阿拉斯加航空 (ALK) 2010 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Alaska Air Group third 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 will now turn the call over to Alaska Air Groups Managing Director of Investor Relations, Shannon Alberts.

Please go ahead.

Thanks, Brooke.

Hello, everyone and thank you for joining us for Alaska Air Groups third quarter 2010 earnings call.

Today Alaska Air Group CEO, Bill Ayer, Alaska Airlines President, Brad Tilden, and Air Group's CFO, Brandon Pedersen, will share their thoughts on the quarter, our financial results, the operating environment, and our future initiatives.

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 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 net profit of $122.4 million.

Excluding the impact of mark to market adjustments in connection with our fuel hedge portfolio, as well as fleet transition and restructuring costs at Horizon, Air Group reported an adjusted net profit of $118.1 million, or $3.21 per share.

This compares to a first call mean estimate of $3.11 per share and to last year's adjusted net profit of $83 million, or $2.33 per share.

Again excluding unusual items Air Group reported a year to date profit of $215.2 million, or $5.87 per share, compared to $84.1 million, or $2.32 per share for the first nine months of 2009.

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

With that I will turn the call over to Bill.

Thanks, Shannon.

And good morning, everyone.

This quarter's results represent Alaska Air Group's best adjusted quarterly profit in our history displacing last quarter's record.

Our financial performance was driven by increased traffic, stable yields and good cost management through improved productivity and lower overhead.

And our employees continue to provide customers with a travel experience that is among the best in the industry.

I'm proud and honored to work with such dedicated people and the credit for our quarterly results really belongs to the 12,000 employees of Alaska and Horizon.

Turning to the operations, both companies had a very good summer and Alaska's was particularly noteworthy.

In July and August, Alaska finished first among the top ten US carriers with more than 88% of flights arriving on time and in September where industry rankings not yet available, more than 90% of our flights arrived on time unofficially extending our number one rank among the top ten airlines to 17 of the last 18 months and every month in 2010.

In addition, we're hitting our 20 minute bag guarantee over 90% of the time in our top 14 cities.

I want to spend a minute updating you on the changes we are making at Horizon.

One of most important components of our plan is to accelerate the move to an all Q400 fleet and we now we believe we can achieve that in 2011.

This will allow Horizon to capture the same kinds of efficiencies that Alaska realized when it transitioned out of the MD80s.

During the third quarter.

We announced that Horizon will move to an all capacity purchase model in 2011 further optimizing Horizon's route system to benefit Air Group.

We've reached a tentative agreement with Horizon pilots on a new contract and we're optimistic that agreement will be ratified in the fourth quarter.

We've outsourced the last of our heavy maintenance, with a significant dedicated oversight function.

We're working with Bombardier to improve the schedule reliability of the Q400 and we're working to eliminate any remaining redundant functions between Alaska and Horizon.

Glenn Johnson and his team have done a great job managing the pace and magnitude of these changes and I want to thank the entire Horizon employee group for their dedication and understanding as we move the Company to a more competitive and profitable long-term model.

As we look at the industry environment, we are encouraged that traffic is holding up despite the continued economic uncertainty.

One of the keys has been our ability to adjust our schedule quickly to match capacity with demand and to take advantage of opportunities.

And just to give you a little perspective, in the last 30 days we've initiated service in three new markets and will begin serving eight additional markets by the end of the first quarter.

We are doing this through increased utilization and the delivery of three additional aircraft next year.

We are just now wrapping up our 2011 planning process, in addition to the changes at Horizon that I mentioned, we are focused on increasing revenues again next year.

We're making changes to Alaskaair.com to better merchandise our products including rental cars and hotels.

Developing a new mobile phone application and building on the successes our employees had this year getting involved directly with our customers and communities.

And even though our major focus is to increase revenue we know we must continue to reduce unit costs.

Since its inception in 2003, one of the goals of our long-term tragic plan has been to position us for profitable growth.

Our results over the last several years give us confidence that our plan is working and we can begin evaluating growth opportunities with the requirement that any growth produce appropriate returns.

We'll be working on this over the next several months and we'll share more with you on future calls.

And with that, I will turn the call over to Brandon.

Thanks, Bill, and hello, everyone.

As Shannon said, Air Group reported an adjusted net profit of $118.1 million, compared to an $83 million net profit last year.

An Improvement of more than $35 million after tax, and $55 million on a pretax basis.

Not only is the absolute profit a record, these results translate to a record 17.9% adjusted pretax margin for Air Group.

Which brings our trailing 12 months return on invested capital to 9.2%.

