阿拉斯加航空 (ALK) 2008 Q3 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Alaskan Air group third quarter 2008 earnings conference call.

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

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

(OPERATOR INSTRUCTIONS).

And now I would like to turn this over to the Managing Director of Investor Relations, Ms.

Shannon Alberts.

Thanks, Jennifer.

Hello everyone, and thank you for joining us for Alaska Air Group's third 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 address questions from the analysts, then from journalists.

Other members from 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 available on our website.

Our presentation includes some non-GAAP financial measures, and we have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release.

This morning, Alaska Air Group reported a GAAP loss of $86.5 million for the third quarter.

Excluding the impact of marked to market adjustments for fuel, fleet transition, and restructuring charges, as well as the one-time benefit from the change in our mileage plan expiration policy, Air Group reported an adjusted net profited of $39.9 million, or $1.10 per share.

This compares to a recently increased First Call mean EPS of $0.93 per share, and to a net profit of 78.8 million, or $1.93 per share last year.

Again, excluding special items Air Group's loss for the first nine months of this year is $12 million, or $0.33 per share, compared to a profit of $109.5 million, or $2.67 per share for the first nine months of 2007.

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, available on our investor website at Alaskaair.com.

Now I will turn the call over to Bill Ayer.

Thanks Shannon.

Good morning everyone.

We are pleased to be one of only a few airlines so far to report an adjusted profit for the third quarter.

While our net profit is only half of what we posted last year, earning a profit at all in this difficult environment, indicates that our efforts to respond to high fuel costs and softer demand are paying off.

We were able to increase air group revenues and reduce non fuel operating expenses during the quarter, but those improvements were not enough to make up for the $110 million increase in economic fuel costs for the quarter.

Oil is now down to around $70 per barrel, about half of where it was in July, and that is good news.

However oil is being driven lower as a result of the slowing economy, which results in less demand for air travel, and makes it more difficult to sustain the meaningful passenger RASM increases that we have begun to experience.

The biggest issue facing airlines today is the uncertainty surrounding customer demand, and fuel prices for 2009 and beyond.

The key is to control what we can, and to continue to adapt our business to the changing conditions.

Our fleet, our balance sheet, and our strong customer following put us in a great position to do just that.

Last quarter we discussed five things that we are doing in response to the challenges we face.

Maintaining healthy liquidity and a strong balance sheet, reducing and redeploying capacity, boosting revenues through fare increases, improved load factors, and ancillary fees, conserving fuel efficiency through our highly efficient fleets and operational improvements, and finally, controlling non-fuel costs.

Let me spend just a minute on three of these that are particularly relevant right now.

First I am happy to say that our liquidity remains strong and is improving.

We ended the quarter with $1.07 billion in cash and short-term investments, and at the moment we have just shy of 1.2 billion, up from almost exactly 1 billion at the end of the second quarter.

Second, we are pleased with the early returns from the scheduled reductions that we implemented in late August.

In September we saw an almost immediate double-digit unit revenue increase across all lines of business, in response to our schedule of reductions.

The third area of particular relevance is fuel conservation.

Our hedge portfolio has been a great asset, but the best long-term hedge we can have against high fuel costs is a fuel-efficient fleet.

Now in terms of ASMs per gallon, which you might think of as comparable to miles per gallon for your car, we achieved fuel efficiency of 75 ASMs per gallon in September, following the retirement of our last MD-80 on August 25th.

With Southwest's third quarter number at 69, United's at 62, and American's at 61, we believe we lead the industry in this measure.

Last quarter we noted that as we shrink our capacity, we will also need to decrease the number of people we employee.

It is always difficult to take this kind of action, but early indications are that we will be able to significant reduce the number of front line furloughs, through early out and voluntary leave arrangements.

While we are aggressively reducing capacity in some markets, we are redeploying capacity where we see opportunities.

Alaska will begin service between Seattle and Minneapolis this Sunday, between Anchorage and Maui on October 31st, and we are looking forward to starting service to Kona, Hawaii on November 17th.

Horizon will start seasonal service to Mammoth Lakes, California in December, and has recently announced it's intention to expand service to Everett Paine Field, a satellite airport just north of Seattle.

We are seeing excellent operational performance at both airlines.

For the third quarter Alaska's on-time performance jumped 12.6 points to 81.9%, and Horizon's was up 6.4 points to 87.3%.

