Air Group has earned a return on invested capital over the last four quarters of 5.5%, well below our goal of 10%.

Additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures and fleet count can be found in our investor update, which is included in our form 8-K and on our investor web site at alaska.com.

Now I will turn the call over to Bill Ayer.

Thanks, Shannon, and good morning, everybody.

The big news today is the Horizon fleet change so after I make a few comments, I will turn the call over to Jeff to explain the rationale for our decision.

Then we will hear from Brad for update on Alaska and the Air Group balance sheet.

With five air lines declaring bankruptcy within a two-week period, oil closing at $118 yesterday and growing concerns about the economy, to say that the airline industry is facing some of the most difficult challenges in its history is an understatement.

Some analysts have likened the headwinds facing the industry today to the aftermath of 9/11.

It remains to be seen to what degree those predictions play out because I think you've already concluded a significant change is ahead for our industry.

Many now believe that $100 plus oil is here for the foreseeable future.

That's also our view and the actions we are taking reflect this outlook.

In addition to the Horizon fleet transition today we are also announcing a number of changes at both carriers in response to the current economic environment.

When fully implemented, these changes could generate up to $150 million in revenue and cost savings.

We plan to devote most of the time this morning to talking about these actions.

Reporting on Air Group adjusted net loss that is more than double last year's is disheartening in light of the tremendous efforts and sacrifices our people have made to control costs and to improve our operation.

The fact that the tidal wave of rising fuel costs has outstripped our efforts.

Our balance sheet and fuel hedge portfolio combined with our progress on costs have put us in a good relative position and they allow to us make considered rational decisions for the long-term.

We have been reminded once again that things can change rapidly and we can are we are acting now to ensure that we have a solid position for the future.

Let me me take just a minute to talk about some of what we are doing to improve revenues and reduce expenses in the face of current challenges.

Starting with fleet, in addition to today's announcement regarding Horizon,s fleet, we will complete Alaska's transition to an all 737 fleet with the retirement of our last MD80 on September 30th, three months ahead of our original plan.

The decision to replace our MD80s with 737 800s made good sense at $50 oil and it makes even better sense today.

With these changes Alaska and Horizon will each operate single type fleets of the most modern and fuel efficient aircraft in their class.

We have attached a couple of slides to our investor update to show how the 737s in Alaska and the Q400s at Horizon compare to other narrow body and regional aircraft in terms of fuel consumption per seat.

The bottom line, at a time when it matters most, we couldn't have a better fleet to deal with today's fuel environment.

Through our relationship with aviation partners Boeing we will soon have winglets on the majority of our 737 900s in addition to our 700s and 800s.

Winglets alone are reducing our annual fuel bill by about $20 million at today's fuel prices.

We have completed a number of other fuel conservation initiatives and are working on more, including a new fuel flight planning system, further reducing the weight carried on aircraft and decreasing the amount of fuel burned on the ground.

We are also asking the FAA to help us take greater advantage of our flight deck technology for more direct routings and fuel-saving approach and departure procedures.

Given the potential for significant cost savings and reduced emissions, we hope the FAA will implement these on an expedited basis.

Effective Sunday, we are starting ago new schedule called our West Most schedule, which features hourly service between Seattle and LA seconds and every other hour service between Seattle and six other California airports.

Over the past several schedule cycles we have been reassessing aircraft assignments at both Alaska and Horizon to ensure optimal deployments.

As a result we have already reduced schedules in some markets.

We plan to make additional reductions, exit underperforming markets and initial, service to a number of new destinations that will bring in additional revenue.

Our spring and summer schedules reflect these changes and you will see more in the fall and winter.

We recently completed a comprehensive review of all of our fees and pricing and Brad will provide more specifics on this and on our schedule changes in a few minutes.

In February Alaska's on time performance was the second best in the industry.

We had a solid performance again in March and April is also going well.

Year to date, our on time performance is at 77%, a 3.6 point improvement over last year.

Alaska also took the top spot in terms of fewest customer complaints in February and ranked fifth in this baggage performance.

This performance came during a period of high loads which makes the improvement even more noteworthy.

Horizon posted an 80% on time performance for the quarter, which is up 1.8 points over last year.

In times like these it's important not to lose site of what's going well and there are several reasons why we are well positioned to ride out the current storm.

Specifically, we have a strong fuel hedge portfolio, a young fuel efficient single type fleet in Alaska and a decision to move in that direction at Horizon, a strong network of coshare partners poised to benefit from trans Pacific growth, a good track record on cost reductions, a conservative balance sheet with good liquidity, better economic conditions in our region of operation and, importantly, a management team with a proven history of making it through tough times with a commitment to providing shareholder returns.

I often here from frequent fliers and they tell me that they've noticed a significant improvement in our operation and how much they enjoy flying on Alaska and Horizon compared to other options.

Our improvement has everything to do with the hard work and dedication of our employees and I couldn't be more proud of the progress our people have made.

This progress combined with other aspects of our service creates a clear preference for our brands and a long-term competitive advantage.

My thanks to the folks at both companies and especially to those in our operational divisions.

