阿拉斯加航空 (ALK) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen.

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

At this time, I would like to welcome everyone to the Alaska Air Group first quarter 2009 earnings release.

(Operator Instructions).

At this time, it is my pleasure to turn the conference over to Ms.

Shannon Alberts.

Please go ahead.

Thanks, Lori.

Hello, everyone, and thank you for joining us for Alaska Air Group's first quarter 2009 conference call.

During our call today, Alaska Air Group Chairman and CEO, Bill Ayer, will provide a Company overview; CFO Glenn Johnson will talk about Air Group's financial position; and Alaska President Brad Tilden and Horizon Air President and CEO, Jeff Pinneo, will comment on the financial and operational performance and future initiatives of Alaska and Horizon.

Other members of the senior management team are also present to help answer questions, including two that are new in their roles -- our COO, Ben Minicucci, and VP-Marketing, Steve Jarvis.

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've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release.

This morning, Alaska Air Group reported a first quarter GAAP loss of $19.2 million.

Excluding the impact of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported an adjusted net loss of $25.4 million or $0.70 per share.

This compares to a First Call estimated mean loss of $0.49, and to last year's adjusted net loss of $37.7 million or $1.02 per share.

Additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures and fleet count can be found in our investor update included in our Form 8-K and available on our website at alaskaair.com.

With that, I'll turn the call over to Bill Ayer.

Thanks, Shannon, and good morning, everyone.

While our first quarter results represent a significant improvement over last year, we're nonetheless disappointed to report a loss for the quarter.

In spite of our capacity cuts and scheduled redeployments, the steep falloff in demand has resulted in lower revenues and declining yields.

Fortunately, the decline in revenue has been offset by lower oil prices, which are a welcome relief; but they're a byproduct of the recession, which has depressed demand for air travel to a level that only the most bearish industry watchers could have predicted just a few months ago.

Although we can't control the economy, we can control how much capacity we produce, where we deploy that capacity, how we price our product; and most importantly, the level of service our people deliver each and every day.

Alaska and Horizon are focused on finding ways to optimize revenue regardless of the level of overall demand.

Let me talk about two areas that are specifically aimed at improving our revenue performance -- ancillary fee initiatives and capacity adjustments.

Ancillary fees have proven to be an effective way for airlines to improve revenues.

In that vein, this morning, we announced our decision to charge a service fee for the first checked bag beginning July 7th for tickets purchased on or after May 1st for travel on Alaska or Horizon.

We believe we can implement this in a way that represents a good value to our customers, and that is consistent with our brand.

This fee puts us on par with the majority of other airlines, and it allows customers to book a low base fare and pay for only the additional services they decide to use.

We believe we are the first to provide a delivery guarantee in connection with the fee; and that is, if the bags are not on the carousel within 25 minutes, our customers will receive their choice of either $25 off a future flight or 2500 Mileage Plan miles.

We're also improving revenues by tailoring schedules and aircraft mix to better match the lower demand levels we're seeing, while maintaining good time-of-day market coverage.

Horizon CRJ aircraft are now serving many of our Portland to California city pairs, freeing Alaska's jets to serve new markets or respond to competition.

For example, we've recently announced that Alaska will start service between Bellingham and Las Vegas, and we'll continue to reallocate capacity in response to changes in demand.

These changes, combined with our new advertising campaign and a grassroots initiative designed to engage our entire workforce in our sales efforts, will help us optimize revenue through this difficult demand environment.

One thing we couldn't control this quarter was mother nature.

Our operation was challenged early in the quarter by severe weather conditions in the Pacific Northwest, only to be followed by a series of volcano eruptions in Alaska.

I'm grateful to all the Alaska and Horizon employees for the extra hours and the caring service they provided, including the work by our pilots and flight ops teams to continually assess the flight conditions affected by the volcano.

The safety of our passengers and crew is always our primary concern, and we appreciate the flexibility of our customers as we juggled our flight schedules.

We are very pleased to have reached a tentative agreement with Alaska's pilots, who will vote on the proposed contract during the next month.

Alaska's flight attendants also recently ratified a two-year extension to their agreement through 2012.

We're looking forward to reaching agreements with the remaining work groups at both airlines.

I know you're all curious to know what light we can shed on demand trends for the summer.

