阿拉斯加航空 (ALK) 2010 Q1 法說會逐字稿

Good morning.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Alaska Air Group first quarter 2010 earnings conference call.

Today's call is being recorded, and will be accessible for future playback at www.alaskaair.com.

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

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

(Operator Instructions) Thank you.

I would now turn the call over to Alaska Air Group's Managing Director of Investor Relations, Shannon Alberts.

Thanks, Stephanie.

Hello everyone and thank you for joining us for Alaska Air Group's first quarter 2010 conference 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 your questions, including Alaska's recently elected Vice President of Marketing, Joe Sprague.

We are issuing a slight change to our Q&A process today and will invite both analysts and journalists to queue up together at the end of our prepared remarks.

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 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 profit of $5.3 million.

Excluding the impact of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported an adjusted net profit of $13.1 million, or $0.36 per share.

This compares to a first call estimated mean net profit of $0.35 per share and to last year's adjusted net loss of $25.4 million or $0.70 per share.

To look at it another way, our first quarter results improved by $38.5 million or more than $1 per share.

Additional information about expected capacity changes, unit cost, 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 will turn the call over to Bill Ayer.

Well thanks Shannon, and good morning everyone.

We are very pleased to report our best first quarter since 1999, and our results were driven by a record first quarter load factor, improving yields and first bag fee revenues, partially offset by an increase in the cost of fuel.

In addition, our ongoing network restructuring has contributed substantially to the quarter's profit.

As you know this is seasonally our weakest quarter of the year and one in which we usually post a loss.

In fact, the last time we announced a first quarter profit was in 2006, when we reported less than $3 million in net income and prior to that in 1999 when we earned $20 million.

As in 2009, our biggest opportunity this year is to improve the top line with a specific focus on increasing network and ancillary revenues.

To that end, we are continuing to redeploy capacity to new markets.

In addition to the new Portland - Honolulu service we announced last week, today we announced new service to Hawaii from San Diego, along with some other changes that Brad will touch on in a few minutes.

While our fleet size has remained essentially flat, over the past 24 months Air Group has entered 26 new markets including those announced today.

In addition we have initiatives underway to improve ancillary revenues and to do it in a way that is understandable and viewed by customers as fair and reasonable.

One important source of ancillary revenue is checked baggage, and today we are announcing a modification to those fees.

Beginning June 16, we will charge $20 each for the first three bags.

That is an increase for the first bag from the current $15, but a decrease for the second and the third.

We expect this change to be accretive to revenues to the tune of about $20 million per year.

With this change we expect ancillary revenue per passenger to increase to more than $11 up from $4 just a couple of years ago.

It's important to note that our baggage charges are still less than the industry standard, and we have a unique time to carousel guarantee which we are enhancing along with this increase.

Operational performance at both carriers continues to be outstanding.

For the latest 12 month DOT reporting period that ended in February, Alaska held the number one spot in on-time performance among the ten largest US airlines.

Horizon is also performing exceptionally well, and recently a story was published in Forbes that ranked Horizon among the top five airlines in the world for on-time performance in 2009.

I want to thank the thousands of Alaska and Horizon employees who make our operations run safely and on time, and who provide outstanding customer service each day.

It's no secret that everyone is working harder, and we could not succeed without the extraordinary efforts of our people working together to improve our company.

Given the seasonality of our business we are very encouraged to be starting the year with a profit that we can build on instead of having to make up for a loss which has been our pattern historically.

But we acknowledge there are risks.

Rising fuel prices and the slow economic recovery present challenges, but we are doing a number of things to counter them.

First, maintaining low capacity growth and a stable fleet size helps ensure that we don't over serve existing markets, and that we choose new markets carefully.

This should keep load factors strong and create more pricing power.

Next, we are continuing our fuel hedge program using caps exclusively on the crude oil portion of our program, which protect against fuel price increases, yet allow us to take advantage of decreases in the price of oil without the risk of triggering payment to counter parties.