With that I will turn the call over to Jeff.

Great.

Thank you, Bill, and good day everybody.

Given the announcement we made today regarding our move to an all Q400 fleet, I'll be spending the majority of my time on that.

But before I get into that, I would like to spend just a minute on our fourth quarter results.

As reported, Horizon posted an adjusted pretax loss of $18.1 million, compared to a loss of $11.2 million in the same period last year.

Our revenues grew 9.7% on 1.8% growth in capacity.

System-wide RASM was up 7.7% and, as in previous quarters, mix played a key role in the year-over-year comparison, as aircraft that we were flying low RASM, low CASM missions for Frontier last year returned to our native network.

If we look at this by line of business, brand capacity was up 29% and RASM was down 7.9% due to lower yields.

And purchase capacity was up 15.8% while RASM was down 1% due to strong load factors which is offset lower yields.

And this year of course the Frontier flying is gone.

As we replaced our 37 C Q200 flyer with 76-seat Q4200s, we expect lower RASMs, however the CASM on the Q400 is much lower than the Q200 its replacing so profits should improve.

I would like to note that the high ASM growth for both the brand and CPA entities came about due to the rapid return of the Frontier JetExpress aircraft.

This capacity growth has affected our revenue performance and will be adjusted as part of the move to a single fleet of the single Q400s.

We recently announced service between Los Angeles and Flagstaff, Arizona, and between Santa Rosa and Las Vegas, both of will be funded from frequency trends in underperforming markets.

In an effort to recoup some of the cost increases brought on by soaring fuel expenses, we've enacted a number of fare increases during the quarter.

The most significant action occurred in early February when we increased fares between $5 and $20 each way.

Even with these recent changes, local fares in most markets are still lower than prior to our fare simplification initiative.

We remain confident that these higher, more reasonable local fares will improve the mix of revenue on the airplane and still stimulate traffic.

On the expense side of the ledger, the $20 million increase in adjusted operating costs represents an 11.7% increase over last year's first quarter.

Predictably, it was all about fuel, which accounted for the full $20 million increase.

We reported CASM ex fuel and fleet transition costs that were 3.6% below last year and 2.6% below plan, which we're particularly proud of given that we no longer have the low CASM Frontier flying.

The CASM improvement is due to making further strides in employee productivity and getting through the planned maintenance fee that impacted us so much of last year.

Operationally, our teams continued to perform near the top of the industry with an on time performance rate of 80.3% for the quarter, up 1.8 points from last year.

My thanks to all our people for the excellent experiences they continually deliver to our customers.

For the second quarter, we are forecasting a 4% decrease in ASMs with CASM ex fuel of $0.155 to $0.156 up 3 to 4% from 2007's second quarter.

This expected unit cost increase is the result of replacing last year's low CASM Frontier JetExpress flying with higher CASM native network flying and is offset by lower fleet transition costs, lower maintenance costs and higher gauge aircraft.

With fuel headwinds, other cost increases and a softening economy working against us, it's become increasingly clear that the root of our challenge is not our product or our ability to take good care of customers but the influx of capacity we've introduced into our native network and our costs especially those associated with our current fleet complexity and lack of scale.

After careful study, we concluded that the costs associated with our multiple fleet type model are simply not aligned with the revenue and fuel cost environment we anticipate going forward.

These and other important considerations led to the announcement this morning of our move to an all Q400 fleet.

The economics, a single fleet type, the Q400s category leading fuel economy and our experience with the aircraft and its broad customer acceptance make this the right strategy for us.

As the leading operator of the Q400, we've come to know it as an extremely flexible and capable airplane, it's high-speed and passenger comfort make it a great match for our current and planned markets and would block our fuel burn rates 30% lower than CRJ 700s despite having nearly 10% greater seating capacity, the story becomes even more attractive.

Add to this the multi-million dollars savings we plan to realize through simplification and eliminating duplications in parts inventories to training programs to crew bids, and you quickly see why the strategy is so compelling.

We believe these efficiencies will lead to significantly higher returns on a capital base that's likely to be less than what we have in place today.

We currently have well firm commitments for 15 additional Q400s, which will bring our total fleet to 48 and options for another 20 beyond that.

In this environment, reducing our exposure and maximizing the productivity of our flying are essentially, so our goal is to use this transition to reduce our total number of aircraft while continuing to serve the vast majority of our current markets with ASM levels that were in place prior to the incorporation of the nine CRJ 700s from Frontier albeit with lower frequency.

When we are finished with the transition, Horizon's fleet with will consist of at least 48 Q400 aircraft, with the final number dependent on market conditions and the number of options we exercise.

So in addition to simplifying the fleet we will also be reducing its size and reducing and reallocating capacity as appropriate to match current and forecasted demand patterns.

Decisions on whether to exercise any of the options we have in place will depend on whether the business case for each incremental airplane meets our ROIC goal.

A key part of this transition will be the successfully remarketing of our 20 CRJ 700s, an efforts that Alaska Air Group will launch suit.