Brad and Jeff will talk about what we're seeing in our advance booked load factors in a minute; but I can tell you that along with the rest of the industry, we don't have a clear picture about demand going into the summer season.

The summer is down, but it doesn't seem to be getting materially worse.

And we're optimistic that our sales efforts, while negatively affecting yield, will have a positive effect on future bookings.

In the meantime, we'll continue to keep a healthy level of cash as we do our best to control what we can, match capacity to demand, and optimize revenue.

And with that, I'll turn the call over to Glenn.

Thanks, Bill.

Good morning everybody.

As Shannon said, Air Group reported a first quarter 2009 adjusted net loss of $25.4 million versus a $37.7 million loss in the same quarter 2008, so a $13 million improvement.

As is our usual practice, that states fuel on an economic basis, excluding mark-to-market adjustments on hedges that settle in the future.

The drivers of the $13 million improvement were as follows: First, consolidated revenues declined by nearly 12%.

Consolidated non-fuel operating costs were down about 2%, which was disappointing given the significant capacity reductions; but not unexpected for the reasons that we talked about on the fourth quarter call, which included increased pension expenses, reflecting the amortization of the loss on the portfolio in 2008, the timing of certain maintenance events, and changes to our aircraft financing where we're using sale leasebacks this year versus debt financing in the past.

Unfortunately, it also tends to overshadow the great work that both companies have done to trim costs in the operation.

Let me just note a few key statistics that demonstrate how we've managed assets and related costs down as we reduced capacity.

Total Alaska Air Group FTEs are down by about 1700, or 12%, March 31st, 2009 versus the same period last year.

And we reduced the total aircraft across Air Group by 14 units -- three at Alaska and 11 at Horizon.

Ultimately, though, the biggest driver offsetting the 12% decline in revenues was the 41% decline in economic fuel expense.

This year's economic fuel costs include roughly $26 million in net hedge costs -- about $0.29 per gallon -- for hedges that settled during the period.

By contrast, last year we had a net hedge benefit of $29 million, which reduced our cost per gallon by $0.28.

I would also note that of the $26 million hedge cost this year, $19 million of that relates to collars, which made up 6% of our portfolio or 3% of our consumption during the period.

We have two remaining collar positions, representing about $6 million in mark-to-market losses as of March 31st of this year, and no collateral posted on those collar positions.

We're maintaining our strategy of using caps almost exclusively to manage volatility, and we continue to think about our hedge program as insurance with a small incremental premium cost over time.

I also want to note that crack spreads are significantly lower this year.

LA jet crack averaged $0.57 a gallon in 2008 and reached a high of $1.07 in May of last year.

By comparison, through April 21st of this year, the crack has averaged $0.31 a gallon.

We remain very committed to our long-term goal of achieving a 10% return on invested capital, or ROIC.

For the twelve months ended March 31st, Air Group generated an ROIC of just about 4% on our base of $3.5 billion of deployed capital.

Turning to the balance sheet, we closed the quarter with cash and short-term investments of $1.04 billion, just about the same as year end.

That puts our cash at 29% of our revenues, which we believe remains the strongest position among the major carriers.

Our adjusted debt to total capitalization ratio was 80%, a slight improvement over year end.

Cash flow.

We generated $15 million of operating cash flow, down from $34 million last year.

In addition, we realized proceeds from new financings of $294 million during the quarter.

Those related to the sale leaseback financing for six 737-800 aircraft, as well as one 800 that was debt financed.

And of course, we had prearranged debt financing for the two Q400 aircraft delivered during the quarter.

In addition, we anticipate closing about $60 million in additional debt financings in the next month or so, and we have term sheets for further financings this year.

So we believe adequate financing is available to airlines with strong balance sheets and attractive collateral, and we're fortunate to have both.

Those cash inflows were offset by CapEx of $226 million, debt repayments of $122 million -- which include paying off our line of credit balance at year end of $75 million.

Overall, I would characterize our liquidity position as comfortable and note our ability to raise additional capital if necessary.

Our goal is to maintain about $1 billion in cash, although we would certainly be comfortable with a higher balance until the environment stabilizes.

I would also note that our cash balance represents approximately $29 per share, which we've been able to sustain over the past several quarters.

Turning to the fleet -- Alaska's fleet.

Alaska ended the quarter with 112 aircraft, up two from year end.

You'll recall that the Boeing strike pushed five aircraft from Q4 into Q1.