Third, we are limiting capital expenditures and last but not least, we are maintaining a healthy cash balance.

Most important of all, we continue to focus on the things we can control -- running a safe, compliant and on-time airline, improving revenue, managing costs and delivering that special brand of customer service that sets Alaska and Horizon apart.

So with that, I will turn the call over to Glen.

Thanks Bill and good morning, everybody.

As Shannon said Air Group had an adjusted net profit of $13.1 million, or $0.36 a share in Q1, 2010 versus an adjusted net loss of $25.4 million in the same quarter last year.

Those adjusted results equate to a 12-month trailing return on invested capital of 6.9% at the Air Group level, which compares to 4.1% ROIC in the 12 months ended Q1 2009, and is approaching our weighted average cost of capital.

On a pre-tax basis, our first quarter results improved by $62 million.

A couple of things drove the improvement.

First, consolidated revenues increased by $87 million, primarily driven by strong load factors at both carriers, but revenues were also bolstered by two other items -- $23 million in bag fees and, I'd note that we will see this again in the second quarter from the annualization of the first bag fee -- and second, $10 million of changes attributable to the affinity card agreement which we revised in the second quarter of 2009.

The revenue gains were offset by $27 million increase in economic fuel cost.

With oil on the rise a couple of people have asked whether or not we'd consider increasing our hedge coverage.

The simple answer is "no." Our practice of hedging 50% with caps for crude oil has worked really well for us.

There's a table in our investor update that summarize our hedge coverage over the next few years, and we are well positioned with 50% of our planned consumption for the balance of this year at $75 per barrel.

Our consolidated non-fuel operating costs were about flat.

On the positive side, we have lower pension costs, as we anticipated, and we have seen savings from our productivity initiatives and fewer FTEs.

Those positives were offset by the increases in the pilot wages, reflecting our new agreement that took effect in April 2009, and increased incentive pay expense.

Last quarter I walked you through the components of incentive pay expense, the most significant of which is our performance based pay plan, or as we call it, PBP.

As we told you on the January call, our initial guidance assumed PBP would pay at target, generating Air Group incentive pay expense of $50 million for the year.

Our forecast for pre-tax profit now exceeds the goal that was set by our board, so we are tracking to pay above target, resulting in Air Group incentive pay expense of $72 million for the year.

The extra cost negatively impacts our [CASM] but it bodes well for the bottom line, which is really what counts.

I do want to reiterate, especially for the employees listening to the call, this is a very seasonal business and there are a number of estimates involved in the numbers I just shared, and those estimates have a high degree of uncertainty.

So it's very dependent on how we all perform each day, each flight, for the rest of the year.

Turning to the balance sheet and cash.

We are just under $1.2 billion of cash at quarter end, which represented 34% of trailing 12 month revenue.

We generated $55 million of cash flow from operations compared to $10 million of cash flow from ops in the first quarter of 2009.

Offsetting those inflows, we have capital spending of $24 million, debt repayments of $40 million and we resumed our share repurchases, using $11 million during the quarter to repurchase 279,000 shares.

We talked last quarter about reducing the amount of cash on hand over the next two years, from the current 34% to the 25% to 30% range which will help us to improve our return on invested capital.

A little more color on our plans.

First, we intend to pay cash for four new 737 deliveries in 2010 and I'd note that we will be returning six aircraft this year so that will result in two fewer Alaska units at year end.

And second, we intend to prepay approximately $90 to $100 million of long-term debt by year end.

These actions will lower our invested capital base, slightly reduce our net interest cost, and increase the number of unencumbered aircraft we own.

Despite these goals to lower our cash balance we are committed to a strong balance sheet and maintaining plenty of access to liquidity should we need it.

And to that end, in March we announced two new lines of credit totaling $200 million which replaced our previous single $185 million line.

There are three benefits to the new arrangement.

First, one line is secured by accounts receivable and spare parts inventory, which frees up airplanes that would be much easier to finance if the need arises.

Simply said, we have done the harder financings first.