All indications are that worldwide interest in 70 to 90-seat regional jets remains strong, given the current focus by major airlines on improving the efficiency of their network support by upgauging their existing 50-seat units.

he CRJ 700s have served a great purpose within the Alaska Air Group fleet these past several years by improving performance in markets previously served with Alaska's larger aircraft.

However these markets continue to underperform.

With no end in site to the yield pressures and cost increases, particularly fuel, we believe that moving to an all Q400 fleet is the best approach for us to generate appropriate returns.

Our targeted time frame for the completion of the transition is 24 months, subject to market conditions and operational planning considerations.

We believe this time line reflects both the urgency of our situation and the need for the transition to be managed in an orderly efficient fashion.

And while some workforce reductions will be necessary as we transition to a smaller fleet, we hope to manage them primarily through attrition and other voluntary means.

In addition to this long-term initiative, the current environment compels us to move aggressively on a range of shorter term profit improvement initiatives that we expect will save us between $4 million to $5 million a year.

We provided some detail in the press release and plan to communicate more about this with our employees in the days ahead.

There is no question that the path we've outlined today will be challenged.

It's bold, it's ambitious and it's not without risk, yet it's also very clear that in today's environment taking these actions is essentially.

Maintain the status quo is most clearly the risky strategy of all.

Now, let me turn the call back over to Brad who will provide an update on Alaska.

Thanks Jeff and good morning everyone.

With fuel stated on an economic basis, Alaska Airlines reported a pretax loss of $37.7 million for the quarter, compared to a loss of $14.3 million in 2006.

The increased loss was simply a result of fares not keeping pace with rising fuel costs.

Main line passenger revenue increased 11% this quarter on a 6.8% increase in capacity a 4.1% increase in passenger RASM.

The quarterly PRASM increase was driven by a three-point increase in load factor as our yields were flat.

Our PRASM performance lagged the domestic industry by about 2.5 points for the quarter, but PRASM for the month of March was slightly better than the industry, as our relative performance improved steadily through the quarter.

Additionally, our yields were diluted by the 6% increase in our average trip length.

By themselves, our two Portland transcons and three Hawaii routes depressed our system yield by about three points and our system RASM by about two points.

So adjusting for these, our RASM performance was on par with the industry.

As is the case at all airlines our revenues are simply not high enough given current fuel costs.

We are turning over every rock in an our effort to address this problem and today, I'd like to talk about three areas that we are working, schedule adjustments, fee increases and changes in pricing and yield management practices.

Let me spend a minute on each.

First schedule, as Bill said we've been actively managing our schedule to improve our profits.

Over the last couple of schedules, we have completely exited the San Diego, San Francisco and Orange County/Oakland markets as well as several Horizon markets.

Additionally, we've reduced frequency in a number of other markets.

We've used the aircraft to add two new transcon flights from Portland and three daily trips to Hawaii and to fortify our Southern California schedule, which now features 78 flights including hourly service to LAX.

With this schedule, we're also making Boise and Reno exclusive Horizon cities.

This summer we are continuing to fine-tune the network and we're adding new service to Maui and Flagstaff, Arizona.

And as we look forward to the fall, we will reallocate another 3 to 5% of network capacity and redeploy these aircraft in ways that will bring new revenue to the company.

For competitive reasons we are not ready to announce these changes just yet.

Next, fees.

Effective this summer we will be charging for a second bag and, effective May 21st, we are increasing the service fee for tickets sold through our reservation centers from $10 to $15.

We are also increasing fees for overweight bags, unaccompanied minors and transporting pets.

We are trying to increase these fees in a way that's consistent with our simple and customer friendly fare structure and to levels that are in line with the cost of delivering these services.

In the aggregate, these changes should bring in $30 million to $40 million annually.

And finally fares.

We are increasing fares as we can and holding more seats open for our premium customers who book closer to flight departure.

In the first quarter we generated $17 million more in first class revenue and, at the same time, improved the bucket mix in the main cabin.

4% of our sales volume was purchased first class tickets and this figure has grown steadily from a little more than 1% a few years ago.

We are also evaluating changes to our mileage plan to better align with the realities of $118 per barrel.

We plan to announce these changes later in the second quarter for effect later in the year.

As we look to the second quarter, we are encouraged by recent fare increases particularly those led by Southwest which should be helpful.

Also, last year at this time we had a deeply discounted system-wide sale but this year the sale fares we have are generally at higher levels.

With respect to advanced bookings, we are currently down one point April and up one point for May and June.

Although I use the word encouraged to describe what we are seeing with revenues, the reality is that Alaska and the entire industry needs significant and sustained increases in revenue to make this work.

Assuming today's fuel at $3.60 per gallon which is the number would you get with crude at $118 per barrel, refining costs at $0.70 per gallon and assuming no hedge benefit, Alaska would need an average fair increase of $10 per passenger to break even and about $25 per passenger for to us achieve the kind of margins investors expect.

Again this assumes no hedge benefit we obviously do have good hedge protection for 2008.

Despite our hedges, Air Group's economic fuel expense increased by $89 million that's after taking $27 million more in hedge benefit this year than last.