Our plan is to hold the fleet count constant at Alaska through the rest of 2009, although that assumes we can sell four 737-700s on acceptable terms, which may be difficult given the market.

In addition, as we manage future capacity, we recently renegotiated our delivery schedule with Boeing, which we've outlined in this morning's press release.

By the end of June, we'll have 116 aircraft, and then no further deliveries until April of 2010.

In 2010, we have seven aircraft to be delivered, with seven retirements during the same period.

There are no deliveries now scheduled for 2011, down from four under the previous delivery schedule.

We've pushed two of those into 2012 and two into 2013.

And finally, we firmed up two options in each of 2014 and 2015 to replace planned lease returns, so we now have 17 firm deliveries in total from this point forward.

The Horizon fleet -- Horizon flew its last Q200 flight in January, marking their transition to two fleet types and reducing their invested capital base by approximately $100 million.

Due to market conditions and financing constraints, we've not been successful in remarketing the CRJ-700s to date.

We've advised Bombardier of our need to defer delivery of the three Q400s still scheduled for this year; and the remainder of the order, which is eight Q400s, scheduled for delivery in 2010 and early 2011.

I would note that we're not in a fire sale mode, and we can certainly continue to fly the CRJs, which are a very reliable aircraft that have served us quite well, especially given the price of fuel moderating.

Our objective is still an all-Q400 fleet at Horizon; but both airlines have an absolute conviction about not accepting capacity that they cannot profitably deploy.

And finally a note about pensions.

You'll note that we have no required funding in 2009, although we contributed about $11 million this quarter.

We plan to contribute a total of $48 million for the year, which represents a service cost, dependent on the economic environment and our cash position.

We continue to evaluate the performance of our plan assets, and I would note that another year of plan asset performance similar to 2008 would further impact pension costs in the future and could trigger a hefty funding requirement in 2010.

We'll certainly keep you posted on that on calls throughout the year.

With that, I'll turn it over to Brad.

Thanks, Glenn, and good morning everyone.

For the quarter, Alaska Airlines reported an adjusted pretax loss of $26.6 million compared to a loss of $39.6 million in 2008.

This represents a negative pretax margin of 4.1%, compared to a negative 5.4% in 2008.

As Glenn said, the quarter was characterized by lower revenues, offset by even lower fuel costs.

The first quarter is typically our weakest; and while we're never satisfied with a loss, it's not unexpected in this environment.

But the real headline for the quarter is what we're doing to move the Company forward.

We've made progress with two very important labor groups.

First, we were happy to reach a two-year extension with our flight attendants; and I might note that we reached this more than 12 months before the agreement became amendable.

And second, we reached a tentative agreement on a four-year deal with our pilots.

We've agreed with ALPA to not release details of the agreement while it's in the ratification process; but I would note that our objectives going in were to improve both wage rates and productivity, to close the defined benefit pension plan to new entrants and to move toward a common gain sharing program for all of our employees.

We feel this tentative agreement meets these objectives.

I want to extend a heartfelt thanks to the Union leaders and the Alaska management team, who've worked so hard to get this deal to this point.

Turning back to the financial results, Alaska's mainline passenger revenues were down 11% or $72 million for the quarter.

The revenue decline was the result of a 9% reduction in capacity and a 2% decrease in passenger unit revenues.

Sequentially, passenger RASM improved by 5% in January, but declined by 4% in February and 6.3% in March.

The shift in the timing of Easter negatively impacted March.

Our unit revenue decline of 2% for the quarter compared very favorably to the industry, which was down 9.9%.

Regionally, we saw strength in the Hawaii and Alaska long-haul markets, which continued to meet or beat expectations, and weakness in the Bay area and Southern California markets, and this came despite significant capacity reductions.

Our folks in planning, marketing and revenue management are doing a number of things to optimize our network and improve our revenues.

During this time when we have excess capacity, we've significantly improved unit revenues by moving many of our red-eye flights to daytime.

We're also making as much noise as we can with a new advertising campaign.

We're involving our employees in a number of activities to market the Company, and we're doing some limited-duration sales in focused markets to create some buzz and stimulate demand.

Bill mentioned the first bag service charge and the bag guarantee, which will be effective July 7th.

We estimate the annual benefit to Air Group at $70 million, and the benefit for the remainder of 2009 at $30 million.