Second, the terms of the two lines have staggered expiration dates, and third the combined amount is larger than what we had before.

Finally, I want to close with a quick update on our CapEx plan for 2010.

We expect to spend $200 million on CapEx in 2010, down substantially from prior years.

Aircraft spending will be constrained, we will be down, as I said, by two Alaska Airlines units at year end, compared to year end 2009, with a plan to be up one net aircraft at the Alaska Airlines unit by the end of next year.

And we believe we have the opportunity to generate free cash flow, even after scheduled principal payments, it's likely that we'll have net free cash flow that we can use to further strengthen our balance sheet.

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

Thanks Glenn, and good morning, everyone.

For the quarter, Alaska Airlines reported an adjusted pre-tax profit of $26.5 million, compared to a loss of $26.6 million in the first quarter of 2009.

I want to thank all of our employees who have worked so hard and congratulate them on these fantastic results.

For the quarter, Alaska's mainline passenger revenue increased by $47 million or almost 9% due to a passenger unit revenue increase of 8.3%.

This increase was a function of our 5-point improvement in load factor, and a small improvement in yield.

Looking at the individual months, passenger RASM increased by 3% in January, a strong 13% in February, and by 10% in March.

Our 8.3% PRASM increase compares favorably with the domestic industry increase of 7.5%.

And if you compare this first quarter with the first quarter of 2008, our unit revenues increased 6%, versus a decline of 3% for the industry.

Nearly every one of our regions posted unit revenue increases, and we saw particular strength in the Southern California, Bay Area, Arizona, Nevada, and Transcon regions.

As you know, we reduced capacity in many markets in these regions over the last several scheduled periods.

Over the last year or so, we focused on reducing the seasonality of our results.

We've been identifying routes that we can fly profitably during the fall and winter months, managing our schedule frequencies more aggressively to increase load factors to high levels during months that are traditionally soft, and moving as much of our training and vacations as possible out of the busy summer months.

We are very encouraged by the first quarter results.

Making a profit and flying at an 80% load factor are great indications that our people and the network planning area and throughout the company are on the right track.

Alaska's April advance booked load factor is up 3.5 points, and May and June are each up 3 points .

Yield trends are positive and we are starting to see business demand return, as evidenced by an increase in revenues in the middle fare classes, and improved revenues in the first class cabin.

In addition to last week's announced service between Portland and Honolulu, where we are filling a void left by Delta, today we announced new service in four more markets.

First, the addition of Portland - Kona this fall brings to three the number of Hawaii destinations we serve from Portland and allows us to capitalize on the great response from the Portland community to our marketing efforts.

Second, our new San Diego - Maui service takes advantage of strong demand for travel to Hawaii from one of our best performing non-hub cities.

This represents our fourth California city with Hawaii service.

Third, we are initiating seasonal service between San Diego and Puerto Vallarta this fall, an action that will further reduce our seasonality.

And finally, Horizon will provide service beginning late this summer between San Jose, California and Los Angeles, allowing us to take advantage of alliance relationships and international connection opportunities at LAX.

Our fleet and invested capital do not change as a result of this new flying, and we expect Alaska's full-year mainline ASM growth to now be between 4% and 5, up from our initial guidance of 2%.

Despite the ASM increase, total departures will increase by less than 1% for the year and will remain 10% lower than 2008.

To wrap up our revenue discussion, in addition to the revised baggage service charge that Bill mentioned earlier, today we announced changes to our fees from unaccompanied minors, same-day stand-bys and ticketing holds.

We estimate an aggregate annual revenue benefit of about $30 million from these changes and this number includes bag fees.

Turning to cost, we ended the quarter with CASM ex fuel of $0.084 about flat year-over-year on flat capacity and in line with our initial guidance of $0.084 to $0.085.

For the rest of 2010, we are forecasting full-year CASM ex-fuel of $0.079 to $0.08, down from our initial full-year guidance of $0.08 and about 4% lower than 2009.