With nearly 10 months behind us, we are optimistic that we will reach our 10% ROIC goal this year, or get darn close absent a sudden change in the revenue environment or a major spike in oil prices.

This is a significant accomplishment and one that all Alaska and Horizon employees should be proud of.

The $55 million improvement in our adjusted pretax result was mainly due to a $100 million increase in revenues.

Consolidated passenger unit revenues fared well increasing 3.7% on a 6.1% increase in capacity.

The revenue improvement was offset by a $31 million increase in economic fuel costs and a $13 million increase in nonfuel operating expenses.

Absolute nonfuel costs increased just 2%, on a 6% increase in capacity, resulting in a 4% decline in consolidated CASM ex fuel.

We are quite pleased with our cost performance this year.

Our challenge for 2011 is to not let 2010 solid profit distract us from our focus on driving unit costs down by improving productivity and keeping overhead in check.

As we look ahead, we are concerned about rising fuel prices.

To mitigate volatility in this area, we continue to maintain one of the best fuel hedge positions in the industry, and our young fuel efficient fleet gives us a natural hedge.

In fact a recent Wall Street Journal article likened our fleet to a Prius with wings making reference to Alaska's position as the most fuel efficient and lowest emission producing operator in the country.

Turning to the balance sheet, we closed the quarter with cash and short-term investments totaling just over $1.3 billion.

That puts our cash at 35% of revenues, which remains among the strongest in the industry if not the strongest.

We generated approximately $500 million of operating cash flow during the first nine months of the year, a first for us.

Up from just over $300 million, last year.

Cash generated from operations was offset by about $150 million of capital spending bringing free cash flow for the nine months to approximately $350 million, or about 12% of year to date revenues.

We've said many times that we are trying to build a good Company not just a good airline.

And good mature companies generate free cash flow.

In most years we'd like to see this Company generate free cash flow I recognize that earnings and capital expenditures can be lumpy, and there may be years when we don't achieve the goal, but as a general rule, we plan to focus more on the free cash flow metric.

In addition to funding future growth without leveraging the Company too much, maintaining a healthy amount of free cash flow would allow us to return cash to shareholders, consider additional contributions to our pension plans or take advantage of opportunities that come our way.

To that end, we continue to execute on our $200 million debt prepayment plan, bringing aggregate prepayments at September 30, to $115 million and to $169 million if you count October activity.

We ended the quarter with a debt to cap ratio of 68%.

The lowest leverage since 2000.

Our plan was to spread the program over most of 2011, but we've stepped up the rate of prepayment, and now expect to finish during the first quarter of next year.

Besides reducing our leverage more quickly, it will reduce our negative carry resulting in a slight EPS benefit.

We also continued our share repurchase program.

During the quarter, we bought back 102,000 shares for $5 million under the $50 million program that our Board authorized in May.

During the first nine months of 2010, we've repurchased $31 million worth of shares under the current and prior authorizations.

I also want to take a moment to touch on Horizon's results for the quarter.

Horizon posted an adjusted pretax profit of $18.8 million.

This result excludes nearly $7 million in charges related to four CRJ aircraft that left the fleet during the period and $3 million in restructuring charges related to outsourcing the last of the heavy maintenance function.

As part of our plan to accelerate the Horizon fleet transition, we are working on a deal that would allow us to move another eight RJ's to a third party carrier in the fist half of 2011.

If we're able to get this done, we'll accelerate delivery of eight Q400 aircraft from 2012 and 2013 in to 2011, to replace those RJ's on a one for one basis resulting higher capital spending than originally planned over the next six to nine months.

Because we don't yet know the final structure of the deal for the eight RJ's, it's possible that we may incur more fleet transition costs.

We expect those charges if any, to come in the first half of 2011 when those aircraft are likely to leave the fleet.

Assuming we do bring the Q400 deliveries forward, Air Group capex would increase to $211 million in 2010 and $312 million in 2011.

Again, this is just a timing issue as those aircraft are already scheduled for delivery in 2012 and 2013.

Now over to Brad.

Thanks, Brandon.

And good morning everyone.

This was a great quarter for Alaska Airlines.

We reported an adjusted pretax profit of $173 million, compared to a profit of $118.7 million in the third quarter of 2009.

And year to date, our adjusted pretax profit was $328 million, which represents a margin of 12.8%, and a 140% improvement over last year.

We've had a goal of a 10% pretax margin for many years now and if we're able to produce a margin of between 1.5% and 2%, in the fourth quarter, we will hit our goal.