Changes like this are not easy to implement, and I would like to offer our thanks in advance to our employees who will be on the front lines today and for the next several months, ensuring that this change goes well for our customers.

Looking forward, we expect our April load factor to be up 1 to 2 points, helped by the Easter timing; but we're really watching May and June as bellwethers of what the rest of the year might bring.

Alaska's advance booked load factor for May is down about a half a point, and June is down 4.5 points.

There are really two things that we would say about these advances.

One, we've seen a trend of closer-in bookings in the last couple of months -- and you've probably seen this as you've looked at our guidance -- and we're obviously hopeful that this trend continues into the summer.

But two, the weakness in demand is likely to have a negative impact on yields, as we take actions in revenue management to fill the unsold seats.

Turning to the fall, if the demand environment were to deteriorate further, we are prepared to reduce capacity, and this could then require us to furlough additional employees.

This is certainly something we would like to avoid, but we need to remain responsive to the environment and disciplined with capacity.

With respect to costs, our CASM ex fuel for the quarter was $0.084, up 11%, but at the low end of the guidance we provided in January.

As we look to the rest of 2009, we're still forecasting CASM ex fuel of $0.081.

This number reflects refinements to our capacity and cost estimates, as well as our best estimate of the impact of our pilot agreement, assuming it ratifies.

For the second quarter, our CASM ex fuel guidance is $0.082.

We expect to reduce available seat miles by 7% in the second quarter, and now expect full year -- our full year capacity reduction to be 6%, which is down a bit from our previous guidance of 7%.

At this point, I'll turn the call over to Jeff.

Thanks, Brad, and good day, everybody.

Horizon posted an adjusted pretax loss of $12.2 million for the quarter, a $6.3 million improvement over 2008's first quarter, marking our third consecutive quarter-over-quarter improvement.

While we're encouraged by our progress, we're far from satisfied with this result.

First quarter revenues were down about 17% on a 20.4% decline in traffic and a 16.5% reduction in capacity.

System yield was up about 4%, which helped limit the decline in system RASM to 0.8%.

Breaking it down by line of business, we noted that brand flying revenue was down 16% on an 18.4% capacity reduction.

RASM in this line increased by 3% due to a 6% increase in yields, combined with a 1.7 point decline in load factor.

Yield was driven higher, primarily by annualization of fare increases implemented during last year's run-up in fuel costs.

Ancillary revenues increased $700,000 or 34% from last year.

For capacity purchase flying, our revenue was down 19%, a result of lower fuel cost reimbursements that Horizon records as revenue and a 17.5% decrease in departures over last year's first quarter.

Since we have upgauged from 37 seat to 70-plus seat aircraft, the need to appropriately align our capacity with current demand translated to frequency reductions in some markets, particularly on our short-haul routes.

We have also made further schedule trims to free up aircraft time for strategic Air Group missions.

In the affected markets, we're working to mitigate the impact on demand through retiming of flights and tailored pricing actions.

We continue to monitor the demand outlook, and are committed to executing further reductions and/or realignments of capacity as necessary.

On the expense side, CASM ex fuel increased by 5.8% on a 16.5% decline in capacity.

Our nearly 12% reduction in non-fuel expense was significant, but not in proportion to our reduction in ASMs, due to expenses related to our Q200 transition and the front-loaded nature of the capacity reductions.

Although our non-fuel unit costs came in slightly below our latest guidance, they were higher than our original guidance as a result of the $4.8 million Q200 transition charge that was higher than anticipated.

Fuel expense for the quarter was down nearly $22 million, or 44%, offsetting revenue softness and unit cost increases; and fuel burn improvements are further augmenting benefits from price reductions.

Recognizing our vulnerability to fuel price and revenue fluctuations, we are continuing our efforts to squeeze costs out of the operation, including further reducing overhead expenses across the Company by 10%, integrating more support services into shared services with Alaska, and ensuring that we execute against the aggressive cost reduction goals we've set for ourselves in 2009.

For the quarter, labor productivity, as measured by passengers per FTE, was down about 5% due to the sharp drop-off in passengers.

FTEs were down about 12%, and we remain focused on continuous improvement in this area.

Transitioning into the summer season, the demand picture remains somewhat unclear.

As reported in today's investor update, year-over-year advance booked load factors for our brand markets are up one point, down 2 points and down 4.5 points for April, May and June, respectively.