While crude prices get most of the attention, we are equally concerned about refining margins which at $0.70, now equal what our total fuel cost per gallon was for much of the 90s.

Despite the bad news with fuel we were pleased with our nonfuel unit costs which were down 3.4%.

In the second quarter we are currently forecasting main line CASM ex fuel of $0.075 to $0.076, up 3 to 5% from last year and in line with our plan.

The increase is due to maintenance timing, increased depreciation costs and lower ASM growth than we saw in the first quarter.

For the full year, we still expect CASM ex fuel to be about flat at approximately $0.075 per ASM in line with our previous guidance.

We see capacity growth to be flat for the rest of the year, which will give us full year capacity growth of about 2%.

This figure is down from the 6% figure we planned some time ago.

And in 2009, our fleet will either not grow at all or will grow by a single airplane.

That will mean that from 2006 through 2009, our fleet will only grow by two or three airplanes.

Our balance sheet remains quite strong and we are well positioned to weather the current economic environment.

At the end of the quarter, we had $922 million in cash and short term investments, which is up $100 million from the beginning of the quarter.

I might note that our portfolio contains no option rate securities.

We have relatively low leverage with adjusted debt to total capitalization of 73%, we had an unused line of credit in the amount of $185 million.

We had the second best hedge book in the industry with 50% of our -- of this year's consumption hedged at $76 per barrel and we had a fleet of the most fuel efficient aircraft in the industry.

Our $100 million increase in cash was due to positive cash flows from operations of $41 million and proceeds from new debt financing of $292 million.

These inflows were offset by capital spending of $139 million, debt repayments of $57 million and common stock repurchases of $41 million.

We also took delivery of one leased 737 800 during the quarter.

Year to date, we've repurchased 2 million shares under our share repurchase program at an average price of $23 per share.

Given the current industry environment, we are going to take a pause with respect to future share repurchases.

We may still repurchase stock on the open market from time to time under the current board authorization.

But for the time being we are going to see what happens with fuel prices and the economy.

As of today, our cash balance is over $1 billion as we made some borrowings since quarter end under our predelivery payment facility.

As you know, we've always maintained a conservative balance sheet.

This approach has worked well for us and we plan to continue it going forward.

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

Thanks, Brad.

We are happy to address questions from analysts at this time.

Brandy, would you please assemble the roster for us.

(OPERATOR INSTRUCTIONS) Your first question comes from Ray Neidl.

Hello, Ray.

Hi, Shannon.

Could you give us your overall, your thoughts in an industry that may be consolidating, where you are going to have much bigger airlines out there?

I know you have a partnership with a lot of them but is there a place for a special niche airline like Alaska in a world of giants?

What's your thoughts on that?

Hi, Ray, this is Bill.

Absolutely.

We look at this, I think you're right about consolidation and, frankly, we think from an industry standpoint that's a good thing.

But we think we have a very significant role to play almost regardless of what happens with the industry.

And specifically the partnerships that we have with, as you know, the Switzerland strategy here with so many carriers is based on the win win situation, that the relationship works for us and works for them and we think those things will continue.

They will stay in place as long as it continues to be mutual benefit.

We don't see anything there.

We think Seattle is poised as a place for more Asian service, for example, and looking forward to that.

And we just think we are well-positioned no matter what happens with consolidation in the industry and the focus is on the things that we've talked about here, it's about fleet and it's about cost management and customer service.

And we are making progress on all those front.

Okay.

Great.

And I got on when you were talking about the Q400 which is a great airplane, I've ridden on that and it's very comfortable from a passenger viewpoint.

But my question is with Horizon Air, I know you have to make major changes and cut costs and get those guys back to profitability and there's high fuel cost.

But by going to one fleet type, a fairly big airplane like the Q400, is that going to preclude you from going into a lot smaller markets or developing newer markets that previously you had developed and turned over to Alaska Air.

Hi, Ray, this is Jeff I will start and Brad might want to chime in but I think the answer is its different.

That is for as many markets on the fringe, on the very low end, for instance, and maybe some up at the higher end that might not be optimally served by the Q400, we think going forward there are new opportunities more that balance that.

It's fair to say that as we go forward there are a few markets that are characterized currently by low frequencies with Q400s and low densities that are going to be a challenge for the Q400 to serve appropriately.

We are going to work it hard.

Our commitment is to work hard to preserve levels of service, whether it's through us or vis-a-vis Air Group and another third party smaller operator to ensure continuous service to the communities that we've been a part of for an awful long time and we see that mainly on the low end.

The toughest thing is going to be those markets that are closer in with a smaller number of frequencies today.

But, Jeff, I think a lot of Horizon's capacity is represented in markets like Seattle-Spokane and Seattle-Portland where -- Seattle-Portland there's 30 plus frequencies, so you have an opportunity to upgauge and still have really frequent service for passengers.

We are learning as we go forward, when we talk about frequency trends, in most of our markets one or two flights off of what was a six flight pattern is really a healthy thing to do.

We are not losing traffic.

It's still a very convenient pattern both for local passengers and the network and the lower unit cost for the Q400 make it a much better proposition.