Alaska's performance for the month of September represented a 14.5 point improvement, and it's best on-time performance in a decade.

Of course, the credit for these improvements goes to the Alaska and Horizon employees, who have received $10 million year-to-date under our shared rewards program.

And it is even more gratifying when customers recognize the good service provided by our employees, as they did this summer.

In a customer satisfaction survey conducted by J.D.

Power and Associates, Alaska Airlines tied for first place among North American network carriers, achieving top marks in five of seven areas including overall customer service.

This remains the most difficult period in commercial aviation history.

Through all the upheaval, our basic strategy to build a great airline for employees, customers, and investors, and to do it for the long term has not changed.

The tactics required have varied, but our commitment has not wavered.

In spite of the current economic uncertainty, and the magnitude of change, our employees have kept their focus on delivering a safe and enjoyable travel experience.

I couldn't be more grateful to them.

With that, I will turn the call over to Brad.

Thanks, Bill.

Alaska Airlines reported an adjusted pretax profit of 56.6 million for the quarter, compared to 123.4 million last year.

As is our usual practice, our adjusted figures state fuel on an economic basis, and exclude fleet and restructuring charges.

We also excluded the significant gain that resulted from the change in the expiration policy for our mileage plan miles.

Air Group's after tax GAAP loss this quarter includes 137 million in marked to market hedging losses, as we started the quarter with oil at $140 per barrel, and ended it with oil at $100 per barrel.

We have excluded these paper losses from our adjusted results.

In the second quarter our GAAP results included 97 million in mark to market hedging gains, as we started the quarter with oil at $102 per barrel, and ended with oil at $140 per barrel.

Like the paper losses in the third quarter, we excluded those gains from our second quarter adjusted results.

Our adjusted results always exclude mark to market gains and losses, and only include the cash benefit of settled hedges.

We know that many of our competitors have fielded questions recently regarding their fuel hedge portfolios, as oil prices have declined substantially from their record highs in July.

We have been relatively conservative with our hedging programs.

I would like to ask our Treasurer, Jay Shaffer, to walk you through how lower oil prices will affect us.

Thanks, Brad.

Air Group's hedge program has been based mostly on the use of call options, commonly called caps, because these instruments cap the price we pay for oil.

For the 94% of our portfolio that is capped, we will fully benefit from any decline in oil prices.

When using call options, the only payment we make is the up-front premium paid for future fuel price protection.

So under any future fuel price scenario, there will be no additional cash obligation.

This includes both cash settlements and cash collateral.

We generally don't try to time the market, but instead have a program of layering in hedges three years in advance, so we are 50% hedged six months before the fuel consumption takes place.

We view our hedge program as an insurance policy, which when consistently applied buys protection that helps us manage the volatility of rising fuel prices, while allowing us to enjoy the benefit of falling fuel prices.

For the quarter we had 44 million in cash inflows form hedges, which was 27 million more than in the same quarter last year.

And year-to-date, we have received 129 million of cash inflows.

Since July 2002, Air Group's hedge program has provided approximately 500 million of net hedge benefit.

This is actual cash received from our counterparties to reduce our fuel bills, and is net of the premiums paid.

The program has been systematically executed to not only provide adequate hedge benefit in a period of rising prices, but it was constructed so that would it not disadvantage our Company in periods of falling prices as well.

For the great majority of the portfolio, we are not at risk for paying any additional cash to counterparties, as the price of oil declines below our hedged prices.

With that said, call option premiums have become quite expensive, as oil volatility has increased.

As oil prices fall, the downside risk may moderate to the point where a more diversified portfolio of call options, collars and swaps becomes appropriate, which is similar to how our portfolio was constructed in the 1990s when we began our hedging program.

With that, I will turn the call back to Brad.

Thanks, Jay.

Now I would like to take a closer look at Alaska's P&L.

Mainline passenger revenue increased 3.6% this quarter on a 0.8% decline in capacity, and a 4.4% increase in passenger unit revenues.

Our passenger RASM lagged the domestic industry by about 3 points, but again this quarter our capacity decline was less than the industry's, and our stage length increased 6%.

If you adjust for these differences, our unit revenue performance was in-line with the industry.

More importantly, our unit revenue performance improved as the quarter progressed.

In July, our passenger RASM improved by 1%.

In August it improved by 1.9%.