Forecast load factors are impacted by our year-over-year upgauging from 37-seat Q200s to Q400s, as well as from raw traffic declines.

Since our previous investor update, we have seen some modest improvement in April traffic and load factor through close-in bookings.

Even in a time of capacity downsizing, we are committed to defending our turf up and down the West Coast and ensuring that we're in the optimal competitive position to take advantage of opportunities as they are presented.

To that end, we have recently implemented a number of pricing actions to not only stimulate travel, but also respond to competitive threats.

We continue to play a key role in harmonization efforts with Alaska to enable the most profitable deployment of all Alaska Air Group's assets.

Shifting the focus to operations, our team posted an 81.2% DOT on-time rating for the quarter, an improvement over last year's 80.7%.

Also, our entire team is to be congratulated for their tremendous performance in the month of March, when 86% of our flights arrived on time, placing us number one when compared to DOT reporting airlines in the continental US.

As Glenn noted, our plan to transition to an all-Q400 fleet has been stalled by extremely soft market conditions.

As the remarketing environment improves, we'll continue our push toward a single-type fleet.

In the meantime, we're confident in our ability to efficiently operate our current two fleet types within the AAG network.

Looking forward, we anticipate our second quarter CASM ex fuel will come in between $0.149 and $0.151, up 4% to 5% from 2008's second quarter on an expected capacity decline of 12%.

For the full year 2009, we're forecasting CASM ex fuel to be 5% to 6% higher than in 2008, with capacity down 9%.

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

Thanks, Jeff.

We recognize that the economic outlook has created a great deal of uncertainty and anxiety across the nation, and I want to express my thanks to the Alaska and Horizon employees for maintaining their focus on running a safe operation and for taking really good care of customers through it all.

So with that, let's move to questions.

Shannon?

At this time, we would like to invite questions from analysts.

Lori will help us assemble the roster.

Thank you very much.

(Operator Instructions).

We'll pause a moment to assemble the question roster.

Our first question today comes from William Greene with Morgan Stanley.

Yes, good morning.

I'm wondering if I can ask you about this capacity outlook.

Historically, you've been pretty prudent in managing the capacity; so I guess I was a bit surprised that -- although it's only minor -- but you did up the guidance on capacity from the previous guidance you had given.

So maybe you could talk a bit about that in the context of demand and loads being down in June 4.5 points.

It would seem that actually the change now should be more cuts, not fewer.

Bill, this is Brad.

And I certainly get the question.

What is driving the change in the guidance are two factors.

One, we did see significant reductions in capacity in the service between the Lower 48 and the state of Alaska this summer.

And as I think everyone knows, we take our responsibility to serve the state of Alaska very seriously, and we did add some seats there.

Our capacity in the state of Alaska is actually up year-over-year, which is a bit unusual, but the market capacity is still down significantly.

So that was one of the drivers.

And we think that will be a good capacity for investors.

And second, we have announced two new cities that we start in August -- Seattle-Austin and Portland-Maui -- and those also contributed to the capacity increase.

I think if you look at our capacity in our core markets, it's still down significantly; but as you say, the 4.5-point decline for June is a concern, and that's why the comment about the fall.

We're going to be watching this very carefully as we get our head together for the fall schedule.

Okay.

And when do you -- how much lead time do you need to cut?

You know, Bill, this is Glenn.

I was just going to comment on the levers that we have to moderate the capacity in addition to what Brad just said.

In the very short term, we can really reduce high frequency markets if we see the need to do that, and we can do that right up to the point where we post flight attendant and pilot schedules, really.

In the mid-term, of course -- and I would think of that in terms of our fall schedule -- we can warehouse a bit of capacity by reducing the utilization on the airplanes.

And if you look at the press release today, we're down about an hour a day in terms of aircraft utilization, so we're exercising that lever.

And then, of course, we've announced the intent to sell four 737-700s, so disposing of fleet; and then in addition to that, deferring the aircraft orders with Boeing.

So we've got both short- and long-term levers to reduce the capacity that range anywhere from very close in to longer-term.

All right.

Just one question on the bag fee.

You mentioned in your comments you were going to -- you are prepared to defend your turf, and Southwest doesn't have a bag fee.

So how did you think about it when you decided to put this in?

Does your assumption of $70 million in ancillary revenue gains from this include some share shift?

How do you think about the competitive response there?