So all in all we are pleased with how that progresses and as we learn we can also take a look at other things that we are not doing today that in years in the future might pencil out profitably two.

Would you consider contracting out to a third party for smaller aircraft?

Ray, we may well do that.

We don't have a huge need for that.

It may be something like three or four airplanes for particularly small cities that feed Seattle and Portland.

It may be that our need for that is so small that we have trouble attracting someone but that actually is part of our thinking, to look at someone to help us serve some of the particularly thin city fares that feed Seattle and Portland.

Not unlike what Alaska does today in the state of Alaska.

Great.

Thank you, guys.

Your next question comes from Mike Linenberg with Merrill Lynch.

Yes, a couple questions here.

I guess maybe as a starting point with the new competition coming into the LA and San Francisco to Seattle market, at the same time that you guys are going to hourly service.

I'm not sure if you've actually started the hourly service.

What are you seeing with bookings and how are loads holding up and, of course, should we expect that pricing in that market will be depressed given the competition and the additional feeds?

Yes, make maybe I will start and maybe we can get Gregg to offer some color on this as well but this is one, I guess candidately, this is one part of our network that there is going to be a little bit of pressure with respect to capacity.

We are going at 13 flights into LAX last summer and going to 15 this summer and I think San Francisco we had seven and we're going to eight.

So we are looking to engage a little bit in these Virgin America markets specifically in response to their service, which four and three.

So that kind of said, I think it's important to keep in mind that in the bigger scheme of things we have 500 flights a day and in a lot of our markets capacity is flat or down and there is a fight going on, up and down the West Coast from Seattle to LAX and Seattle to San Francisco and we don't intend to give anything in that fight.

Those markets are important to us and we will defend them to the end.

Okay.

And then I don't know if Gregg is there.

The other thing I would say is it's a bit too early to tell the impact of Virgin on our service.

They only started in the month of March in one city pair.

We saw no impact.

In fact our Bay Area PRASM in the month of March exceeded our system PRASM improvement.

But we had a very strong March.

We had Easter moved into it and we benefited from that.

As we look forward in both LA and San Francisco in the network quarter, we are seeing demand in So Cal roughly flat -- against the load factor, roughly flat year over year, and in the Bay Area a little bit of softness but nothing that's very concerning.

And I think as we've stated, I stated in last quarter's conference call, we are in this fight to win and we know how history has played out elsewhere in the country and we don't intend for that to happen here.

Good.

My second question and this is either to Jeff or Brad.

I think, Jeff, had you commented about Horizon as you think about each airplane coming in, there are these return on investment, these ROIC hurdles.

Can you share with us what those hurdles are or even just give us the rough range as an investor or as one who follows the company, when you look at historically the returns generated by the Horizon business?

And I realize there could be some transfer costs, call it inefficiencies between the two models.

But historically it has seemed -- it has appeared from the outside that you have been in violation or not able to -- of our covenant.

Violation of not able to meet those sort of return prerequisites.

So based on what it has been historically, it seems like would you take no additional 70-seater.

So I know it's a philosophical question but it does sounds like you are onto the right track going to a single aircraft type.

It does seem to be what will make that model work.

It's a great question, Mike, and I think it's not only philosophical, I think it's also pragmatic relative to getting smarter about our business, the deployment of capital within the Alaska Air Group and what standards any investment decision needs to be make.

I know you have heard us talk about increasingly in detail about meeting these goals over the last three years and I think the standards I refer to is the one that both Alaska and Horizon, with the guidance of our Board, are applying to any investment decision going forward.

So with that sense, as you look at opportunity out there, it's a difficult challenge.

You're looking at trying to forecast the returns on a seventeen-year commitment to an asset in a volatile environment.

There is no certainty to that but what I can say is that we've got an awful lot smarter about how we calculate the prospects, the range and what the down side risks are.

So what you can take I think a lot of confidence in is the analysis is much more refined, sharper, the standards are high, we understand there's risk.

I mean in this business getting out of bed in the morning has risk to it, so that goes with the turf.

But we are being wise about it and we're being conservative and it's been a great collaborative effort.

You guys want to add anything to that?

You know, Mike, I guess we would agree with the premise of the question, the returns on capital at Horizon today are not what they need to be.

I think they are about 2% in the way we would calculate that.

I'm not sure that we want to actually share our own model in terms what this does for us because, candidately, it just may not be -- it may not be as precise as it should be to share with you.

But our -- what we look at takes us a tremendous distance towards getting towards appropriate returns on capital with the fleet move by itself.

Another important thing in your question, while there is some capital investment involved in getting to more Q400s, I actually think the invested capital base at Horizon will stay flat or go down as the capital associated with the Q200s and CRJs comes out of the base.

On substantially improved returns so we think we have a line of sight as to how we get there, in terms of the goal we talked about.

Another thing Mike, this is Bill, importantly we have a discipline about this that several years ago we didn't have and I think a lot of carriers are probably in that same boat.

So as we look from the Board's perspective, allocating scarce capital to the two entities with a standard and we are getting better at our forecasting of returns and we have a very strong discipline about this going forward and I think that's really important.