Unit cost will benefit from the extra ASMs, but as Glen said we have a headwind on the incentive pay line that represents some risk to our guidance.

We are making very good progress with the productivity and overhead initiatives we talked about last quarter.

Each of our operating divisions has aggressive productivity targets, and we are pleased with the results to date.

On the overhead side, we are well into our effort to reduce the size of our management staff by 50 people in the first half of this year.

Once complete, we will have decreased the number of management positions by 168, or 10%, since the beginning of 2008.

Like all reductions, these are not easy but they are necessary in order to position Alaska to provide our customers with the value they demand over the long term.

At this point I will turn the call over to

Thank you Brad, and good day everyone.

Horizon also made progress this quarter posting an adjusted pre-tax loss of $3 million compared to a loss of $12.2 million in the first quarter of 2009.

About half of the improvement was the result of higher revenues driven by brand yield and load factory increases, offset by higher fuel costs.

The other half came from the absence of Q200 transition costs this quarter.

Touching first on revenue, our total revenue for the quarter increased $11.6 million or 7.9%.

Our flying between the Northwest's four largest cities of Seattle, Portland, Spokane and Boise improved greatly during the quarter.

These markets, which together constitute 31% of our brand flying, saw a 6% year-over-year increase in revenue, and an 18% improvement in PRASM on a 10% trim in capacity.

Day-of-week frequency reductions on selected routes also helped improve revenue quality during the quarter.

A part of our revenue story stems from customer preference driven by outstanding operational performance.

Our on-time performance led the nation in 2009 and placed us, as Bill said, among the top five carriers in the world.

And so far in 2010, we have gotten off to an even better start.

Our 88.8% performance for the quarter was nearly eight points better than last year.

While comparatively good weather played a role, much of the credit for this can be traced to the skills and dedicated team work of Horizon's people, folks I'm proud to work with and very thankful for.

Turning to expenses for the quarter, our CASM ex-fuel and fleet transition charges increased 1.7% on less than 1% increase in capacity.

Scheduled maintenance timing and accruals for broader participation in our performance-based pay plan account for much of the variance.

In contrast to Alaska, where much attention is focused on improving revenues, our efforts remain focused on closing unit cost competitiveness gaps in pursuit of our return-on-capital goals.

On the productivity front, we've made great strides in reducing overhead and adjusting staffing levels.

FTEs are down 6.5%, while passengers per FTE are up 9.6% over last year's then-record first quarter.

In maintenance we are reviewing options for further reducing heavy maintenance expenses, including the outsourcing of "C" check work not currently handled by outside providers.

We are actively communicating with the union and our mechanics as we review the alternatives, and the decision is still pending.

Concerning our pilot costs, we are now entering the federally mediated phase of negotiations that both parties recently applied for, with first meetings scheduled for late May.

We will continue to strive for a solution that will lead to competitive pilot costs, while still recognizing the solid contributions this group makes both now and in the future.

We have also been fortunate to realize many cost benefits that come with running an outstanding operation.

While we've made good progress on reliability modifications to the Q400 fleet, we are working closely with Bombardier to accelerate the improvements.

These improvements will provide us with ongoing cost savings and customer benefits as we progress toward our long-term single fleet goal.

Looking ahead to the rest of 2010, our plan is still to hold capacity growth to between zero and 1% and we are forecasting a decrease of between 2% and 3% in CASM ex-fuel for the full year.

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

Thanks, Jeff.

Let me once again congratulate our employees for a great first quarter, as we prepare for what looks like a very busy summer.

So Stephanie, with that, we are ready for questions.

At this time I would like to invite analysts and journalists who would like to ask a question.

(Operator Instructions).

Your first question comes from the line of Bill Greene with Morgan Stanley.

Yes, hi there.

I'm wondering if we can talk a little bit about the fact that I guess historically it's safe to say you haven't been viewed as a company that would acquire other airlines but you've clearly found a model that is certainly driving success financially, which is a pretty powerful statement in this industry.

