阿拉斯加航空 (ALK) 2009 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Alaska Air Group third quarter 2009 earnings 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).

As a reminder today's conference is being recorded for future playback at www.alaskaair.com.

I would now like to turn the conference over to Ms. Shannon Albert, Managing Director of Investor Relations.

You may begin your conference

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

During our call today Alaska Air Group's CEO Bill Ayer will provide a company overview.

CFO Glenn Johnson will talk about Air Groups Financial position and the presidents of our two operating subsidiaries, Brad Tilden and Jeff Pinneo, will comment on the financial and operating performance and future initiatives at Alaska and Horizon.

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

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

Additional information on risk factors that could affect our business can be found in our periodic SEC filings 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 third quarter GAAP profit of $87.6 million.

Excluding the impact of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported an adjusted net profit of $83 million, or $2.33 per share.

This compares to last year's adjusted profit of $39.9 million, or $1.10 per share and to a First Call mean estimate of $2.26 per share.

Again excluding unusual items, Air Group reported a year to date profit of $84.1 million or $2.32 per share compared to a loss of $12 million or $0.33 per share for the first nine months of 2008.

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.

Before I turn the call over to Bill, I want to mention that Alaska Air Group is slated to ring the opening bell at the New York Stock Exchange on November 10.

After that we're hosting our first ever Investor Day at the Exchange.

If any of our listeners are interested in attending please e-mail me at IR@Alaskaair.com.

Now over to Bill.

Thanks, Shannon and good morning everyone.

Not long ago we took stock of the goals we set in 2003, which we called our 2010 plan.

We were struck by a couple things.

One is we've been very consistent in our direction over the past 7 or 8 years, and we're now seeing a solid trend of improvements.

These results reinforce the need to maintain a long-term focus and the discipline to persevere through tough times in order to make sustained change.

The other is that some of the goals that seemed like a real stretch back then have become realities today.

For example, in 2003, moving Alaska to a single fleet seemed like an enormous undertaking, but we took our last MD-80 out of the fleet a little over a year ago.

Six years ago we set a goal to have every employee on the same incentive plan, aligned around the same operational and profit goals -- and today we are close to achieving that.

Reaching these milestones increases our confidence that we'll be able to accomplish important future initiatives.

So with that background, we are pleased to report Alaska Air Group results today that represent a 14% pretax margin for the quarter.

The third quarter is seasonally our strongest and we had a lot of help from lower oil prices.

However, these results would not have been possible in this environment of depressed demand without the hard work and willingness of our employees to try new things as we re-engineer the business.

It was a good solid quarter and our people should be very proud of their accomplishments.

As a leadership team we're optimistic about the future because we've identified proven principles that will continue to guide us, and we've learned about how to respond quickly to a changing environment.

There's also a natural advantage to being smaller.

We are closer to our customers, able to make changes and adapt to economic realities more quickly.

With the help of our 13,000 Alaska and Horizon employees we have made great strides in improving on-time performance.

Through August, Alaska has ranked number one among our peers for five months running, and we achieved a 90% DOT on-time performance rate in September.

Our baggage performance has also been excellent, and our unique bag-delivery guarantee underscores our commitment to reunite bags with customers at baggage claim in a timely manner.

Horizon also continued its track record of excellent on-time performance, achieving 91.3% for the month of September.

Even though 2009 ASMs are declining by 5% at Alaska and 9% at Horizon, we have started service to 18 new Air Group markets in the last 18 months.

This is important for two reasons.

One, redeploying aircraft into new markets increases the utility of our network and generates incremental revenue, and two, it enables us to retain a significant number of employees who otherwise might not have jobs.

Next year we're again planning to spend a considerable amount of effort maximizing our unit revenues.

We'll pursue additional ancillary revenue opportunities and we still have room to increase load factor.

For the quarter, RASM was down about 1.5% at Alaska, and up about 3% for Horizon brand flying, comparing very favorably to our peers.

We believe our RASM was positively impacted by aggressive capacity management and the fact that we have less exposure to international and business traffic relative to the rest of the industry.

However, we are now entering the season when our results depend more on business travel, and we've yet to see any meaningful loosening of travel budget constraints among our corporate account.

To sum things up, this has been one of the best quarters we've had in a very long time and I hope our people will savor the success they've worked so hard for.

I want to thank them for all the things they do for our customers every day and for their commitment and flexibility as we look ahead.

With that I will turn the call over to Glenn.

Thanks Bill and good morning, everybody.

Alaska's third quarter 2009 adjusted net profit of $83 million is a little bit more than double the $39.9 million that we reported for the same quarter in 2008.

Both those figures take fuel on an economic basis excluding mark-to-market adjustments on our hedges that settle in the future.

The three major drivers of the improvement were first and most significant, the dramatic decline in our fuel expense, which on an economic basis declined by 42%, meaning that we paid $150 million less for fuel this year than last.