In September it improved by 11.9%, as our August 25th schedule reduction began to have an impact.

Geographically nearly all of our regions posted double-digit PRASM increases for the quarter, except the Bay area, southern Cal, and intermountain regions, where PRASM fell marginally.

The results in these markets reflect the competitive landscape, coupled with the weak economy, and depressed housing values.

However, in September, PRASM increased is in every region with Mexico, Alaska long haul, and transcon leading the way, with both healthy yields and unit revenue gains.

I want to caution that a lot has changed in the last three weeks, and September's results may not be indicative of a trend that we should extrapolate.

As we finalize our 2009 plan, we have agreed as a leadership team that our #1 initiative is to focus on revenues.

Our goal is to maximize unit revenue gains that should result from reducing capacity, implementing new ancillary revenue streams, and increasing preference for our brands.

Some of the things we are considering include, an investment in new tools and practices for schedule planning, revenue management, and mileage plan, higher planned advertising to increase market share, and new revenue streams such as in-flight Wi-Fi, trip insurance, and previously announced changes to our mileage plan, including new award redemption levels, and fees for partner reward travel.

We expect capacity to be down 7 to 8% in the fourth quarter, on a 14% decrease in departures, as our average trip length is growing significantly.

We are currently expecting first quarter capacity to be down between 10 and 12%, and full year 2009 capacity to be down about 8%.

These capacity plans are dependent on what happens with the Boeing machinist strike and the economy.

Although we have not included the amounts in our adjusted results, I want to quickly say a word about the $42 million benefit from the change in mileage plan expiration terms.

We deleted about 7% of the total miles outstanding.

We expect that the policy change will result in revenue increases in the future, perhaps as much as $2 to 3 million per quarter.

Now turning to costs, our unit costs ex-fuel were $0.0714 per ASM, which was significantly better than our initial guidance of $0.074 to $0.075.

Our non-fuel spending for the quarter was $7 million lower than last year.

The better than forecasted results are due to lower maintenance costs, lower wages and benefits, better ASM production, and a significant reduction in passenger remuneration costs, as our folks ran a terrific operation this summer.

For the fourth quarter we are currently forecasting mainline CASM ex-fuel of $0.081 to $0.082 per ASM, about 5% higher than last year.

That would put us at about $0.755 for the full year, up marginally over 2007.

We are not yet ready to give cost guidance for 2009.

However, I can tell you that we are focusing on finding ways to convert as much of the capacity reduction as possible into cost reduction.

We are setting aggressive goals for employee productivity and real estate utilization, and we are targeting a 10% reduction in overhead spending.

With that.

I will turn this over to Jeff.

Thank you, Brad.

Good day, everybody.

I am pleased to report that Horizon posted an adjusted pretax profit of $12.7 million, compared to a profit of $7.5 million in the same period last year.

Fare increases, capacity reductions, and non-fuel cost improvements are helping to offset the cost of fuel, which while significantly lower than it was this summer, remains at levels unheard of prior to this time last year.

While we are pleased to report a profit for the quarter, and a significant improvement over last year's results, our year-to-date results reflect a loss, and business conditions remain very challenging.

Our revenues grew 3.7% on a 12.8% decline in capacity, and a 20.2% system yield improvement.

Systemwide RASM was up 18.9%, and as in previous quarters line of business mix played a key role in the year-over-year comparison, as we are no longer flying low RASM, low CASM missions for Frontier.

Looking at lines of business more closely, brand capacity was up 1.1%, and RASM increased by 9.8%, due to a 9.5% increase in yields, and a marginal increase in load factor.

Ancillary revenues were up nearly $1.3 million, or 70% from last year.

Purchase capacity flying for Alaska was down 1.8% on a 14% decrease in departures, a function of scheduled trims, and larger gauge aircraft than in the prior year.

In comparing our year-over-year results it is important to keep in mind the impact of the landing gear inspection related grounding of our Q400 fleet in September last year, which negatively impacted profitability by several million dollars in the quarter.

The inspections and related disruptions lasted several weeks, with collateral impact spilling over into the fourth quarter.

On the expense side, our $19.8 million increase in fuel expense was offset by focused non-fuel cost management which held CASM ex-fuel in check up just 0.7%, despite the sizable decrease in capacity.

Maintenance costs decreased $5.4 million, partially due to timing of events, but also more importantly, due to continued successes in streamlining heavy checks, and implementing Lean processes.