And so what would the world look like or what are the sort of situational facts that would allow you to reconsider that view and maybe think about acquiring another company and maybe applying this, or even just acquiring assets.

How do you think about that?

Maybe I can start on that, Bill.

We have been spending the last decade restructuring the business, and that has been 100% of our focus, and we are not there yet.

We have work left to do, and so we haven't spent a lot of time thinking about that.

The M&A question in the other direction is the one that we have been asked a lot and the answer is really the same, that we think it's really a question about what is the best path for the shareholders, that's what all this comes down to.

How do we improve and optimize over the long term the shareholder value?

And we believe that the path that we are on, which is remaining independent, growing organically, profitable growth is the way to go.

And so we are not to the ROIC number we want yet, we are getting closer which is really good but we have work to do.

We are sticking with the plan, and making good progress, but I think that's as much as we think about it today and we still have more to go, and we are pleased with the results.

Okay.

This is sort of a little bit of a different question and you kind of answered a little bit with your comment just there.

But, would you ever consider a bigger aircraft to take you to non-North American destinations?

Same kind of answer which is that we really like the single fleet that we have, the simple fleet of all 737s and the fact that we've got this difference within that family, from 700s, 800s, 900s, and 400s that allow us to match capacity with demand, and the 737 does all our missions really, really well and we have realized a lot of synergy and a lot of cost savings with this single fleet.

And, it's a remarkable airplane, and we think again, it's -- again, we're focused on it and we haven't got all the synergies out probably of that from the MD-80 transition, there's probably still more to go.

And then over at Horizon of course we want to do the same thing with the single fleet there.

So that's -- when there are market opportunities to move out of the RJs, we're going to do that and we are going to be really, really good at operating Q400s and hopefully at growing a fleet of profitably deployed Q400s.

Okay, thanks for the time.

Your next question comes from the line of Hunter Keay with Stifel Nicolaus.

Thanks, guys, good morning.

Good morning.

Brad, I noticed in your prepared remarks that you pointed out some region of strength that are really heavily served by Southwest.

Should we assume that you guys have been specifically targeting price increases in those markets where Southwest plays, given the fact that your competitive capacity is really coming down against them?

My general sense is that all of the players in the markets that we mentioned, the Bay Area, Southern Cal, Arizona, Nevada, have been pulling capacity in and that has been good for the economics for all of us.

And I think if you looked at Southwest's frequency, you would find that.

So pulling the frequency down on those marketsis really good for the load factor and good for RASM.

You saw that we had a 5-point improvement in load factor for the first quarter.

And then the opportunity Alaska has as a smaller airline is to move those airplanes into Atlanta and Houston and a lot more frequency in Hawaii and those are all places that, all of that revenue we know is new to the company.

Good.

So I guess then maybe a little more -- in that sense -- a little more color on March PRASM would be helpful because it looks like the first quarter number implies a bit of the sequential degradation in March PRASM, despite the fact that you had an easier comp.

Were there maybe some pricing opportunities that maybe you guys missed?

Were you focusing on loads?

Or, maybe a little bit more color there would be helpful.

I might start and I'll ask Andrew Harrison to help, but as you know, the load factor was up six points in January and February.

It was up around three in March, but the yield did get better as we moved forward in the quarter.

It was actually down in January, up a touch in February, and up 5% or 6% in March.

So, we saw pricing strengthen.

And the volcano last year might have affected March comps as well.

Yes.

You might recall Mount Redoubt erupted last year where we pulled down especially in the last week of March up to 10% of our capacity up there and at the end of the day, our loads got very full.

The other thing just to add to Brad's comment is that the yield as we got to March was up 6.3% and that's on 2.2% ASM growth, versus we shrunk 2.4% in February.

So we are trying to find that wonderful balance between supply and demand and as we get fuller and into the 80% load factor range to really make sure we leverage that on the yield side which is what we successfully did in March.

That is very helpful.

Thank you.

Just one more follow up if I may.