With that kind of fall-off in fuel costs, you'd expect revenue declines, which we did see with consolidated revenues down $55.5 million or 5.4% but not as much as our peers as Bill mentioned.

Unfortunately, against declining revenue our consolidated non-fuel operating costs increased $23.7 million or 4.1%.

The most significant increase in the non-fuel costs was variable pay, which increased nearly $18 million across Air Group.

In addition, we saw increases in wages and benefits largely due to our new pilot contract and pension expense at Alaska, which we've discussed on previous calls.

We continue to be very focused on reducing non-fuel costs at both entities.

Coming back to the fuel story, we paid $210 million less to suppliers for raw fuel, which was less than half of last year's third quarter fuel bill.

The economic fuel costs include $16 million in net hedge costs this year, about $0.17 a gallon, compared to a net hedge benefit of $44 million or $0.43 a gallon last year.

I'd remind you we're maintaining our strategy in terms of fuel hedging with caps to manage the volatility, and we do have a table in our investor update with all of the current hedge positions.

For fourth quarter our fuel forecast is $2.30 a gallon.

That's based on $80 per barrel, which is $1.90 plus a $0.22 crack spread, $0.14 for taxes and fees, and a $0.04 net cost for hedges.

We've committed to update our investors on our return on invested capital results each quarter.

And I'm pleased to tell you that for the 12 months ended September 30, Air Group generated an adjusted rate of just over 6% on our $3.4 billion base of deployed capital.

Turning to the balance sheet, we had cash and short-term investments over $1.2 billion at the end of the quarter which is up $100 million since the end of last quarter, and represents 36% of revenues.

Despite all the capital that's been raised by our competitors in the last three months we believe that we're again the strongest cash to revenue position among the majors.

And in addition to our cash balance, we still have our $185 million line of credit which remains undrawn.

We also saw an improvement in our adjusted debt to total capitalization ratio coming in at 78.22, which is an improvement over both year end and Q2 '09.

Cash flows year to date are as follows.

We've generated $306 million of operating cash flow versus $141 million for the same nine months last year.

That includes proceeds from new financings of $422 million, and we plan to close financing on one more 737 and three more Q-400s in the fourth quarter which will generate another $75 million.

Those cash inflows were offset by our share repurchase program.

I would he remind you that as of September 30 we've repurchased 1.3 million shares for $24 million.

You will note that we haven't repurchased any additional shares since late July, although our repurchase program is still active up to $50 million.

Our CapEx year to date stands at $347 million which covers 10, 737-800s and 2, Q-400s on the Horizon side.

We expect to take delivery of three additional Q-400s in the fourth quarter under our restructured delivery schedule with Bombardier and bring our full-year capital expenditures to $440 million.

In addition, cash was utilized to repay debt in the amount of $227 million year to date.

In terms of our liquidity, we're in the process of renewing our line of credit, which I mentioned was $185 million.

It doesn't expire until March 2010 but we're very optimistic about our ability to not only renew it but potentially upsize it.

In addition, we're reviewing liquidity needs going forward, given our much lower level of planned capital expenditures in 2010 and 2011 as a result of deferrals of our Boeing and Bombardier deliveries.

We also expect to pay cash for all six Boeing deliveries next year and we have no current plans to seek any financing in 2010.

Additionally, we're looking at the ability to pay down additional debt and further reduce our leverage in 2010 and 2011.

With that, I will turn the call over to Brad and then Jeff to provide color on the individual subsidiaries' performance and outlook.

Thanks, Glenn, and good morning, everyone.

For the quarter, Alaska Airlines reported an adjusted pretax profit of $118.7 million, compared to a profit of $56.6 million in 2008.

This represents a pretax margin of nearly 14% compared with 6% a year ago.

For the year to date, Alaska's adjusted pretax profit is $137 million, and that gives us a margin of about 6%.

And these compare with break-even results for the first nine months of 2008.

Alaska's mainline passenger revenue was down 49 million or 6.5% for the quarter.

The decline came from a 3.3% reduction in capacity and a 3.4% decline in passenger unit revenue.

Looking at the individual months, passenger RASM declined by 1.3% in July, by 3.5% in August, and by 5.5% in September.

Our 3.4% quarterly RASM decline compares favorably with the domestic industry which posted a unit revenue decline of 14%.

Note that our performance came on an average trip length increase of 7.3% versus 1.9% for the industry.

We've been pleased with the results of the schedule changes we've put in place over the last 12 months.

Not only have we been able to pull down capacity in weaker markets such as California, Nevada, and Mexico, we've been able to redeploy our airplanes to new markets to bring new revenue into the system.

Much of our new service is to Hawaii, but we've also added Austin and Houston recently, and we launch Atlanta tomorrow.

The Hawaii flying in particular has increased our leisure travel proportion and reduced our exposure to the weaker business markets.

I might also note that markets such as the Bay Area and southern Cal where we've reduced our capacity significantly over the last several schedules have responded very well to the right-sizing of capacity.

RASM is up, profitability is up, and we are hanging on to our market share as our competitors have made reductions similar to ours.