Wages and benefits were down $3.1 million, as we reduced our employee base relative to our flight schedule reductions.

For the quarter FTEs were down 7% versus prior year.

These actions, combined with fleet mix changes, drove an 8.3% productivity gain to 180 passengers per FTE, making this quarter the 25th out of the past 27 with year-over-year productivity improvements.

Lastly, aircraft ownership costs decreased $4 .4 million, due to the disposition of additional Q200s from our fleet.

Shifting the focus to operations our teams once again worked their magic in delivering outstanding experiences for our customers during the busy summer season.

Working together they posted an 87.3% on-time rating for the quarter, a 6.5 point improvement over 2007.

Were we a DOT reporting airline, we would have earned the top spot among all mainland US carriers in July, an extraordinary accomplishment that every one of us who depend on the performance of our frontline teams is extremely proud of, and thankful for.

Earlier this year, we announced our plan to transition to an all Q400 fleet.

We are still on track to retire our entire fleet of 37-seat Q200s next week, at which time we will have only three of the original 28 aircraft unassigned.

That leaves us with the 20 CRJ-700s we have committed to remarketing, two of which we are currently finalizing a sub-lease agreement for.

We will continue to operate the remaining 18 aircraft during our remarketing effort.

To date, we have had exchanges with a number of parties, both domestically and abroad, yet it is clear that the market has softened somewhat from our original forecast, due to the changing economic landscape.

Accordingly, we are in discussions with Bombardier, to exploring timing and the retiming of our deliveries of Q400s next year, to coincide with the retirement of CRJ-700s from our fleet.

Looking ahead, the prospect of softening demand adds urgency to the capacity and cost reduction strategies we have developed.

We previously announced capacity reductions of about 21% in Q4, and approximately 9% for all of 2009.

Early returns on the effect of reductions thus far have been encouraging, with significant positive impacts on yield and PRASM emerging across all of our key regions.

As we move to an all Q400 fleet, we will continue to adjust frequency, and reallocate some capacity from underperforming markets, to higher potential opportunities as necessary.

This affords us the flexibility to adjust to the current downturn, while laying a firm base from which to build as conditions improve.

The current economic environment, coupled with our transition route Q200s, has resulted in the suspension of service to a few markets that we have served for decades.

I would like to thank the customers and employees who made Klamath Falls, North Bend/Coos Bay, Butte, and Pendleton, very proud parts of our system for many years.

A silver lining to these capacity reductions has been the availability of aircraft for redeployment to some underserved current markets, including the Seattle/Portland and Seattle/Spokane shuttles, as well as to a few promising new markets, including La Paz, Mexico, Prescott, Arizona, and coming this December, Mammoth Lakes, California.

We anticipate our fourth quarter CASM ex-fuel will come in between $0.161 and $0.163.

That is up 10 to 12% from 2007's fourth quarter.

For the full year 2008 we are forecasting CASM ex-fuel to be 1 to 2% higher than in 2007, with capacity down 9%.

Now let me turn the call back over to Brad, who will update you on the Air Group balance sheet.

Thanks Jeff.

Once again we closed the quarter with cash and short-term investments of 1.07 billion, compared to $823 million at the end of 2007.

Our cash and short term investment balance on Tuesday was 1.18 billion.

We generated 141 million of operating cash flow during the first nine months of the year, down from 373 million last year.

The decline was simply a function of the deterioration in our results, because of the $267 million increase in our economic fuel costs.

In addition to the 141 million of operating cash flow, we have proceeds from new financings of 640 million, for total cash inflows of 781 million.

These were offset by capital expenditures of 410 million, debt repayment of 73 million, and share repurchases of 49 million.

Together these items explain the 244 million increase in cash and short-term investments.

We expect our full-year capital spending to be 445 million this year, and 405 million next year.

Last month we modified the terms of our $185 million line of credit, to eliminate all existing financial covenants, and replace them with a simple minimum cash requirement of $500 million.

While there was a cost to do this, we believe that maintaining our borrowing ability under the line, is an important part of preserving our flexibility.

Last week we drew down 75 million on the line, due to expected temporary delays in our aircraft financing plan.

We have debt financing commitments in place for all of our firm Q400 deliveries, and we are working right now on a number of options to finance our 737-800 deliveries.

Finally, turning to our pension funding, we have contributed 52 million to our defined benefit plans this year, bringing our post-9/11 funding to $420 million.