These results are a huge credit to the people of Alaska Airlines who have been working very hard for several years to make fundamental changes in our business.

It's very rewarding to see the Company executing so well on so many fronts.

Alaska's main line passenger revenue increased by $90 million or 11.6% for the quarter.

The increase was driven by a 7.3% increase in capacity and an 11.2% increase in traffic.

So our load factor continued to show nice year-over-year improvement.

Our yield for passenger mile was flat but given the significant increase in our average days length and strong 2009 comps, we are very pleased with the absolute unit revenues we are seeing.

Nearly every one of our regions posted unit revenue increases.

We saw significant strength in Mexico, Hawaii, and in our flying between the Pacific Northwest including Vancouver, and southern California, Arizona and Nevada.

Our Mexico service is benefiting from the shut down of Mexicana airlines and to take advantage of the void, we've announced new red eye service from Sacramento and San Jose to Guadalajara that will start mid December pending the regulatory approval and a second trip between LAX and Guadalajara that is scheduled to begin in February.

And we increased frequency in the LAX and Mexico City market earlier this month.

More broadly, we've just launched new service between Honolulu and Portland, between Seattle and St.

Louis, and between San Diego and Maui.

We look forward to starting Portland-Kona and adding frequency to the Seattle-Kona market in November.

And we're starting service between Bellingham and Honolulu, and between both Oakland and San Jose and Kauai in the first quarter.

We expect Alaska's main line ASM's to grow 9% in the fourth quarter, bringing our full year ASM growth to 5.5%.

Our October advance book load factor is up about 4 points.

November is up 2.5 points.

And December is currently tracking under last year by 1.5 points.

We've seen our year-over-year load factor comps increase as we get closer to travel dates and we would not be surprised if this is the case again in the fourth quarter.

Turning to costs, we ended the quarter with CASM ex fuel of $0.0752 down 4.7% on our 7.3% increase in capacity.

Productivity increased by more than 10% to 174 passengers per FTE for the quarter.

And our people are doing a good job controlling overhead as well.

Through the first nine months our overhead spending is down $8.6 million or 4.4% from 2009.

High productivity and low overhead have been important focus areas for us and we are very pleased with the results.

We are forecasting 2010 full year CASM ex fuel of between $0.079 and $0.0795.

Which is a bit lower than the $0.079 to $0.08 range that we've been talking about most of the year.

The only significant risk to this target is on the weights and benefit and incentive pay lines which could move if we get a deal with our COPS employees that includes participation in the performance based pay program among other things.

We currently expect mainline ASM's to grow 8% to 9% in 2011, with a 6% increase in departures.

Nearly all of the added capacity represent the annualization of flying we've either initiated or announced in 2010.

We're working on extending leases for three B737-400 aircraft into 2012 and that would result in a net increase of three airplanes next year.

We're working on the 2011 budget as we speak, we currently expect CASM ex fuel to be down at least 3% compared to 2010.

At this point I would like to turn the call back to Bill.

Thanks, Brad, and before we get to the Q&A, I want to tell the analysts and investors on the call that Shannon Alberts has accepted a new position in our corporate affairs group.

So this is her last earnings call.

And I want to thank Shannon for her outstanding work over the last five years in the IR role.

Chris Berry, who currently serves as our Director of Accounting and Financial Reporting and Shannon's main back up has been promoted to Managing Director of Investor Relations.

I want to wish both Shannon and Chris the best in their new roles.

And so Brooke I think we are now ready for questions.

(Operator Instructions) We will pause for just a moment to compile the q and a roster.

Your first question comes from Bill Greene with Morgan Stanley.

I'm wondering if I could talk a little bit about Horizon.

Some of your peers in the past have shed their regional partners, AMR is looking at it and you are going through this restructuring, I know in the past, you said this an integral part of Air Group, but does some of this restructuring at least open the possibility you would consider that or no that's not even on the table in any way.

Bill, this is Bill.

We are going through a lot work at Horizon because we think it's a great part of Air Group and can become more significant and more profitable and contribute in a bigger way.

So our intent to continue to keep it as a wholly owned subsidiary and create value through the actions that we are taking.

And the capacity purchase arrangement on it is really just for internal purposes then?

Hey, Bill, this is Glenn.

The move to all CPA is really just coming in line with the model that's common across the industry as you know.

It will make it simpler across Air Group.

It puts all the pricing and schedule decisions at Alaska where they should be.

We really just focus at Horizon on producing safe reliable low cost ASM's on behalf of Air Group.

Brandon, just a quick question on pensions I know it's early, do you have a sense for what those will look like in 2011 in terms of expense funding?