I'd love to get a little bit more color on how you view your code-share partnerships, mostly with AMR and Delta and how you view those ramping.

Maybe -- is there flexibility built into the Delta agreement that allows you guys to increase the code-share, if theoretically Delta starts relying on SeaTac as sort of an Asian gateway, is there flexibility that you guys can ramp-up that code-share with Delta?

We obviously don't make public -- obviously -- some of the agreements we have with our co-share partners, but a couple of things to point out.

Number one, we certainly do and you've seen us add a lot of code-share with Delta over the last six months down into Los Angeles and into Mexico.

This time last year--and this is the way we've been able to expand our network and get greater business presence -- this time last year we were using American to put passengers beyond the Chicago hub, but this year as we sit here today, we have beyond markets through Atlanta.

We have them now through Dallas/Fort Worth with American and we have Minneapolis.

So we have substantially increased the number of places our passengers can fly in our markets across the country.

We found that to have very positive results on both the load factors, and the ability for passengers to go directly to their locations out of the Pacific Northwest versus having to maybe try other carriers and fly through their gateways.

Delta is starting service this summer from Seattle and Beijing and a flight from Seattle to Osaka, and those will have the code on them and we expect those to do very well for both of us.

That's great color, thanks guys.

I appreciate it.

Your next question comes from the line of Helane Becker with Jesup and Lamont.

Thanks very much operator.

Hi everybody.

Thanks again for taking my question.

Can you update us on now with these changes in Hawaii and Mexico, the percent of your capacity in Hawaii, Mexico and also, what percent of your capacity would be considered monopoly markets within the state of Alaska?

Wow.

Helane, it's Brad.

Hawaii has really, really grown.

With these announcements today we are up to 101 flights a week, 14.5 flights a day and I just might remind everyone that is from no flights to Hawaii three years ago, and we think that Hawaii is going to be 15%, 16% of our ASMs once we annualize all this and get it on to a full-year basis.

The state of Alaska second question.

Andrew -- 20%, 21% if we were to look at it annually?

Yes, in the summer it gets up to the 23% long haul.

The other thing to note though is there's been a significant increase in capacity this summer by other airlines into the state of Alaska.

But we feel very good about where we have our capacity this summer in the state of Alaska.

And Helane, the Mexico figure we are just pulling here.

About 8%, 9%.

For the second quarter it's about 6.5% and then for the third it's 4%, just on that which will become public today but we've exited Cancun.

So we pulled out of Los Angeles - Cancun and now Seattle - Cancun, and these are some of the reallocations you've heard or seen.

There will be immediate return for our shareholders from taking that six hour flight out of Mexico and putting it in the Hawaiian markets.

Mexico is maybe 6% or 7% if you were to look at it, to annualize it now.

Okay, so that has really come down a lot, as Hawaii has gone up a lot, relative to your prior plan.

I'd say it has come down a point or two.

Okay, thank you very much.

That was it.

I just kind of wanted to get a sense of how you've rebalanced the capacity.

I appreciate the help.

Helane, it's Brandon Pedersen.

One clarification there.

That Alaska number, that was thrown out, that is not monopolistic.

That is simply our capacity in the state of Alaska.

The number of markets that we are a monopoly presence in is -- I'd have to defer to Andrew -- but very, very few I think.

They are all very small.

In fact, the clear majority of the Alaska traffic is long-haul traffic between Anchorage and Fairbanks to the Lower 48 and we actually have a lot more competition in that market this summer.

If you look, there's non-stop service from Fairbanks down to the L48 and I think from Anchorage into most of the big airlines' hubs this summer, and it's quite a bit more than there was last year.

Can I just ask one passenger-related question before I go?

On your frequent flyers are you able to tell what percent of your flyers are -- you know -- have an American advantage versus a Delta whatever their thing is, frequent flyer number versus your own?

Yes, Helane.

This is Joe.

I don't know that we have that data available.

Obviously we have a lot of frequent flyers that are members of our program that are members of multiple other programs, but I'm not sure that we have the specific detail on that.