We have no required funding in 2009.

At the end of 2007, our funded status was 86% on a PBO basis, which is the most conservative measure.

Given activity in the market this year, we believe our PBO funded status has declined to roughly 70% at the moment, meaning that we are underfunded by approximately $300 million, and again this is on a PBO basis.

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

Thanks Brad.

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

Jennifer, would you please assemble the roster for us?

(OPERATOR INSTRUCTIONS).

We will pause for a moment to compile the Q&A roster.

Your first question comes from Ray Neidl from Calyon Securities.

Congratulations on Horizon.

Looks like it is finally turning around.

But with the weakening economy and other things happening in the Pacific Northwest, what other further actions might have to be taken, or do you feel you are pretty much on track for solving the problems completely now?

Well, good morning, Ray.

I think the things that characterize the actions we have taken th us far, lay a real firm foundation to weather the storm here.

We have done significant capacity shifts, and in many cases reductions, although the mix change between Q200s and Q400s has had some effect.

But in all of those cases, the frequency reductions that we have made, down to levels that preserve a pattern that is suitable both for local and network support, are what we consider to be sustainable levels.

And we are working very closely with all of the communities we serve, to engage in whatever stimulative activity is appropriate there.

And feel that the adjustments we have made in terms of trimming markets, was foreseeable given the up-gauge to Q400s, but that we are at a place now that we think is pretty sustainable going forward.

Ray, this is Bill, I might just add that the fleet moves at Horizon are very significant, and we are not quite done with the Q200, as you heard, and there are identifiable expenses that go away when that fleet type goes away, even more so with the CRJs.

So we are looking forward to getting Horizon to a single fleet of Q400s.

We think that will be the most fuel efficient, and we will get some specific savings as we make those transitions.

We estimate between the two, Ray, the overhead reductions are about on the order of $10 million, as a step function once the two fleet types go away.

Great.

You are doing a great job in that area, which had been a drag on the company.

The other thing, just to clarify the fuel hedges, were you guys smarter than other airlines?

Sounds like your fuel hedges were less risky than other airlines with oil prices coming down, why did you decide to to do it that way, and what was the trade-off, as far as the cost goes?

Hey, Ray, this is Jay.

No, we weren't smarter than anyone else.

We have a conservative philosophy in the Company, and we think of the fuel hedge program a bit like an insurance policy, where you pay the premium that is a sunk cost, and candidly, had we not had fuel run up against us, that would have been an expense that we would have had on our books quarter after quarter, but we benefited from fuel going up, but because of the hedges that they are call options, we will participate on the downside.

(audio break) Are you still there, Ray?

Is the operator there?

Sir, it looks as if he needs to press star 1 again, he did go out of queue.

Okay.

Fair enough.

So yes, just to recap that question, we have hedged primarily with call options, which means we pay a premium, and we benefit fully from the downside.

I think some of our competitors have hedged with swaps and collars, which puts them at some exposure as fuel prices come down.

Okay.

With that Operator, we are ready for the next question.

Okay, sir, just one moment.

Our next question comes from Mike Linenberg from Merrill Lynch.

Your line is now open.

Okay, thanks.

Hey, I guess two questions.

Brad, you talked about drawing down part of the revolver, 75 million, this temporary delay in your aircraft financing plan.

Can you elaborate on that?

Is that tied to just airplanes coming in late because of the strike, and the number of airplanes that you are anticipating, and taking delivery of for 2009?

Yes, it is not really related to the strike.

It is related to the disruption in the financial markets in the last three our four weeks.

So we had a fourth quarter financing plan.

Did it get pushed back a little bit, what we hope is a temporary delay.

Given that, we decided that the conservative thing to do was to pull down $75 million off the line.

Okay.

And just the size of that line, and what is just the rate that you pay on that line?

The size is $185 million.

The rate, Jay, have we disclosed the rate?

We have not.

Probably not wise--

Is it fixed or floating?

We had seen the huge run-up in LIBOR, and, of course, we are getting a bit of a pull-back.

It is floating.

Okay.

That is helpful.

Just my second question, and this is probably, I don't know if it's Bill or Gregg Saretsky, but when I think about your positioning in Seattle, and we have a merger, a proposed merger in the works, and just from the commentary that we got from Delta and Northwest, it seems like it is on the tracks, it looks like the deal is going to go through.