The first bag fee, which you might recall we started on July 7, certainly helped.

We collected $17 million during the quarter for Alaska and 23 million for all of Air Group.

We're on track to meet or even exceed our estimate of 70 million in annual incremental revenue.

Looking forward, Alaska's October advanced book load factor is up 3.5 points.

November is up about 2.5 points with the earlier Thanksgiving return, and December is flat.

We've been seeing a much shorter booking curve over the last five or six months so we're hopeful that December's load factor will improve in the coming weeks.

We're seeing similar advance booking trends at Horizon.

We had a very successful fall fare sale that ran from August 30 to September 10 for travel through January 2010.

We put a significant number of reservations on the books and we believe the sale is contributing nicely to RASM.

Given the economy and the importance of leisure travel, we've been quite active with our advertising and communications and our business seems to be responding well to these efforts.

We expect to fly about 5.5 billion ASMs in the fourth quarter, which is even with last year.

However, departures will be down nearly 9%, reflecting the much longer average stays length of the new flying that we have initiated this year.

On the labor front, I think you know that all of Alaska's major groups are under contract now but the IAM contracts become amendable next summer.

We would very much like to secure an extension with the IAM and in doing so, wrap up our effort to get all of the Alaska Airlines employees into a common gain sharing program.

With respect to costs, our CASM ex-fuel for the quarter was $0.0789, up 10.5% on the 3.3% decline in capacity.

We expect fourth quarter CASM of about $0.083 on flat ASMs.

As we look to the rest of 2009, we are forecasting full-year CASM ex-fuel of $0.082.

The primary drivers of our 10% CASM increase are, first the 5% decline in capacity, and second, a $45 million increase in pension expense which accounts for $0.002 of our CASM increase, third, a $40 to $45 million increase in incentive compensation, which accounts for another $0.002 of a percent of CASM.

We put a great deal of focus this year on improving productivity and reducing our overhead.

Our productivity, as measured by passengers per employee per month, is down only 1.5% for the year to date on the nearly 10% decline in the number of passengers.

Regarding overhead, we're happy to report that we're on track to reduce it by nearly $20 million across Air Group this year.

We're just now rolling up the budgets for 2010.

Based on what we see today, we hope to be able to get our unit costs, ex-fuel, below $0.08 on capacity that will be roughly even with this year.

In our 2010 planning we're putting an intense focus on revenues, productivity, and overhead, and we're optimistic about what this process will produce.

At this point I will turn the call over to Jeff.

Thank you, Brad, and good day, everybody.

I'm pleased to say that Horizon posted an adjusted pre-tax profit of $17.9 million for the quarter, a $5.2 million improvement over the same period last year, marking our fifth consecutive quarter-over-quarter improvement.

This good result stems from tremendous work by our people to lower total costs, enhance revenues, run a great operation, and provide outstanding service.

As proud as I am of them and all they've accomplished, our business is quite seasonal with the third quarter always our strongest, and the outlook on the economy and demand in general remains uncertain.

So as we look ahead we remain committed to not letting up in any way on our efforts to further reduce expenses, improve productivity and enhance revenues in order to achieve and sustain returns that justify the capital invested in our company.

For the quarter, wages, aircraft ownership and maintenance costs were down as we scaled back our operation.

However, the overall rate of expense decline was not sufficient to prevent an increase to our unit costs excluding fuel and transition charges which rose 6.2% on a 9.5% capacity decline.

Since last year, we've reduced our workforce by over 410 employees, or 11.3%, which outpaced our 8.7% decline in passenger boardings, resulting in 3% improvement in passengers per FTE (full-time equivalent).

We also benefited from lower fuel prices that resulted in a $25 million or 43% expense reduction.

Our dedication to achieving cost competitiveness is being addressed across the organization and is critical to enabling future growth.

Of particular importance, we're actively working on achieving market-competitive labor rates for all workers and as part of that process are offering participation in our performance-based incentive pay plan, which would align the goals of the entire team.

Reducing maintenance costs, improving labor productivity, reducing overhead expenses will be top level priorities as we move into 2010.

All employees have been engaged in a call to action to help navigate the challenging road ahead to achieve our expense goals and position the Company for long-term success.

Turning to revenue, our third quarter totals decreased 12.7% or $26 million.

Load factor was up by 1.6 points but system yield declined 5.8%, pushing system RASM down 3.5%.

By line of business, our brand flying revenue was down 11.9% on a capacity decline of 14.3%.

For July, August, and September, brand PRASM was up 3.9%, up 4.6%, and down 1.1% respectively thanks to actions taken to reallocate flying from underperforming routes and a $4 million increase in ancillary revenues.

For capacity purchase flying, revenue declined 13.8%, a result of lower fuel cost reimbursement and a 2.4% decrease in flown capacity over last year's third quarter.

On the demand front, we're pleased with how load factors have continued to respond to the schedule and pricing actions we've taken, especially given our network's dependence on the business traveler.