Okay.

Fair enough.

Thanks for the full answer.

Thank you.

Your next question comes from Peter Jacobs with Ragen McKenzie.

Good morning, gentlemen.

Let's see, first question, I guess for Brad, could you expand a little bit on your comments regarding the $10 in extra average fare that you'd need for break even and then the $25 per share to make the acceptable kind of returns that you want, is that relative to the first quarter or is that how you look at it over the entire year?

I'm just trying to understand kind of how that is matched into the seasonality of the businesses, so on and so forth.

Candidly just what we did with that quick and dirty analysis was we assumed the revenue performance for the last three quarters of the year was similar to the first quarter, and we assumed the capacity growth and the cost guidance that we've given you, and then we took fuel out at our -- whatever crude assumption you have and you know our hedge positions, but we basically took fuel out and took the 350 million gallons that we think we'll burn and multiplied that by $3.60 per gallon, which is -- that's the fuel cost with $118 barrel crude, $0.70 crack and zero hedges.

If you do that and have the same count that's in our forecast, you need to get $10 a passenger to get the P&L of Alaska Airlines to zero and you needed $25 or $26 a passenger to bring the P&L to a 10% margin.

Okay.

I'm glad they have transcripts of these calls because that's how I'm going to have to follow that, but thank you for the response.

Second question is the $0.70 refining margin that you talked about, the crack spread, that's not including the taxes and fees you pay, is it?

Or should I think about another $0.14 on top of that?

No, the $0.70 does not include taxes in the plane and that's about $0.13 a gallon.

And that's how you then get to that 363.

Right.

Because I couldn't get the math to work.

That's a figure -- we said it in the notes, but that's a figure that people should just be really, really be reacting to.

Over my time at Alaska, the crack spread has been kind of -- it's been in the range of $0.07 to $0.15.

So to see it go to this level today is very, very difficult for folks like us that depend on this commodity to try to make things work and it's difficult to understand why it is where it is.

Also could you talk a little bit more just about some of the competition and how you're holding up in other parts of your system, maybe transcon, Mexico and areas like that and what kind of competitive reaction you are getting with your flights to Hawaii.

Peter maybe I will try and take a crack at that, this is Gregg.

I would say our advance book load factor is trending up year-over-year in each of the next couple of months and there is, apart from some softness as I mentioned earlier in the Bay Area, the rest are all trending ahead.

We're delighted with the response we've seen in the Hawaiian markets.

I think on a go forward basis be helped a little bit by the reduction in capacity to the Islands generally from the West Coast.

Our advance bookings are very strong.

Clearly in that market, as in others we need to get a little more ticket price to make our return targets.

Mexico is strengthening, that largely a function of reductions in competitor capacity there.

And the transcons look to be strong again for the summer.

So the enterprise is pretty good generally.

One last short one, please, and that is what kind of sense do you in terms of the -- when we'll see some of these fare or revenue initiatives start to take hold?

Is that something we should look at as being maybe material in the third or fourth quarter this year or should we be a little bit more muted in our expectations?

The figure we provided was $30 million to $40 million annually which would be roughly 1% of the company's revenue.

I guess if I was thinking about that, I would say you should begin to see that role in in the third quarter in terms of having any real significant impact with maybe a little bit towards the latter part of the second quarter.

Okay.

Thank you.

I will give somebody else a crack.

Your next question comes from Frank Boroch with Bear Stearns.

Good morning, everyone.

Bill, I was wondering if you could share have you had opportunity to communicate the slower growth plans with labor or maybe Jeff, you can both comment on this, and how does that sort of impact their expectations and maybe the pace of negotiations?

Well, at Alaska, Frank, I think it's been a sort of an evolving story.

And as we said a while back, this year was planned to be upwards of 6% capacity growth and that's now scaled back to 2% and we are through the biggest part of that with this quarter and we go back to some very low growth rates for the balance of the year.

So we do make a habit of keeping all the employees informed about what's going on and I think it's -- this is pretty visible, I mean people have friends at other carriers, they know what's going on.

They know the risks of -- in the industry and people are very concerned and I think, by and large, from what I'm hearing are appreciative of the actions that we're taking to maintain a relatively good position here for the company.

So I think and what I've noticed, frankly, is people working together more.

Decisions are easier to get to in this kind of environment frankly and we are finding better everything about our company.

The differentiation here is customer service and we are seeing lots of indications that that's getting even better.

I think the on time performance is a further indicator of that, the improvement there.

So I think we've communicated well and we do that as an ongoing thing and Jeff has the additional piece of the Q400s and he's already been working that communication with his folks.

Great.

I guess just lastly, as you see the need to make the fleet changes, what's the bigger driver?

Is this going to help you or is this going to hurt the 2010 CASM ex fuel goals, but you could see a larger benefit on the unit revenue side or how do you foresee getting some of the fixed costs out that previously you hadn't thought about?

Frank, just to be clear, are you asking more about Alaska or Horizon?

I guess I was thinking about both given that the growth trajectories are now changing, but the 2010 plan I was thinking more about Alaska and the 7.25 CASM figure.