When I think about your relationship with Northwest, you have a relationship with Delta, you also have relationships with Air France and KLM.

Alaska, in my view, as a partner, would become even a more attractive partner post the merger of those two companies, given the historical relationships that you have, and the fact that it seems like SkyTeam is making this focus on Seattle.

You have the French flying from Seattle to Paris, and you have had Northwest with KLM at the Amsterdam, and just recently the Heathrow flight.

So when I think about your positioning and the importance of feed to those markets there is maybe a bigger opportunity for you.

So I know you don't talk about it much of late, but what is your thinking on that?

How should we think about that?

Any commentary would be helpful.

Thanks.

Hi, Mike, this is Gregg Saretsky.

That is a good question, in fact we do have partnerships existing with both Delta and Northwest.

Our geography plays well because of our strong position on the West Coast, to feed Northwest's existing network at Seattle, and more of that feed goes to Delta, frankly at Los Angeles.

So having strength in both those points, makes us I think a good partner for all of our airlines carriers, and we expect that will continue post the merger.

Okay.

All right, that is fine.

Nice job this quarter.

Thank you.

Your next question comes from Gary Chase from Barclays Capital.

Your line is now open, sir.

Thanks, guys.

This is Dave Simpson.

A question as I look at your advanced booking guidance to see November, mainline November down 3 points, December up 5.

Capacity pulls for you seem to get bigger during the quarter, and competitive capacity seems to get better.

Should we read into anything into that November number other than seasonality, or is that reflect maybe a weaker build in Thanksgiving than you were expecting?

October up 1, November is down 2.5, December up 5 at the moment.

There is a little swivel this year with the Thanksgiving return traffic.

The Monday is going to fall into December this year and it was in November last year, so that may affect some of the November/December numbers.

So that is what we each looking for.

One of the things we might say with respect to advanced bookings is in the aggregate they look good.

We are up a couple of points if you look at next 100 days, or something like that.

I think probably like a lot of airlines, and like a lot of businesses, the last three weeks have been lighter, so that I think it is as we said on the call, I think it would be appropriate to be a little cautious with how much folks extrapolate from these advanced bookings that we are looking at today.

Great, thanks.

Just to come back to the line of credit pull, when you say the plan, the financing plan got pushed back, was that committed financing that you are having difficulty closing, or was that non-committed financing that you are looking to close?

Hi, Dave this is Jay.

No, it isn't committed financing that we didn't close.

We have received term sheets from commercial banks for both debt and sale leasebacks, but given the credit market dysfunction, it was candidly at prices that we didn't like, so one of the benefits of having a strong balance sheet, is that we have the time and the patience to wait for the credit markets to return to normal, then we will go back into the market, and the credit facility was priced a couple of years ago, and so it was the perfect tool for us to use to bridge that.

Okay, got you.

I appreciate that.

Thanks, guys.

Your next question is from Daniel McKenzie from Credit Suisse.

Your line is now open.

Good morning, guys.

Just a couple questions here.

Brad, I know you guys, I am sensitive to the fact that you guys have been very good about providing transparent guidance with respect to the quarter, but one thing that sort of jumped out in my model this quarter was the fuel estimate, which actually turned out to be $0.10 higher than what you had guided to.

Is there any thoughts you can share about what might have caused that to move around at the last minute?

Hi, Dan this is Brandon.

I don't have anything specific on that.

I think one thing that worked into the overall price for the quarter was the fact that we had some very high priced fuel in inventory at the end of the second quarter that bled through the average cost of that inventory, driving up the overall price, which was perhaps a bit higher than the spot price that we were paying at the end of the quarter.

There may have been a bit of confusion on that on our end.

Got it.

Okay.

And then given the Boeing strike, maybe a different wrinkle here, I am wondering if you guys, if that is resulting in a detectable change at all, perhaps in corporate travel in and out of Seattle?

Dan, I will take a crack at that.

This is Gregg.

We are seeing a slowdown in corporate travel across our network, not only in Seattle.

I will say though, however, the Seattle market is a little more buoyant than what we are seeing in California.

And we have met recently with corporate travel managers, who tell us that are introducing or enforcing compliance with travel policies that are requiring further advanced, or booking further in advance of travel, so we will see in addition to a reduction in demand, some reduction in ticket prices, as a result of them taking advantages of 14-day advance purchases versus 7.