Bill, we'll ask Steve Jarvis, our VP Marketing, to address that.

There is some dilution in that estimate.

But Steve, why don't you talk more about how we generally thought -- came to the decision to implement the first bag service charge?

Sure.

This is Steve.

We took a really careful look at this and, quite frankly, hung out there for quite some time without the first bag fee.

It's really hard to estimate what kind of shift might occur; but I can tell you we were concerned that we weren't seeing shift coming our way because of this fee for many, many months.

And we looked at that not just in our bookings but also surveying customers, understanding the awareness of whether or not we had this first bag fee, and came to the conclusion that it really hasn't been a determining factor in the choice of carrier for our customers.

So we wanted to be careful in implementing it and stand behind it.

That's why we're proud of this industry-first guarantee -- if customers are going to be charged for the first bag, we want to deliver it with a certain amount of guaranteed service, and we think that will be looked upon very well by customers.

Right.

So the conclusion was you were just leaving too much money on the table and you weren't getting the share shift without it?

So you put it in place.

Correct.

All right.

That makes sense.

Thanks.

Our next question will come from Jamie Baker with JPMorgan.

Hey, good morning, everybody.

Good morning, Jamie.

My first question, just regarding Virgin America, since you've made that an effort of yours.

I'm aware of the broader issues.

What confuses me at this point is why there hasn't been any apparent movement or summary judgments.

Things seem pretty clear cut to me.

Do you have a feel for how this issue is proceeding in Washington, if it's proceeding at all?

Yes, Jamie, this is Bill.

No, we don't.

Simple answer.

And the quick background is we just thought it was appropriate to be asking the question given the media reports and the changes in their US ownership.

Others have joined that question, union groups and so forth; and we're waiting to hear from DOT as to what they're going to do with this.

And I know that Congressman Oberstar is also interested in it.

So I think something will move at some point, but they've probably got a lot of other things they're dealing with.

Okay.

Well, that's helpful.

And secondly, an aircraft question.

You logically identified the price of fuel as having taken some of the CASM sting out of continuing to operate the CRJ-700s.

I know that the Q400 has better economics still, but I guess there are also training costs and some other considerations.

Is there an oil price at which keeping the CRJs longer-term makes sense, or does the Q400 just win every single time?

This is Jeff, Jamie.

As you drop down in oil price, of course, the gap diminishes considerably, particularly when you consider how we deploy the RJs on the longer stage lengths and stuff.

But right now, we figure at $50 oil and if you input about a 500-mile stage length -- the Q400 is just under 5% better than the RJ.

You can increment that down a bit.

If fuel were to drop, I don't think it goes up proportionately on the upside as much.

The other thing, of course, is it has six less seats than the Q400, so that's where we would also miss it in the higher load factor environment.

So we're watching it close.

We think right now in this environment it's very nominal, and it's also working very well for us from a planning point of view in keeping frequency levels up in strategic markets like Portland-Bay Area and such, and it's a good solution right now.

Okay.

I appreciate the color.

Thanks everyone.

Thanks, Jamie.

Our next question comes from Mike Linenberg with Banc of America-Merrill Lynch.

Yes.

Hey, good morning, everyone.

Good morning, Mike.

I guess two questions here.

You know, obviously, it's never fun to report a loss.

And I think, Brad, you've even indicated, though, that seasonally this has always been maybe a tougher quarter for Alaska than the rest of the industry.

And yet when I look at your margin this quarter, ex-special items, it looks like it was probably your second best operating margin this quarter over the last 10 or 12 years.

So on a relative basis, it was actually quite good.

What do you think helps drive that?

I mean, I realize pulling capacity down, trying to get that in sync with maybe a reduced level of demand.

Do you think, though, maybe the network has changed to the extent that you're less seasonal, you've got the longer legs -- whether it's out to Mexico or to Hawaii or maybe the single fleet type?

I mean, what may be helping that, that you're seeing that in those numbers?

I mean, any color would be great.

Thanks, Mike.

This is Glenn.

Yes, I think you've hit on a number of the issues.

Certainly, the capacity restraint that we've shown, I think, is helping to drive some of that.

Just an absolute focus on cost control across both companies is continuing to help those areas.

And I guess I would also just say that despite your comments about being the best or second best in 10 years, we're still absolutely focused on the need to get up to the 10% ROIC.

So we've got to do better than we did, but it is encouraging.