Together with Alaska, we're closely monitoring demand patterns and are prepared to make further adjustments as opportunities and challenges emerge.

Turning to our product, our people once again did a phenomenal job operationally,posting an 89.4% DOT on-time rating that was up 2.1 points from last year's quarter.

This ranked us ahead of all mainland-based DOT reporting carriers in both July and August.

Looking ahead, we project our fourth quarter CASM ex-fuel and transition charges will come in between $0.154 and $0.155, up 3 to 4% from 2008's fourth quarter on an expected capacity increase of 4%.

Excluding the impact of our significant snow storms last year, capacity would be up 2% on the annualization of our fleet transition up-gauging.

Also in the fourth quarter we will take delivery of three Q-400s to be used as replacement aircraft with no net increase in flying.

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

At this point I will turn the call back to Bill.

Thanks, Jeff.

I just want to say again how encouraging it is to see the hard work and determination of our employees beginning to pay off.

It's their dedication that gives us confidence about the future.

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

Paula, would you please assemble the roster.

(Operator Instructions).

Your first question comes from Bill Greene of Morgan Stanley.

Hey there, good morning.

I'm wondering if I can just ask a clarification on your capacity comments about 2010.

Does that -- I guess it assumes you're not really adding back capacity you would have cut related to H1N1.

Hey, Bill, it's Brad.

The H1N1, we did cut -- but we didn't have huge cuts there.

It was Mexico, which is on a full-year basis maybe 10% of our route network.

We cut it by a third, really from July through November.

By November this year most of that capacity is back on-line.

So it's in there next year, basically at a resumed basis.

Okay, sorry.

So if I turn to maybe the bag fee, I know you had put it in place just a few months back.

Can you tell now, you mentioned the revenues are surprising on the up side, but can you tell if there's any sort of negative effect on the passenger fare side, because Southwest keeps saying that they're actually seeing share shift.

But do you find that's been your experience in your markets where you compete with them?

Hi, Bill this is Steve Jarvis.

And we're not seeing impact of book away because of this.

hTe way we've been thinking about this is customers have decided and told us that they want a low base fare and are willing to and actually want to pay for services over and above that as they need them, be they products or services.

So we aren't really seeing an effect on the base fare or on our demand.

I think the customer acceptance of this, especially with our unique baggage service fee, has been quite good.

Okay, you also mentioned that you thought you had more buckets to pursue on the ancillary side.

What would those buckets be?

This is Steve again.

We actually -- we're not looking at adding a whole lot of new ancillary revenues next year with the single exception of Wi-Fi, which we're very excited about.

What we do want to do is a better job of selling the ones we already have, and that will happen on our website, which is due for a major redesign around selling ancillary next year -- car, hotel, cruise, and vacation packages.

Then on board the airplane, as you know we've gone cashless.

It allows us to be more surgical with what we sell on board, targeting price points and products that customers want that are higher margin than what we've been selling before.

So the way I would describe our focus on ancillary would be doing a whole lot better job of selling what we have all along had but haven't focused on.

The new ancillary revenue that we're hopeful for are the likes of Wi-Fi.

Thanks very much.

Your next question comes from Mike Linenberg of Bank of America Merrill Lynch.

Hi, everybody.

Two questions here.

When you gave us the PRASM guidance by month, you gave us July, August, and September.

And it looked like the trend was worsening.

Any early read on October?

Mike this is Andrew Harrison.

Fourth quarter is actually our toughest comp.

In Q4 '08 our unit revenues were up 6%.

So this fourth quarter I think we could safely say that our unit revenues will perform probably a little bit worse than what we've seen in the third quarter.

Okay.

And then if I could just ask on the fuel, I believe in the forecast, I think fourth quarter the economic fuel price you're using I want to say is $2.30.

I'm trying to get a sense of what the underlying base that you're using so I can determine the cost of the oil caps there.

Can you just -- can you break that out?

Sure, Mike, this is Jay Schaefer.

Hey, Jay.

So we're assuming roughly $80 a barrel for the crude oil and $0.22 a gallon for crack, so $1.90 for oil, $0.22 a gallon for crack, roughly $0.14 for taxes and into plane.

Then at that crude price there is a net cost of our premiums for our call options of roughly $0.04 a gallon.

That's actually very helpful.

Actually, if I can just sneak in one more, you read some of the press releases out of Delta and what they're doing on the West Coast and you can see how you're being integrated into their network as a key partner.

I mean, I think that was -- that came through loud and clear on their recent press release highlighting a lot of the new service off the West Coast, particularly Seattle.

I noticed flying, I notice that you're ending, I believe, you're no longer going to participate in the Continental frequent flyer program.

I wonder if that also included codeshare, and I also wondered if that meant you were also going to end some of your other partnerships that you had with other carriers and migrate more over into the Delta-Northwest-Air France type network.

Can you just give us an update?

This is Andrew, forgive me if I forget some of the questions you asked in there, but number one, our relationship with Continental has come to an end.