Yes.

I think given the decline in interest rates and what we see now in terms of investment performance we are probably looking at a $20 million to $25 million increase in pension expense next year.

I think as you know you don't exactly figure that out until the end of the year but that's kind of what we are seeing right now based on the information that we have.

Does it change funding?

Does it change funding?

Jay on that one.

It doesn't change our funding requirements.

The funding rules are a little bit different than the GAAP rules.

So we actually are taking advantage of some airline pension relief that we received a few years ago and so we don't have any funding requirements next year.

But we continue to make contributions we made $45 million this year.

Okay.

Thank you for the time.

Your next question comes from Hunter Keay with Stifel Nicolaus.

Thank you.

Good morning.

I just want to verify, did you guys say mainline ASM is up 8% to 9% 2011 year over year?

We did.

Okay.

And it sounds like you're I guess extending operating leases or taking out new operating leases on three or four new aircraft.

That's going to be incremental to the previous fleet plan, right?

We had three new 800s scheduled for delivery that stays the same, and then we had three lease returns.

We are extending those 2011 lease returns in to 2012.

Okay.

I guess -- it seems like -- help me reconcile because it seems like a lot of growth.

I know you said that some of it is going to be annualization of something new which you added in 2010, but where are those planes going?

Are they going to be for new routes you haven't announced yet.

I know, Bill you mentioned some growth initiatives in your prepared remarks, are these frequency based or how should we think about where these planes are going to be going?

Hi, Hunter, this is Andrew.

As it relates to the 8% to 9% growth, on average we have about 100 or so airplanes flying at any point in time, so every point of growth is about one airplane.

So if you round it to about eight airplanes, five and a half of those will be going to Hawaii and Mexico, the majority to Hawaii and then the other two and a half aircraft are just spread around our system.

We annualized the new St.

Louis.

So big picture, really this is all the markets we've announced this year and carrying them over to next year plus the new Hawaii in the first quarter basically makes up that entire growth.

So count eight airplanes worth mostly in Hawaii and Mexico and we've been very pleased with the performance of those regions.

Thanks, Andrew, I appreciate that.

And maybe Bill, one for you.

I'm going to ask you about his anyway.

You mentioned it in your script, as you think about the next leg for your Company particularly as ii pertains to your stock price I would say these initiatives you are talking about, you're not prepared to give us much color on them right now as we stand but can you maybe help us think about how these initiatives would rank, I don't want to oversimplify but maybe on a scale of one to ten with regard to sort of calculated risk, are we talking about something maybe way out of the box here for you guys or is it kind of more sort of organic growth into new markets or are we maybe thinking about some sort of strategic asset acquisition or M&A, I mean what kind of calculated risk are we talking about in the context of some of these growth initiatives that you referenced in your remarks?

Well, as I said, we're really just starting to turn our attention to this subject in a more serious way to look at opportunities and alternatives.

But historically what we've done and it's worked very well is this incremental approach to building a strong point of sale presence in the Pacific Northwest.

And by the way that's an important role for Horizon to make sure we've got the smaller cities covered as well in Pacific Northwest and building from that base.

The guiding principal here is improving -- continue to improve long-term shareholder value and take measured actions that we think do that.

Beyond that it would be premature to say anything.

We're just really starting to get into this.

We're talking to the BBoard on a continuing basis now about looking at, it gets to the uses of cash question as well that you've all brought up appropriately so.

So we are looking at -- we are in a great position.

This is what we said when we laid out this 2010 plan back seven years ago .

We said we are not going to grow the Company until we can do it from a good profit foundation and we need to make sure the results we're seeing now really are sustainable.

We only had a short period of time where we have been operating at this level.

We are not going to be rash and rush into anything .

But we do think that we're in a position to look at opportunities and as much as anybody in the industry well positioned to take advantage of some things if they are out there.

That's more general than you probably wanted but I think that's where we are at

Appreciate that color, thank you very much, guys.

Next question comes from Jamie Baker with JPMorgan.

Hi there, everybody.

On a consolidated basis, how much revenue do you believe comes through your numerous codeshare with airlines outside of Alaska Air Group.

In other words, and this is purely hypothetical if American, Delta and everybody else were to stop feeding you revenue how much lower would Air Group revenue be?

Jamie, it's Brad.

We have not historically disclosed that figure.

One thing I can tell you is that interline volume has been about 15% give or take a few points for 20 years at this Company.

So the interline has a long time been a big part, in the old days it was just interline ticketing and then it began codeshare and alliances.