Okay.

Good.

And just --

And Mike, just to extend a bit.

The Hawaii -- you mentioned Hawaii -- but it has been a great counter seasonal market for us.

We were looking at some stuff this week.

We now have a 42% share of the Hawaii markets for the service area that we have.

And with the demise of ATA and Aloha, the capacity on the West Coast is way down.

So that has also -- it's part of the network activity, but it's been a huge contributor.

And Mike, this is Bill.

I might just add to what Glenn said about capacity.

So we've seen a nice effect of selective frequency reductions where we can recapture the vast majority of the passengers but do it on one less flight a day, for example.

And that has a material effect on RASM and the bottom line performance of the market.

And more broadly, I think we are encouraged by the industry's capacity restraint and we certainly hope that continues; but I think the whole industry can help itself with similar -- and I think it generally has occurred.

But selective frequency reductions and running higher load factors with higher yields, and that's kind of what you need to overcome this big demand reduction.

Okay.

And then just secondly, as you become a closer partner with the Delta, Northwest combo, since now you're going to be their primary -- I don't know if feeder is the right term, but you will definitely be one of their key partners for some of their more regional services along the West Coast.

That said, there is some overlap; and I think about Hawaii, I think about some of the stuff up and down the West Coast.

Is it fair to assume that we may see some rationalization between you and them such that maybe those markets even get stronger for you?

Mike, it's Brad.

I mean, one of the neat things about our bigger alliance relationships is that there isn't a ton of overlap.

As we look at the networks -- when we see an airline, we really like it if we see lots of end-to-end connections and not a lot of overlap in markets.

I'm just trying to think of the old Delta and Northwest networks, what overlap there might be.

And I guess there's a little bit in Seattle, Minneapolis --

What about to Hawaii, though?

Northwest does a lot of Hawaii out of Seattle and Portland.

Yes, there is some -- that is a market.

There is some overlap there.

Yes, that's what [I thought].

The vast majority of the focus -- and this is -- obviously in this time nobody's growing and nobody's growing networks -- but as we get hopefully to a better time in the coming years and network development becomes more of a topic, it is the end-to-end opportunity that we both see here, and it's feeding new international destinations and those types of things that we're excited about.

Okay.

Very good.

Thanks.

Great, guys.

(Operator Instructions).

Our next question comes from Helane Becker with Jesup & Lamont.

Hello.

Thanks very much, operator.

Hi, everyone.

Hi, Helane.

Hi, Helane.

Thank you for taking my question.

So I just wanted to ask you about your thoughts with this Bellingham, Las Vegas thing.

You know, Allegiant serves quite a few markets that you guys serve on a one-stop basis.

So what are your expectations for this market, and would you consider more markets on a non-stop basis over-flying your own hubs, if this is -- excuse me -- as successful as you think?

Helane, this is Steve, and we're going to start with this one market.

We're really excited about the Bellingham area, and really there's a story to be told there about the lower British Columbia market.

There's well over 2 million people living in the Vancouver area, and a third of them are south of the Fraser River.

It's actually easier to get to the Bellingham Airport than it is to get to the Vancouver Airport for those customers.

And there's also parking and tax benefits of flying out of Bellingham as well.

So it's a market that we think is growing.

It's right in our backyard.

We're excited about it, and we're going to start with this service to Vegas and watch it.

If you go into the Bellingham Airport, you're going to see a lot of British Columbia license plates parked there, so it's broader than just Bellingham.

It's the whole region up there that we're excited about.

But we are going to be looking at additional services.

We want to see this one and how it does.

And Helane, this is Jeff.

We've been at this for some time, of course, with our service to Seattle that connects to all of these other points, and have responded with some great fare activity, some other promotional activity related to our mileage program; and then beyond Bellingham, in other markets where we compete with Allegiant -- most recently Medford, Los Angeles -- we've also introduced very attractive fare levels and other things to protect our share.

So we're going to continue to monitor and be responsive, both on that front as well as on the front that Steve touched on.

Okay, and then just in terms of your fares, as you -- just broadly speaking -- are you finding that when you stimulate -- that you can still stimulate demand with your lower fares?

We are.

I think our working assumption is that we're not going to stimulate business travel.

We are going to look to win a greater share of it.

But we are finding that with creative pricing and promotion, putting the right price out there, that we can stimulate leisure travel.