Codeshare is already effective, and the frequent flyer will unwind here into 2010.

Continental was a small part of our partnership, of our total partners, less than 10%.

So as it relates to Delta, yes, we're very excited about their news to start Asia service out of Seattle, and as we've said I think previously, both Delta and American are big domestic partners for us.

One of the good things for us is that with Delta and Northwest coming together to being one airline, then with Continental leaving, we really can focus on our customers and our passengers to have a really seamless codeshare, to be done the way we all intend codeshare to be done.

So we're going to be working hard on that in 2010.

Okay, good.

So American you stick with, and -- great, that's all I needed.

Great quarter.

Thanks.

Your next question comes from Jamie Baker of JPMorgan.

Hey, good morning, everybody.

Good morning, Jamie.

Brad, I appreciate that the 2010 plan is still in its infancy, but getting costs below $0.08 on flattish capacity particularly, while maybe leaving some room for IAM cost creep, would strike me as really quite an accomplishment.

Can you throw out some cost categories?

I know it's early, but categories where you currently consider yourself to be a bit uncompetitive, just so we can try to reconcile how you might get to that goal?

Sure, Jamie, I think unit costs were at $0.075 in 2008, with avery substantial increase this year.

To think about how we got to where we are, a big piece of it was utilizing the fleet a lot less, so we had all of the fixed rent costs and depreciation cost that weren't spread over the same amount of flying.

We had a massive increase in our FAS 87 pension costs, from $45 million to $95 million or something like that, a pretty significant increase in incentive compensation, and a new pilot agreement, among other things.

As we're sitting here this year we're hoping the pension assets are doing better so that FAS 87 pension costs come down next year.

As we do the planning for 2010, our sense, Jamie, is that we have the most stable setting for planning that we've had in many, many years.

The wage and benefit costs are very material for any airline so we've got a great opportunity to hit the overhead lever pretty hard, and hit the productivity lever pretty hard.

(Inaudible) So on the back side of it, the distribution costs, we will continue to focus on shifting share to Alaska Air.com, and that's a low-cost channel for us as well.

So I think -- appreciate the question, but I do think we're going to end up sub $0.08 next year.

Excellent.

I had to drop off the call, earlier in the call did you give similar 2010 capacity and cost ambitions on the Horizon side?

We did on a capacity -- well, the capacity look-ahead is flat as well, Jamie, but we didn't give specific cost guidance.

The themes that Brad talked about, many of them apply to our situation as well, and we are clear on the levers available to us on the expense side.

I think they particularly fall into our operations arena on a pilot side.

Of course, it's a well-known fact that our pilot rates are the highest in the industry, and both teams are working really hard around that problem.

I give both parties credit for getting the competitiveness challenge that represents and exploring ways to get us back to a point of market competitiveness.

On the maintenance side, that's the other area we're focusing on for the terrific work that our teams do there, we are handicapped by a smaller fleet and a complicated fleet: the two aircraft types we actually have, and a relatively small worldwide fleet in the Q-400 arena in particular.

It's a challenging prospect to get underneath that and find ways that we can improve our cost efficiency there.

But we believe there's opportunity there, and we're focusing on it very diligently.

Excellent.

Thanks and good luck.

Thanks, Jamie.

Your next question comes from Dan McKenzie of Next Generation Equity Research.

Hi.

Good morning, guys.

Good morning, Dan.

I had had another follow-up question.

Brad, you mentioned you were going to hit the overhead lever pretty hard next year.

When you think about overhead, are you thinking specifically headcount, or are there other overhead items that sort of jump out at you?

Dan, I will ask Brandon Pedersen to maybe jump in.

Maybe the way we're thinking about overhead is more in terms of this continual transformation of the Company.

I guess we don't see any end to the, whatever, new competitive folks that are in our market.

As we look at our overhead structure, we just think it's heavier than it needs to be.

It's not something that you can turn a dial and have it lower on January 1. It's more of a mind set about the next three, four, five, six years, maybe longer than that, of continuing to try to make the Company more simple, make our processes cleaner, a little more focused, move out the things that don't have a lot to do with those areas.

IT is a long-term orientation.

Brandon, maybe you can talk about what builds up overhead.

Hi, Dan, it's Brandon.

If you look at the success we've had in 2009 it's come really from four areas.

One is supplier reductions.

We went out and asked our suppliers to partner with us and reduce costs.

We've had lower expenditures on contractors and professional services.

We've reduced our non-airport real estate footprint and related rents.

There have been some reductions in management headcount over the last couple years that we're seeing savings from.

As we look to 2010, what we want to do is hold the line on things, pursue additional opportunities in those areas.

Certainly, our preference is not to continue to reduce headcount, although that may be a part of it.

As Brad said, wages are a big chunk of that overhead cost.

Okay, that's great perspective.

I appreciate that.

Then I guess my second question is, small competitors can have a big impact on overall revenues, and I'm wondering if you can provide some perspective about how the competitive dynamic from smaller carriers in general is sort of impacting your system.