That's a general volume indication.

What we disclosed about these alliances.

That still helps.

As a follow up, is whether your 15 partner agreements do they have change in control provisions.

For example, again I'm just throwing this out.

If Delta airlines were to buy Alaska Air, not suggesting that's likely one way or the other, but would that automatically sever the relationship that you have with American, with Quantas, with everybody else hypothetically?

Again, I don't believe that we've shared the details of what's inside those codeshare agreements.

They differ from airline to airline and they're complicated.

I think it would be hard to answer simply anyway.

Thanks, appreciate it, take care.

Your next question comes from Duane Pfennigwerth with Raymond James.

Good morning.

Just wondering in terms of your ASM guidance for next year, did you give a consolidated number as well?

We did not give a consolidated number.

The main line number is 8% to 9%.

We are still finalizing the Horizon number.

So I'm -- Andrew I think for Horizon's fleet next year, it's about flat to maybe down a point is where it's looking right now.

That's about it.

It's about 89% of our ASM's will be main line next year.

The remaining 11 is the Horizon fleet.

Doing the rough math, using flat I think if 8% to 9% is mainline, I think consolidated is probably 8% or just shy of that.

Okay.

Can you just give us an idea it feels like an increase in growth expectations at least relative to what we were thinking.

One, is it increased growth relative to what you were thinking and two, what is really driving that?

Is it competitive displacement that you are seeing?

What is driving the decision to grow faster next year?

Duane, this is Andrew.

I will kick it off.

A couple of things, number one, we've just seen opportunity this year and so really what we are doing is dialing up the utilization of our aircraft which we pulled down very significantly over this past cycle.

And then really if you look at the growth a lot of the Mexico growth is filling in voids in some of our core markets where capacity has gone away.

And then what we are seeing here, really to be honest, is Hawaii, and really we are growing Hawaii annualizing year-over-year, and again in the Bay area, in the Pacific Northwest and in San Diego and so that's where -- really where the growth is coming and the new revenue is coming and we have been very happy with the results to date.

Duane this is Brandon, this is just annualizing everything that we've already announced and/or started and in terms of the fleet there is really no change to the fleet with the exception of a small extension to three leased 400s.

Okay.

Just on the Horizon restructuring, bottom line is this about shaving costs or an ability to more tightly integrate that to reduce expense or is this about a top line opportunity you see in replacing brand flying with an Alaska brand.

Duane this is Glenn.

You really hit on all three pieces of it.

It is absolutely about finding synergies between Alaska and Horizon.

It's also about improving the efficiency of Horizon particularly through the fleet transitioning getting to the all key 400 fleet.

I think there is a broad range of benefits that will come out of this business transformation plan that we've talked about.

And the goal is to get Horizon -- the Horizon units to the same level of return on investment capital that Alaska is now enjoying.

Also, one other, this is Brandon again, one other thing is that we've operated Horizon in a way that's different from everyone else in the industry, and so by putting Horizon on an all CPA basis Horizon's P&L can look like the P&L of the other regionals around the country.

And so it gives us a better comp to understand where we may or may not be competitive.

From a cost standpoint.

Thanks.

Your next question comes from Michael Linenberg with Deutsche Bank.

Hey, maybe this is a question for Andrew.

Just to follow up on some of the capacity.

Andrew, if we think about maybe a same store sales basis, you're going to be up 8% to 9% in capacity in 2011, a lot of that is new.

Maybe all of it is new.

If we look at on your current system, is that flat is that down.

Where -- what can you tell us about that.

I suppose Michael big picture, if you go through most of the rest of our regions, I look at the growth within those regions only at 2 or 3 points, so fairly modest when you take into account new markets.

I suppose one of the things that I reflect on is really if you use Q4 as a bit of a proxy we are going to grow at about 9.5% and a majority of all of these new markets are in Q4 and we are very happy with what we are seeing as far as advances in yields and how that's starting to play out.

My second question, I may have missed this, but did you give us a feel for where RASM trends were heading through the December quarter?

I mean, I see the advanced book loads and I see some of the information in the investor update.

Maybe I just skipped over it or didn't hear it.

Your hearing is fine, Michael.

We don't normally give that but what I would share is that we are very pleased, we see continuing strength in the advances and you see December is down 1.5, points, but from where we stand we are very happy with the quality of traffic that's coming on to our books for December.

We are very comfortable with the fourth quarter.

Just as a quick follow up I don't want to run out of your time here, December being down, how much of that is a function of maybe a booking curve, that's becoming a bit more elongated?