We had a really unique 14-day sale here recently that has been very exciting for us in creating buzz and excitement about travel for the summer, and we're watching the bookings.

And if also you look at our close-in booking curve -- and we're seeing that it's got downward pressure on yields, but we're able to put people on those airplanes on the leisure side if we stimulate it.

So we're seeing some success there.

Okay.

Thank you.

Thanks, Helane.

Our next question will come from Gary Chase with Barclays Capital.

Good morning, guys.

It's actually Dave Fintzen.

A couple of quick modeling questions.

First off, in your cost guidance, does that take account of the two labor agreements that you've signed, or could we see changes to cost guidance following the announcement?

Hi, Dave.

It's Brandon Peterson.

Our cost guidance does take into account our current best estimate of the two labor agreements -- the ratified deal with the flight attendants as well as the tentative agreement with the pilots.

Okay, okay.

Great.

And then what do you think the Easter impact on March was for you guys?

In terms of RASM?

Maybe one or two points of RASM, Dave.

One or two points.

And then just looking out -- and I realize book load factor is just one piece of the revenue puzzle -- but looking out into June and sort of talking about potential concern, do you feel like you guys have been maybe less aggressive in your -- in revenue managing your advance sales versus, say, some other carriers are pointing to maybe a little bit better booked load factors?

Or do you feel like maybe your walk-ups held up maybe better?

Just some color kind of on what you may be seeing that's different.

Yes, you know, last year at this time we were a little bit more on sale than we are now; and candidly, as we look forward, we are looking at some additional sale fares and a lot more promotion of the fares that we have.

If we look at some of the transcon fares -- if we look at Mexico, some of the fares into our inter-mountain regions -- even Anchorage to Hawaii -- some of those fares we are going to bring down a little bit to try help fill those seats for the summer.

But if you look at the state of California, the fares are very low today.

So what we're going to do is put some of these markets on sale but advertise all of these markets to try to help fill up these empty seats.

And I'm sorry, just to follow up on that, that's more with these 14 day-type sales, or you're going to be more aggressive, say, looking out into June, July.

That would be more looking out into June, July, and maybe even into August.

Okay, okay.

And then just -- any color on kind of what -- do you feel like the business walk-up travel is stabilizing?

Improving?

Getting worse?

I mean, do you have any color there?

This is Steve.

We're concerned about the business travel.

We talk to our corporations, and the mandated reductions in travel are very, very significant.

So I wouldn't say that we feel that it's stabilizing.

There's a lot of uncertainty out there.

That's why what Brad said is very important.

We're going to be out promoting ourselves very heavily to fill airplanes.

We're not really excited about what we're seeing in the business travel side.

Okay.

Great.

Appreciate the color.

Thanks, guys.

Our next question comes from Michael Derchin with FTN Equity Capital.

Oh, hi, everyone.

You've traditionally and still are a north/south carrier but have been developing an east/west flow.

You talked about Hawaii as successful in that regard.

What about the other direction?

How is your east/west going east doing these days, and what's your capacity plans in those markets?

This is Brad, Mike.

The transcon region, which for us that's Newark, Boston, Washington, D.C., Florida, Chicago, Denver, Dallas, among others, it's middle of the pack, if you were to rank our regions.

If you look back over the last several years, it's actually ranked a bit better than that.

I think that reflects some of the weakness in business travel that Steve was just speaking to.

So it's doing okay.

It's not something that we would be looking to add a lot of capacity to right now.

Probably something we're more looking at to say, "Do we have the exact right amount of capacity in the market?"

Thanks.

Yes.

At this time, there are no further questions from the analysts.

I'll turn the call back over to Shannon.

Okay, thanks, everyone, for your questions today.

Now I'll turn the call over to Alaska's Managing Director of Corporate Communications, Caroline Boren, to conduct the media portion of the call.

Thank you, Shannon, and good morning, everyone.

At this time, we welcome questions from journalists participating in today's call.

Lori, would you please remind our callers of the procedure for asking questions?

Absolutely.

(Operator Instructions).

We'll pause just a moment.

At this time, there are no further questions.

All righty.

That was easy.

Thank you.

Thanks, everybody, for your participation today, and we'll look forward to talking with you next quarter.

Take care.

Thank you very much, ladies and gentlemen, for joining today's Alaska Air Group conference call.

This concludes your conference.

You may now disconnect.