I see.

Yes.

We are probably not in a position to provide a lot of update on that, Frank.

Obviously new capacity is some of the lowest capacity CASM capacity you have because we are bringing on new big airplanes with lots of seats and a lot of them have been flying in longer haul missions.

So that helps.

But the flip side in an environment like this, you have to do everything you can possibly do to kind of hold your business together and so there may be more diligence and more attention with respect to the other side of the business.

I think net/net our guidance for this year is still 7.5.

We are quite comfortable with that guidance and when we are in a position to provide some views towards 2009, we'll do that.

Great.

Thanks.

Your next question comes from Gary Chase with Lehman Brothers.

Good morning, guys.

I apologize.

I've been trying to listen to some of this consolidation hearing, so if you said some of this I do apologize but I was curious, one of the things that everybody wants to do in an environment like this, fuel has moved $30 or jet fuel has in such a short period of time.

And everybody is now moving to adapt to this environment and I think to a lesser extent than others you've got to act, but to a lesser extent than others given the hedge position you have and the balance sheet you've got, I guess I'm just a little surprised to hear that what you want to do now is, despite this rapidly changing environment which you knowledge is true to invest a lot of additional capital in the business.

Can you talk to what the incremental investment is to do this fleet transition and how you think about this concept of, maybe at a time like this it might make sense to disinvest in the business a little bit, which I think is what some of the competition is trying to do or at least keep some powder dry to see what shakes out relative to consolidation and other things?

Is this constraining in any way?

We might ask Jay Schaefer, our Treasurer, to comment on this.

He's been real involved in this project.

One important, I think, point to make in particular with Horizon is while there are 15 Q400s coming in as they move to a single fleet, as the Q200s and the CRJs leave, their invested capital will be flat or likely down from where it is today.

For Alaska, we are getting through our single fleet transition to all 737s, so like last year, this year we have a heavy capital expenditure amount, but that's going to start to decline as we get through the single fleet transition.

So as we look into 2009 and 2010, CapEx begins to fall pretty dramatically and I think that's appropriate given where fuel is today.

But after we are done with both fleet transitions as we said, as Bill said in his opening remarks, we'll have the two most fuel efficient airplanes in their class.

And given where fuel is, that's probably a pretty appropriate place to be for an airline.

And just a couple of follow-ups to that.

So invested capital will be down.

That means you expect proceeds from aircraft dispositions to offset the incremental cost of buying the Q400s?

Well, their fleet, Horizon's fleet will shrink from roughly 65 airplanes down to between 48 to 53ish.

And so that's part of it.

And presumably this is you think a superior alternative to just downsizing the Horizon fleet and waiting to see what plays out?

Well, I guess the follow-up question is at what fuel price would you not contemplate this?

Maybe just to be clear, Gary, there is actually no change in Alaska Air Group's capital spending as a result of this announcement.

We -- prior to this decision we had a firm order for 15 Q400s.

Those 15 Q400s will come in and we will have 48 Q400s on the property.

The real announcement today is we are basically saying that plus or minus a couple of airplanes is the fleet that we see at the moment.

And then we retire the Q200s and retire the CRJs and they come out of the capital base.

In terms of what have fuel price or what might change our thinking about this I think the proviso that is important is the marketability of the CRJ 700s.

The economics of this decision are based on us having certain success getting out of that fleet type and I'm not sure we are at a point that we can talk about exactly where the threshold is, but we do need to find a market for those 20 airplanes for this strategy to work.

We stay close to that as best you can.

You don't know until you get out and put the sign on it these things, but all indications are that worldwide, the market for the 70-seat plus aircraft is very robust.

So you get to the place that they just described, flat or reduced invested capital, no incremental capital announcements made here and a fleet size that's going down from 67 to somewhere around 50.

That's the story.

Okay.

Thank you, guys, appreciate it.

Your next question comes from Jamie Baker with JPMorgan.

Good morning everybody.

I saw you did have a handful of MD80 cancellations recently.

Just curious as to your level of confidence that you are in complete compliance with the recent ADs on 737 rudders and fatigue issues?

Jamie, this is Glen.

We are getting into phase II of the FAA special audit as I think you know.

I think we have a high level of confidence in the work and a quality of what we've done.

And but given the experiences that have occurred across the industry, I guess we are also prepared to work with the FAA in their inspections which go through June 30th and help them through evaluating our paperwork and our airplanes.

Okay.

Fair enough.

And second, you've historically shown a little bit more aggressive revenue acceleration from the first quarter to the second and most airlines in the business, an obvious reflection of where you fly.

I realize there's some Easter noise this year but is there any reason that we really shouldn't assume a fairly typical level of seasonal acceleration?

You've identified Southwest fare increases and a little bit of pressure in the Northwest corridor but above and beyond that any reason they shouldn't be in line with history?

No, I think that's right, Jamie.

I mean if we talk about April by itself the Easter thing was significant.

The other thing that maybe affects us a little more than the others is April has 30 days and we ended up with five Tuesdays and Wednesdays, which we have a little bit more exposure to the leisure markets and so that maybe hits us a little bit more than the other airlines.