Okay.

That's not a problem.

Thank you very much for your help.

Thanks.

Your next question comes from the line of Steve O'Hara with Sidoti and Company.

Good morning.

Good morning, Steve.

Can you just talk about your CASM guidance and does that include the pay-out above target?

Yes, hey Steve, it's Brandon Pedersen.

Our CASM guidance does include our estimated incentive payout at this point.

As Glenn mentioned, it's a little bit uncertain because we don't know exactly where the full year's going to come out.

It's been a headwind versus our original target but, yes, just to confirm it does include our best estimate right now where we will be for the year.

Okay, and then second, how does fuel affect that target?

If you were to substantially increase does that change that payout or is it more based on other operational factors?

No, it does change the payout.

The biggest piece of the PBP plan as we described it is based on profit, and profit is dependent on fuel.

So changes in fuel prices can materially affect the PBP payout, and thus the accrual for incentive pay on the books.

Okay, and then in terms of overall capacity to Hawaii it seems like it's going to be up this year.

Has that affected pricing or is demand still outpacing that?

This is Andrew.

Steve, we've been very happy with that.

Again, as noted earlier there have been other reductions of 757s and bigger gauged aircraft in the markets that we are going in, and the reality is we have seen a strong demand.

We have the lowest prices out there.

Again, you see very low fares today in Hawaii and we've been very, very happy with the growth and we -- as Glenn shared earlier -- we will not continue to grow markets that don't return to the , and we feel very good with the Hawaii growth right

It's worth making that latter part really clear.

We do have the lowest fares from the West Coast to Hawaii using DOT data.

I'm not sure 's happening with market fares, but Alaska is bringing new lower fares to the state of Hawaii.

This is Bill, the other thing I guess I would add is going back to the great fleet that we have is the 737-800 is particularly well-suited for the non-stop service to the other islands, especially where there's already a lot of wide body service to Honolulu, where our sweet spot really is the Mauis and Konas and Waihulaus and it's working really , and we hear from customers their preference for the non-stop, not going through Honolulu and changing

Okay great.

Thank you.

Your next question comes from the line of Dan McKenzie with Hudson Securities.

Good morning, guys.

Alaska in the past has targeted nonfuel CASM of $0.0725 and obviously we are a ways from that today.

So I guess my question is, what opportunities are there for Alaska to walk the non-fuel CASM stat lower longer term, versus where it is today?

Hey Dan it's Brandon Pedersen.

$0.0725 made sense when we came out with the 2010 plan.

I think where we are now, is, it's progress.

We need to have lower costs so we can be competitive, and as Brad said, offer our customers the value that they demand.

Whether $0.0725 is ultimately the right number is unclear at this time.

It depends on the revenue environment.

It depends what fuel costs.

I think what we know is that we need to be somewhere south of where we are now and we are going to continue to work productivity and overhead reduction and other cost reduction measures in order to get there.

It's continually driving costs down so we can remain competitive.

Understood.

Okay.

I guess circling back to the organic growth comment earlier the fleet plan is essentially flat over the next several years.

So I'm wondering, absent more shells, how much capacity could Alaska add simply by increasing productivity?

Dan, this is Glenn.

I'll ask Andrew to jump in on this as well.

But we certainly still are using the airplanes that we have a little less each day than we were a year ago or certainly at their peak.

So we think there is some opportunity to get a few more units worth of utilization across the entire fleet of 100 or so airplanes.

Beyond that, we certainly have the ability, and we call it a buyer's market if you will, to extend leases if profitable opportunities presented themselves and we needed more units before the ability to exercise options out into the 2012 period.

Got it.

So that sounds about 2% to 3% capacity if I understand your comments correctly.

Right.

Couple of percent of 100.

Thanks a lot.

I appreciate that.

Your next question comes from the line of Gary Chase of Barclays Capital.

Good morning, guys.

I wanted to just follow up a little bit on the trends, two questions.