Yes, Dan this is Andrew again.

Certainly I think that's a very true statement.

And we have a number of competitors.

Since 2007 we've had four low-cost carriers emerge on the West Coast and in our markets.

Especially in these down economic times, it gives passengers other options, and there's limited traffic out there to be had.

And so we're having to be very, very cautious.

And we look at those markets individually and we price accordingly to make sure we stay on top of that.

Okay, all right, thank you.

Thanks, Dan.

Your next question comes from Peter Jacobs with Reagan Mackenzie.

Good morning, everybody.

Hi, Peter.

I wanted to first revisit an earlier question, and that is the decline in September passenger RASM at Alaska.

And so I'm just trying to kind of think about it.

And then also the pressure that you might expect in the fourth quarter.

Is this more of a year-over-year, just harder comps, or are you seeing additional pricing pressure out there than what had existed in July and August?

Peter, it may be helpful to think through the dynamic here.

As I think through, last July, was when fuel peaked at $147 a barrel, and so last July is when airlines are all thinking -- and I remember for us the fuel component of a Transcon ticket was something like $150.

So everyone's mind-set was that the variable costs of flying have gone way up and we need to get ticket prices up.

So through the summer that was the mentality.

And I think if you look at the industry, people had quite a bit of success in getting revenues up in third and fourth quarter of 2008.

So my perspective is there's a pretty significant comp issue coming into view.

The good news, by the beginning of 2010, if you look back first quarter 2009, fuel had come down to $40 a barrel, so by the beginning of 2009, RASM was down, and our comps will get easier in the first quarter.

A long way of saying we do have tough comps right now but they get easier as we start 2010.

This is Andrew.

One thing I would add that we really do feel the impact of our stage length being up 7.5%.

You can do all sorts of math and rule of thumb, but some tell me for every point of trip length you can take half a point of unit revenue down.

So that is another piece that's significantly impacting our unit revenues as we go forward.

That makes sense.

Two other questions, if I could.

First, on fuel costs, can you just give us an update of what you're seeing for spot prices right now, let's just say at Sea-Tac, and secondly, as you're thinking about your aircraft utilization rates, which obviously are down as you've pulled back on the schedule -- let's just say 2010 turns out better than most folks are thinking, and you are trying to add capacity back.

How quickly can you get those utilization rates back up, and are there certain markets that you have your eye on, let's say flying east, that you might look to expand, or do you think that relationship with Delta could inhibit that in some way so you don't want to step on their feet?

So this is Jay.

I'll take the fuel question.

Roughly at the pump, raw, unhedged would be about $2.28 a gallon.

Just to break that down, roughly $1.93 for the crude, crack spreads are roughly $0.22.

Both of those are moving around a bit.

Then taxes and into plane roughly about $0.13 at Sea-Tac.

Great.

This is Andrew.

On the 2010 question, we obviously only talk about new markets when they happen, but I will tell that you we absolutely have flexibility within our fleet.

Our utilization is down about an hour for various reasons, but we can continue to shrink capacity, or if the economy turns and opportunities came up, we certainly have the ability to increase our capacity as well.

Peter this is Bill.

I'll make a stab at that.

We're going to continue to be real cautious with capacity.

We've had a lot of success with having good discipline around this and the reductions that we've made have resulted in the numbers that you are seeing to fair degree.

Of course, fuel is the other big piece of it.

And with respect to Delta, we couldn't be happier with their announcement yesterday about Seattle.

We think that perfectly fits the relationship that we've been envisioning.

And by the way, we start Atlanta service tomorrow, so it isn't as though their hubs are out of bounds for us.

Okay.

Great, thanks.

Thanks, Peter.

Your next question comes from Helane Becker of Jesup & Lamont.

Thanks very much, operator.

Hi, gentlemen and Shannon.

Hi, Helane.

So have you thought about how much the Delta codeshare adds to revenue, and are you willing to kind of give us a sense of what that revenue benefit would be maybe in 2010 or some range of benefit?

Hi, Helane.

This is Andrew.

As far as the Delta relationship goes, it is very significant and important to our network, and we continue to increase code-share with them.

You see new markets out of Portland and Los Angeles and other areas, but I don't think I'm willing to comment right now on quantifying those benefits at this time.

Okay, all my other questions were asked and answered, thank you.

Thanks, Helane.

Your next question comes from Gary Chase of Barclays Capital.

Good morning, everyone.

Good morning, Gary.

Wanted to see if I could just follow up on a few things.

And I apologize, we've been bouncing around here.

There's a lot going on here.

If I've missed something, I apologize.

But on the September RASM number did you actually say what it is?

I'm backing into a number that's down but did you actually say what Alaska RASM was?

And then could you elaborate a little bit on this thought that business travel isn't picking up the way some others seem to be observing and sort of give us a little context around that?

This is Andrew.

I'd just answer that September PRASM was 5.5% down.