Got it.

Okay, thanks.

One final question.

Wonder if you could comment a little bit about what you are seeing from Virgin, the competitive dynamic from Virgin?

Yes, Dan.

I think what we have done against them has worked quite well.

You know we went to this hourly LA schedule, on an every other hour schedule in San Francisco.

We fortified our presence against Virgin, while we were lightening up in California generally.

They have gone from four flights LA-Seattle and five San Francisco-Seattle, to 3.3 and 3.4 flights respectively, so they have been pulling down gradually over time.

Good, thanks, appreciate the color.

(OPERATOR INSTRUCTIONS).

Our next question comes from Peter Jacobs from Ragen MacKenzie.

Thank you, Operator.

Good morning, everybody.

First of all Brad, you had made a comment about the mileage plan gain, would also result in positive revenue going forward.

Could you explain that, and did I hear that correctly?

Did you hear it correctly, Peter.

And Brandon Peterson is an expert on this, so we will ask him to answer your question.

You are right, you heard Brad correctly.

We think the change in the policy will result in an additional $2 or 3 million per quarter in the future, because of that more aggressive expiration policy.

When those miles expire, we take that through our P&L at the time.

So are you saying that you think that passengers that would have used the miles are now going to pay for the tickets, or is there some kind of additional accounting mechanism that you are also going to see benefits going forward?

I am a little confused on this.

It is really the latter is what I am talking about.

It is just how we do the accounting when we have that more aggressive policy those miles break faster, for lack of a better term.

Oh, so you are saying the fall-off each subsequent quarter will be close to 2 to 3 million in revenue, basically noncash revenue that you would be recognizing?

Exactly.

Okay, that explains that.

Let's see.

Secondly, on the pension plans, given that on a PBO basis, you estimate that you are looking at probably about a $300 million deficit right now, versus liabilities, why wouldn't there be a mandatory cash contribution next year?

Hey, Peter, it is Jay.

The Pension Protection Act has new requirements regarding how plan sponsors make their contributions, but we have two things working in our favor.

One is the airline industry receives specific relief for contributions, as well as because we have made contributions historically in excess of our required, we build up a credit balance that we can use for future contributions.

And so between both of those, and it is primarily the airline relief, we have the ability to skip a payment next year.

Okay, great.

And just a couple more quick ones.

Could you tell me what the raw fuel prices are that you are seeing at Sea-Tac?

Peter, I don't have Sea-Tac specifically, but right now, based on yesterday's oil, we pay approximately $2.25 per gallon.

2.25.

Now a conceptual question for Jeff.

The retirement of the CRJs, given that you are having difficulty finding homes for those, and that oil prices have come in quite a bit, and still probably not at the level that you would like to justify the cost of CRJs, but is there a price of oil that it makes sense to keep some of the CRJs for routes, such as Seattle to Fresno, or to Santa Barbara, some of the longer range lower density routes?

Good question, Peter.

And certainly as fuel has come down some of the cost inefficiencies of the RJ have been mitigated, but having said that, the prize of simplicity, and everything that accompanies that, in terms of our efficiencies, is still much greater than that.

It is still worth pursuing.

As we look at the capability of the Q400, both it's range and passenger service capability, as well as mostly it is fuel economy, it represents probably the greatest hedge we have against fuel fluctuations.

So while fuel is down now, the only thing we know for sure is that it is very volatile.

In terms of building for the future, we think single type fleet, the economies that come with that, and leveraging the capabilities of that aircraft, both in terms of where it can fly, and how cost efficiently it can fly is our best answer.

And the last one relates to some of the fuel hedge accounting, and the discussion brought up another question in my mind, and that was, when you put these hedges in place, and you pay for these caps or call options, do you expense the cost of those when you put those hedges in place, or do you accrue for those, and do we see those expensed then at settlement?

Peter, it is Brandon Petersen again.

We expense those premiums at settlement.

At settlement.

So it is just baked into the overall cost then that we see, it is netted out?

Yes.

Okay.

Thanks.

Those are my questions.

(OPERATOR INSTRUCTIONS).

We have no questions from reporters.

All right, thanks, Jennifer, and I will hand it back to Bill to close the call.

Thanks for joining us, and we will talk to you next quarter.

See you later.

This concludes today's Alaska Air Group third quarter 2008 earnings call.

You may now disconnect.