The first one on the trends you are seeing, the booked load factors are up there pretty strong.

There are some folks that are suggesting that with improving close-indemand that they have started to transition to a different paradigm in terms of the way they are looking at those advances.

So, curious if you can elaborate on your thought about how that is playing out.

I know that you did mention the accelerating yield trend through the quarter but just your sense of how your close-indemand is looking and why the booked load factor's up strong like that.

Hi Gary, this is Andrew.

A couple of things.

You are spot on there as far as the load factors go.

As we move now into traditional territory, we run about 80% and certainly in the summer, our goal is to be very aggressively managing the inventory that we have.

And as we move, as we shared earlier 3.5, 3.3 points, we continue to see good yield growth as we move forward and with the return of business traffic, our goal will be to make sure that we maximize the revenue by ensuring that we have the right balance between the yield and the load factor.

One other thing of note would be with all of this increase, long-haul flying, both trans-con and even some mid-con and then obviously Hawaii, they run traditionally at much higher load factors than the average core network that is done historically.

So we have also a natural upward pressure on our load factors as you see those with all this new flying coming on.

It was kind of a similar conversation, or there was some similarity when you did your fourth quarter call and were looking ahead into the first where you talked about the strength in booked load and you said you expected yield to more or less offset that.

So I guess looking backward on the quarter that you just had close-in demand looks like it came in quite a bit better than what you were , just based on the RASM performance.

Should we expect that that's a trend that will carry well into the second quarter?

And is it from your vantage

Firstly, you are correct.

Demand came in stronger than we had anticipated.

We break our advance traffic booking into two worlds -- within 120 days and outside of 120 days.

Our outside of 120 days out to 330 is booking strong.

In fact our percentage increases in traffic year-over-year are almost double at this point on our dASMs, which is a very good thing.

We are also seeing similar trends in the close-in booking, but it's not as acute.

So in short, we are seeing good strength in the closer-inbookings as it relates to all our markets across the , specifically in trans-con and mid-con

And then maybe one for Brad or Bill.

I was curious -- and Brandon, all of you.

You talked about the desire to pay down debt, and buy aircraft for cash, prepay debt with your use of , and Bill you were talking about redesigning the airline and certainly if you look at the last ten years, the industry has seen a lot of adversity.

And while your results have been cyclical, they've been stable and you've been profitable through the vast majority of it, of course.

Just curious for your thoughts on one point you started to do a buy-back, under what conditions might you entertain maybe taking in some of the equity just to reflect the stability that you've obviously got

Well, when we began, I'm not sure your question.

You are talking about the possibility of a dividend?

Or a share repurchase.

Or of a share repurchase.

Yes, well this gets to the commitment we have to shareholders and improving shareholder value.

And so this is a Board decision, and we are completing the last tranche of our share repurchase that we have out there right now with the Board authorization and where we go from here.

I think it's a subject for a future Board meeting.

But the principle here -- the commitment is shareholder returns, returning capital to shareholders at a rate that is commensurate with the risk of their investment-- and it's something that this industry hasn't done a good job of, as you all know.

And it's a commitment that we have and we're going to keep working it, and we're encouraged as I said with our results and profitability is the biggest thing we can do to influence this.

And driving higher earnings and getting that ROIC number and then stock appreciation should take care of itself.

Okay.

Thanks.

At this time we have reached the allotted time for questions.

I would now like to turn the conference back over to Shannon Alberts for any closing remarks.

Go ahead Bill.

Okay, thanks everybody for participating with us today and we will talk with you next quarter.

Thank you very much.

Thank you for participating in today's conference call.

This call will be available for replay beginning at 1;00 PM.

Eastern Standard Time through 11;59 PM.

Eastern Standard Time on May 22, 2010.

The conference ID number for the replay is 38150559.

Again, the conference ID number for the replay is 38150559.

The number to dial for the replay is 1-800-642-1687 or 1-706-645-9291.

Also, the call will be accessible for future playback at www.alaskaair.com.

You may now disconnect.