And then Steve can talk to the business travel.

Hi, Gary this is Steve.

The word on the business travel side for us is again caution.

The general sense we have looking at volumes coming out of our key corporations and conversations with those travel managers is that the demand side has stopped falling but really isn't coming back.

There are some pockets of up-tick, mostly southern California, but they were coming basically off the mat.

So our general sense is to be very cautious.

What we've found in this down economy is that corporations have implemented some pretty tough travel policies, both in volume and in fares, and are keeping those ratcheted down.

So we're going to be pretty cautious going into next year.

We're seeing very little continued fall-off but very little continued return as well.

Would it be factually accurate that your revenue hasn't improved?

I mean, I understand the caution, but as you progress through, say, July, August, September, do the year-on-year metrics not improve as you look at your corporate volumes and revenue?

This is Andrew.

I can speak to our relative bucket mix, if you will, and what we did see is not only a stabilization, but a strengthening, mainly from the lower buckets into the mid-class buckets.

I will also tell you that on some of our more business-centric routes, such as Transcon, we've seen good load factor, with reasonable load factor increases going forward.

Our first-class cabin is about flat, although on the Transcon and Midcon we've seen about a point increase.

So we are seeing slow early signs of thawing, if you will, and I do believe it is having an improved impact on our unit revenue, but we have a long ways to go, especially as we get into Q1, which is a very tough season for us.

We'll be watching it closely.

The impact of this mileage plan, that's pretty uniform through the months, right?

So that's not going to explain it.

That's correct.

Okay, and just one last one now on the exact opposite side of the equation.

Which is CASM ex-fuel.

I, too, am impressed with the idea that you might be able to get that below $0.08 next year, so I wanted to ask a few things in addition to the pension.

Are we thinking about a network change that is longer haul, or something that would sort of explain it, or are we talking about real true operating cost decline of 4% on the same capacity base?

No, Gary, I think what we were hoping to do is provide some early thinking about the 2010 plan.

And we are still working on the 2010 plan.

So we might wait to provide a lot more detail.

One thing just to get to your specific question is the stage length, as Andrew said, has gotten a lot longer.

I think on a passenger basis it might be 7%.

On an airplane basis, it might be 9% longer, something like that.

So you are seeing that today, and some of that will get annualized next year.

Doesn't sound like that's a significant component of it, Brad.

I guess the other thing is that the incentive pay, Brandon is mentioning, we are on track for something like $70 million of incentive pay for Alaska Air Group for the full year, and we're having a good year relative to the targets that were set.

And so those accruals would be at higher rates than would be targeted in the base plan.

High quality problem, right?

Yes, exactly.

We're obviously still putting the budgets together for next year, and we'll have more guidance for you later, but this is good pressure for us, because as we've all said here, the world is becoming more and more dominated by low-cost carriers.

That's the competition we face.

We've got to continually work our costs down.

We took a blip up this year for the reasons that you've heard, but again, back to this long-term sort of relentless execution of the plan, the CASM ex has to come down.

We'll save the rest for the analyst meeting.

Thank you very much.

Thanks, Gary.

Your next question comes from Steve O'Hara with Sidoti.

Can you talk about what the checked bag fee added to the quarter in terms of revenue, if you went over it?

I don't know if you've discussed that at all.

Then in terms of repurchase on the shares, it was kind of halted in July.

Just kind of wondering how you're thinking about that with fuel rising here.

This is Brandon Pedersen.

In terms of the first bag fee, it had added $17 million to Alaska's results, and $23 million to Air Group's results.

We said in our prepared remarks that we thought we were certainly on pace to meet our $70 million target and perhaps exceed it a little bit.

As far as your second question on the repurchase activity, Glenn, you want to talk about that?

Thanks.

How we generally think about the share repurchase is that we've got all three sets of constituencies to take care of, customers, employees, and shareholders.

So the repurchase plan was initiated when we felt like our stock was undervalued significantly.

And it's a good way to demonstrate to shareholders that we're going to take care of them as well in this process.

We still have about $26 million under the approved program, and we continue to evaluate how to expend that.

But the program is still active.

And is the price of fuel kind of a key metric in that, or not really?

It is certainly one of the things that we have to consider.

We're looking at fuel prices rising again and certainly if they were forecast to continue to rise, we'd need to watch the cash balance as well.

Okay, great, thanks a lot.

Your next question comes from Kevin Crissey of UBS.

on the first bag fee, second bag fee again unfortunately, when you implemented the first bag fee did you see a fall-off in the number of second bags?

This is Steve.

Actually, we expected to, and we haven't seen that yet.

Interesting.

Okay, great.

And I've asked this on other calls and hadn't really intended to be as repetitive but I'll ask it because you mentioned it as an opportunity.

Shifting share to Alaskaair.com, how does that reconcile with Expedia and the rest of the the OTAs, and basically have you seen market share losses in that regard yet?

Hi, this is Steve again.

Actually, no, and it's a good question.