I think that's maybe something you're seeing in terms of why the April advances are different than May and June.

In terms of the yield side, I think you should -- I think the industry is moving to get fares up and I think we're following that trend and I just take my hat off to our folks down in revenue management area.

I think that we're going to -- good stuff is happening down there.

The, I guess the bigger issue is that, is it enough with fuel where it is?

So I think it's going to be good compared to last year.

I think the seasonal trends will probable continue.

It's not going to be nearly enough for fuel at $118 per barrel so that we still work it as hard as we can.

Thanks for the clarity everybody.

Appreciate it.

Your next question comes from Daniel McKenzie with Credit Suisse.

Yes, good morning.

I had to hop off the call for a few minutes, I apologize if my questions have been asked.

I wonder if you can talk about Alaska's willingness to be a bidder for any assets that might come up?

This is Bill.

Our focus is 150% on what we are doing here at both Alaska and Horizon and certainly we are going to pay attention to what happens to the industry and if there are opportunities, being relatively better positioned as we are, gives us a chance to maybe look at some of those opportunities.

But that's such a broad question there is just, we are going to pay attention and continue to position the company for the best long-term benefit.

Sure, I understand.

And then separately, a number of -- just to go back to Horizon here at the risk of kicking a dead horse, but a number of legacy carriers are dumping a significant number of RJs, so RJ flying is presumably getting cheaper here, and just wondering if you have a sense for whether the new fleet swap for Horizon will result in economics that perhaps are less than where RJ economics are already going today?

Dan, can you repeat the question, I just want to make sure we answer exactly what you're asking.

Sure.

I guess what I'm trying to get at here is in terms of the economics of the Q400s and given where RJ economics are going, ExpressJet is renegotiating its contract with Continental, there is RJs that appear to be getting dumped on the market, the cost of RJ flying seems to be going down here, and I was just wondering, is your sense that the new Q400 flying going to be even more cost competitive than where RJ economics appear to be going now?

If it were all done by a third party, for example.

Exactly.

That's your question.

Yes.

Yes, I think, maybe I will jump in here Jeff and you can follow on or something, but there is a chance that if you just kind of a little of a scorched earth view and said, what is the lowest cost bid here, there's a chance that you can get this flying done for a lower cost than this Q400 solution is going to work out.

But our company has not always positioned itself as the lowest cost, lowest service end of the spectrum.

I think this is going to be much, much more competitive from a cost perspective and it's going -- it's enable us to keep our brand together, keep the service we provided, the position we have for providing good customer service.

We actually do believe that in terms of the long run business model and our ability to have revenues that exceed our costs and provide returns, it's the best answer for us.

But I guess we would concede that if you were just looking for the lowest CASM solution there probable is one out there that's not this Q400 idea.

I am going to be quick to make a note of the distinction when you mentioned about RJ capacity coming back and the distinction between the type of capacity that's coming back in the 50-seat versus the type that's still in demand, the 70 to 90-seat.

And with as much as is coming back on to the market, it's not clear that the, that any pricing that's associated with putting those things back to work is going to be directly reflective to cost either.

They are just putting -- a number of operators being put in a very tough situation of being handed back airplanes and such, so our view is we look at the Q400, it's competitive in virtually all those spaces particularly when we get the benefits of single fleet efficiencies that we are moving toward there.

And then you add into that the synergies that we have within the brand, the way that there's a seamless, there are seamless product and everything else on the revenue side, we think it's a very competitive alternative to that.

This is Jay, I might just add, the 8-K we attached some charts that included fuel efficiencies by regional aircraft and if you look at the fuel efficiency of the Q400 versus a CRJ 700 in particular the 50-seat RJs that many of the regional carriers are flying it is a very, very, very competitive airplane given today's fuel environment.

It's about 22% better than the class of 50-seat RJs and even the Embraer 170 that you referred to, it's even better than that and compared to our own CRJ 700, it's about 18% better on a per passenger basis.

Thank you.

I appreciate the thorough answer and if I could just throw one last really quick one your way, if I could just flip that question around, is there any demand since it is a specialized plane, is there any demand from other legacy carriers that could perhaps be an opportunity under the CPA arrangement for the Q400?

We believe that's a strong possibility.

We've had conversations.

I think on a going forward basis the new efficiencies will have in this strategy cost-wise will make it even more competitive alternative as a major -- other major partners are more interested in fuel efficient network support solutions, so we will certainly keep those channels of conversation open.

Great.

Thanks for all your time this morning.

This is Shannon and I am going to have the call over to our Managing Director of Corporate Communications, Caroline Boren, who will conduct that portion of the call.

Brandy, I am going to go ahead and ask you to reminder our media callers of the procedure for asking questions and then we will proceed.

(OPERATOR INSTRUCTIONS) Sounds like there maybe aren't any.

Please hold while we continue to queue the roster.

There are no media questions at this time.

Okay, thank you Brandy.

Thanks everybody for your participation and we will talk to you next quarter.

This concludes today's Alaska Air Group's first quarter 2008 earnings release conference call.

You may now disconnect.