Because I feel like at least coming into this holiday period and I realize this is anecdotally but I do hear from co-workers and others that people seem to be booking a lot earlier because of the upward movement in the fare structure.

Is that partly what is going on here, is that what we are seeing?

For Alaska Airlines specifically, our upward price increases in the fare structures haven't been that acute.

What you are seeing a little bit is confidence as we get closer in.

Last year a different story, weak economy.

We were happy to sell seats.

But I think this year what you are seeing is we have a little bit more confidence in holding out and making sure we build good yields.

Okay.

Good margin.

Thanks, guys.

Hey, Mike, it's Brad.

I might jump in on this capacity question.

There has been a lot of questions about it.

A couple of things that we would say is one, we are very very supportive of the industry effort to keep supply in line with demand.

If you look at our network a lot of the margin improvement that people are talking to is a result of this.

If you look at our over 2.5 years now, ASMs that we put into southern Cal, the Bay area, Arizona, Nevada, Mexico all of those efforts have been aligning capacity with demand.

To the extent Alaska's grown, it's been as a market like Mexico comes back or putting airplanes into Hawaii or even in the mid Continent regions.

That's one comment.

The second thing is I think while the industry, while we are very supportive of this industry effort to kind of keep capacity in check, I think we would all agree that while that happens industrywide there might be variances from airline to airline if you look at Alaska's history over 20 years now our capacity growth has been almost three times the industry average growth rate and I'm not signaling that that's where we are headed but I am signaling that this Company has done a good job of finding good profitable places to put airplanes for a long long time now and that's what we are talking about as we look at the next five years.

That's a very good point.

Thanks, Brad.

Your next question comes from David McKenzie with Hudson Securities.

Dan McKenzie here of course.

Just a couple of house cleaning questions.

What impact did the liquidation of Mexicana have on overall unit revenues in the quarter.

Dan this Andrew.

We don't get too specific but I think it's not only just Mexicana but also the H1N1 was I think May, June of last year, but as far as our Mexico region was only 4.5% of our capacity in Q3 but it fared very well.

We really just had one LA-Guadalajara and one LA-Mexico City that overlapped during the quarter.

We're adding it now in the fourth quarter to take advantage of the Mexico cessation of operations but with only 2 -- that's less than 1% of our network, with only two flights it wouldn't have had much of an impact on system results.

Understood, the second house cleaning question, with respect to the aircraft deliveries that are coming next year should we expect any lumpiness in labor expense from training costs, ramping up for the new planes?

Dan, it's Brandon.

I don't think so.

Three airplanes in the first quarter and then that's basically it.

I wouldn't expect any lumpiness in training costs or anything like that.

Certainly, nothing at the level that would be visible on the consolidated P&L.

A more broader question here, Bill, given the economic uncertainty referenced in your remarks and your role on the Seattle branch of the San Francisco fed, wonder if you could comment on how you're thinking about overall local business activity as it drives economic trends next year in the Seattle area?

I'm not sure I've got any great insights in that Dan, I think the Seattle area has fared better than much of the rest of the country.

Because of the diversified nature of the industries here and housing has been a little bit better.

But we have certainly been impacted, no question about that.

The biggest thing we talk to businesses and even or own corporate accounts, there is just uncertainty out there.

The fundamentals may be not that bad, but people are just uncertain about so many aspects of what is going on, they are just being very very cautious.

And that in fact slows the recovery of the economy.

All by itself.

Seattle is faring okay through this.

I wouldn't say it's outpacing anybody particularly.

We are cautious because of that.

Got it.

So in particular, no business net inflows or business activity in terms of businesses coming to Seattle that stand out in particular?

No.

Okay.

Thanks a lot.

Appreciate that.

Thanks, Dan.

Your next question comes from Helane Becker with Dahlman Rose.

Thank you very much.

Andrew, could you just, I think you said 4.5% of your capacity now is in Mexico.

I think prior to H1N1 it was something like 6, so with all the changes that you're making over the next say six months in Hawaii and Mexico, can you just update us on where that capacity falls?

Sure.

So for the summer we are about 4.5, and then actually it will peak in the first quarter of 2011 and Mexico will represent about 8.5% of our capacity.

One of the things, Helane, in all of this is that you see the Guadalajara, Mexico City ads but we've also eliminated the Cancun -- Seattle-Cancun-LA which was a very long six hour flight.

So that's 12 hours of flying being replaced by more two to three hour legs.

Overall capacity for 2011 in Mexico will be up a point or two or something like that but not huge.

Okay.