As you know, the on-line travel agencies removed their booking fees some months ago, and we're watching our distribution share through the on-line travel agencies increase significantly.

But it's not coming from the direct channel.

It's not coming from Alaska Air.com.

We have seen our growth at Alaska Air.com taper a little bit year-over-year, but it is still increasing.

So the share is actually being shifted from traditional brick and mortar channels.

Thank you.

Next question comes from Michael Derchin at FTN Equity Capital.

Oh, hi, everybody.

I'm interested in that stage length questioning again-- can you break out your capacity by entity, how much is Alaska, Intra-Alaska, how much is Alaska to the 48 states, how much is the 48 states and how much is Hawaii, and how has that changed over the last couple of years?

Yes.

Give me just a second, Michael.

We'll try to pull something up to help with that.

While you're doing that, I also had a question on the phase-out of the defined benefit plan with the pilots, as new ones come in.

Is that part of the cost good guy, or is that too early?

It is way too early to comment on that.

The pilots are actually going through an election period right now.

I think as you probably know, new hire pilots when we have them will be in a DC plan, and over time that will provide some sort of benefit to the company, but I think that would be well down the road.

Right now pilots are making some choices of whether they want to stay with full credit in the DB plan or move to credit under a DC plan, or there's actually an intermediate option for them, which may affect our costs a bit.

Candidly, we're not anticipating much impact on the companies.

In terms of how the network has changed, that's all in the schedule.

We can actually help you with it.

That's one of the things I think you would see in a pretty pronounced fashion, Hawaii has become very material, probably 8 or 9% of the Alaska Airlines network now.

The Midcon region, I don't have the cities in front of me, do you have proportions, Andrew?

Yes, we'll be probably close to 10% Hawaii.

Our transcon is probably up to now 12% with Atlanta and other cities growing.

In the Midcon, which is the Houstons.

Dallas, Austin.

Those types of cities.

So we have pretty much maintained, California, a third of our network, continues to be about that.

And then little pieces, Mexico is down more than what it has been historically.

So sort of pieces from here and there, but big growth in the longer haul, and mainly Transcon, Midcon, and Hawaii, and a little bit over the as you recall in the Alaska long haul as well.

How much is that as a percent, Alaska long haul?

In the summer it's up to 20%, but then it dies down pretty quick as you move into the back end of the year.

I think Alaska overall is low 20s, and it's actually grown the last several years, but just because Hawaii and Midcon and Transcon have grown more the proportion of the total has declined.

So the major reduction has been California.

And Arizona and Nevada.

We've had big cuts there, too.

And some Mexico.

Right.

In fact, we'll be down in the winter 7% because we've cut some flying out of our Seattle to Mexico in January and February of next year, because we're still seeing a little softness, so it's going to be down just a tad.

And of the 18 new markets that you mentioned earlier are most of those profitable now?

We don't comment on these calls, Michael, on profitability by market.

We have time for just one more question, and then we'll turn the call over to Alaska's Managing Director of Corporate Communications, Caroline Boren who will conduct the media portion of the call.

Your next question is a follow-up question from Jamie Baker of JP Morgan.

Woo-hoo, made the cut.

A follow-up for Andrew on the fourth quarter RASM.

I do appreciate you're up against a tougher comp year on year than in the third quarter, but just for argument's sake, if we did model this same RASM decline in the fourth quarter, so say down 3.3%, it would actually end up suggesting one of your steepest seasonal revenue deteriorations.

I mean, you always produce less revenue in the fourth quarter versus the third anyway, and I'm not saying it can't be that steep of a decline.

I'm just wondering if there's something in your network that would explain that.

You seem to be coming -- to be becoming less seasonal over time.

Are you just playing it safe and acting conservatively on the guidance?

As far as my crystal ball goes, and it certainly has a lot of cracks in it, what we're seeing here is that if you think about what really happened here is we were booking up through the high fuel periods, and we had a further out booking curve.

We were taking in a lot of traffic at very decent yields when fuel went through the roof.

The fourth quarter is our inflection point.

We started for the first time in a long, long time to cut capacity.

And I think we hit it about 6%.

So with a 6% capacity cut, and good solid bookings at higher prices, we did very well in the fourth quarter, up 6% in unit revenue.

If you look at this year, we have the inverse.

We have flat capacity, and we have prices that are less than last year because of the fuel, and we have people booking closer in, and we have this big stage length.

Looking forward, I tend to see it as flattening out, but this fourth quarter I think is probably the worst of it.

Got it.

You rose to the challenge.

That's all good input.

I'll let you get on to the media portion.

Thank you very much, everyone.

Thank you.

Good morning this is Caroline Boren.

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

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

Yes.

To ask a question at this time please press star 1 on your telephone keypad.

Again to ask a question, press star 1. There are no questions at this time.

Okay.

Well, thanks for joining us, everybody, and we look forward to seeing many of you at our Investor Day in New York on November 10.

Take care.

This concludes today's conference.

You may now disconnect.