Then, are you seeing any shift from your core base away from Mexico actually to Hawaii given what is going on there from a political standpoint?

That's, we struggle with that question all the time, Helane.

I think the problem is what is going on is that we had a very rough year last year with H1N1 and the economy and now with the strength coming back and Mexicana no longer flying, what we are just seeing net-net is good strong Mexico demand.

The key to it, Helane, is what we've done everywhere in the system is we've gotten very nimble with capacity and quickly understanding what is going on with demand and matching capacity.

We moved quickly.

Mexico up, Mexico down we can take advantage of that or we can minimize the impact and put airplanes in other places and Andrew and his team have been very quick with that and it's helped us a lot.

So we spend more time looking at do we have capacity matched right than we do asking the question about total demand.

Then just in terms of looking at your overall root structure and earnings production, you really changed the seasonality of the airline.

So from being sort of break even first half to making money all year long, so we should consider that trend kind of continuing as we think ahead for 2011 and so on?

Helane, it's Brandon.

That's certainly the goal of what we are trying to do.

I don't think you should necessarily conclude it's a trend because there is too many things in the macro environment that we can't control.

But the idea behind all of the restructuring that we've done is to get out of the habit of creating a loss in the fourth quarter like you said, and having this huge profit in the third and really spreading our operation over the course of the year so we can generate profits in all four quarters.

And the other thing I would add, Helene, is that out of the Pacific Northwest Hawaii is a good add for us and also some of that Mexico as a seasonal like Puerto Vallarta out of San Diego so we do continue, seasons that are normally typical for us to put that metal in the markets we think can do well for us.

Are there any other Central American markets that might makes sense for you from Seattle then?

It's possible, Helene.

It's Brad.

But we don't normally talk about that stuff in advance of announcing it.

Okay.

Thank you, have a nice day.

Our next question comes from Steve O'Hara with Sidoti and Company.

You mentioned the CapEx for next year, could you just or like intro to it, could you give that one more time for me?

And that's about all I had.

Yes, Steve, it's Brandon, our CapEx next year would be just over $300 million, if we are able to complete this deal to have eight RJ's leave the fleet next year and replace those on a one for one basis with eight Q400's.

That's really a shift of CapEx out of 2012 and 2013 into 2011

If that doesn't get done, can you give me a ballpark on that?

I forget exactly what the number is but I think it was probably more in the $150 million range.

Great.

Thanks a lot.

Okay.

Your next question comes from Kevin Crissey with UBS.

Good morning, everybody.

Any thoughts on Allegiant regarding Bellingham and competition you're seeing there and then maybe as it relates to Hawaii.

Yes, Kevin.

This is Joe Sprague from marketing.

I think we have seen some good performance out of our own Bellingham to Las Vegas service that we are operating and we're really excited about the new Honolulu service that we are going to start on January 7, from Bellingham.

I think the realization for us has been that Bellingham in and of itself is a decent market but importantly the traffic that's coming from North of the border and the lower mainland area of Vancouver, British Columbia is really where the majority of the traffic is going to come from these flights.

We're seeing that already on our Vegas flights so credit Allegiant for maybe recognizing that themselves but maybe credit Alaska for recognizing it also and learning from Allegiant.

And I think we're excited for what lies ahead for us in that market.

I guess, I guess it's not really a question on that capacity but it just seems like there's never an airline that grows.

They always just annualize flying from the year before.

Thanks, guys.

(Operator Instructions) Your next question comes from Glenn Engle with BofA Merrill Lynch

Good morning.

A few questions, please.

One, on Horizon, margins seem to be declining for regional.

How do you -- since it's an entirely internal company how do you set what their margins will be?

Glenn it's Brandon, one of the things, you probably hear my comment a bit ago, was to -- by going in an all CPA model we wanted the Horizon P&L to look like other regionals and when we set the intercompany CPA rate we are going to try to do that in a way that's representative of market.

So the goal is to have market costs and market revenues between the two companies.

So the rate will be set on market costs as well even if Horizons are above or below that?

Yes, that's the idea.

Second you've mentioned a little bit on incentive, what is the current incentive bonus plan now for 2010?

In terms of what our projected cost is for the whole year?

Yes.

So through nine months we had accrued on an Air Group basis I believe the number is $62 million, and so we are on pace to about $82 million this year for incentive pay.

It's been a very strong year.

You are probably familiar with our Performance Based Pay plan that has goals that are not only financial but operational in nature.

As two companies we're exceeding the operational and financial goals set by the Board at the start of the year and so it's a very good year from an incentive payout basis.

Finally, can you talk about how well TransCon did in the third quarter, and to how well your business -- however you measure business improved relative to the overall system?

This is Andrew, Glenn, we were very happy with the TransCon performance.

It actually performed on par with many of the regions during the summer.

As you know, we only have one or two flights a day in the peak season.

They performed very well.

The other thing is our mix of traffic, summer is a big leisure time for us.

We carry a lot of leisure travelers versus more of the business focus outside of that.

And how much has business improved this year, last year was pretty depressed.

Glenn this is Joe.

You are right about that.

We don't, as carries a many corporate business travelers as other network airlines do.

What we have carried has certainly increased over the last year, in fact, most of our regions are seeing about a 30% increase in terms of managed corporate travel.

Do you have an estimate for what percent of your traffic you think is business?

I think on the managed corporate side it's probably 10% or a little less than that.

Thank you very much.

Your next question comes from Michael Derchin with CRT Capital Group.

Hi everybody.

One of the few airlines that actually has higher returns than you, is Allegiant, as you mentioned.

I was wondering if you looked at their model and are there any lessons that you can learn from them?

Mike, this is Joe again.

One thing that they clearly do very well is merchandise on their website and one of the main things that they are merchandising is vacation packages and car and hotel opportunities.

So that's something that we are going to try and learn from, we are doing a little bit of that this year, and our numbers here over the last month or so are increasing, we are going to put a lot of focus on that in 2011.

And that -- and trying to evaluate whether that really is a good opportunity for us.

How much of your Hawaii expansion is related to that type of opportunity?

Clearly Hawaii is an entirely leisure market with the point of sales strength that we have here on the West Coast, we know folks that we are carrying are going over there on vacation.

Absolutely when we look at trying to build our hotel business, Hawaii is the first source that we are going to look for to build.

Thanks, everyone.

Your next question comes from Tom Banse with KUOW Radio Seattle.

Gentlemen, I keep seeing here in the Pacific Northwest my hometown airline mentioned as an acquisition target.

And even again this week.

Can you talk about how many real inquiries from other airlines have come in since say the United Continental merger to have a conversation about merger or acquisition.

Hey, Tom.

This is Bill.

We don't talk about that.

What we do say about this whole topic though is it's about shareholder value.

And what we want to do here is have a Company that we think pursues strategies that optimize over time value for our shareholders.

And so as we talk about plans for the future and the whole universe of things, we believe that the path that we are currently on, the development that we've had, the work that we've done over the last seven years to really transform the Company and first Alaska and now Horizon to build a more competitive business model, a lower cost company, a company that has greater customer value, that flies to the places that people want to go that has single fleet.

A very fuel efficient fleet.

All the things we have been working on for so long, we think that now we are starting to see the results in terms of earnings.

And we think the path that we are on is the right one for shareholders.

Being a public company, you have to say that if that were to change and we thought there was a belter alternative available for shareholders we would look at that alternative.

But where we sit right now and particularly with this quarter's record results we are very encouraged that we are on the right path and we're going to keep at it.

And then just a completely different big picture question, what accounts for the discipline of the airline industry this year in maintaining or avoiding fare wars and keeping a cap on supply?

It hasn't really happened in the previous 10 or 15 years but it really seems to be working this year.

You are right about the historical part of this which is the typical thing in this part of the cycle is people start making money and then buy airplanes and then they have too many seats and fares go down and airlines start losing money.

I think part of it is the fact that you've got management times in place that have been through this cycle a couple of times.

People don't want to replay the movie.

So it's encouraging and there's no guarantee that the industry continues to be disciplined this way.

That's certainly the way it's going right now.

In fact, the consolidation that has happened probably helps that.

Helps the discipline.

It's encouraging.

This industry needs to be profitable.

It's a key part of the economy and the history is not a good one as you know.

We are encouraged, we are certainly trying to do our part to be disciplined about everything we do and we are encouraged that the industry will be so as well and we'll have a long period of profitability in the industry.

Thank you very much.

At this time, this are no further questions.

I will now turn the conference back to Bill Ayer for closing remarks.

Okay let me once again congratulate Alaska Air Groups, both Alaska and Horizon employees for a great third quarter and to our audience, we'd like to thank you for joining us today, we look forward to talking with you again next quarter.

Thanks very much and take care.

Thank you for participating in today's conference call.

This call will be available for replay beginning at 11.30 PM Eastern Standard time through 11.59 PM Eastern Standard time on November 21, 2010.

The conference ID number for the replay is 38153246.

Again, the conference ID number for the replay is 38153246.

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