阿拉斯加航空 (ALK) 2011 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Alaska Air Group's first quarter 2011 evenings conference call.

Today's call is being recorded and will be accessible for future play back 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).

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

Thanks, Alisha.

Good morning, everyone, and thank you for joining us for Alaska Air Group's first quarter 2011 earnings call.

Today Alaska Air Group's CEO, Bill Ayer; Air Group CFO Brandon Pedersen; and Alaska Airline's President, Brad Tilden, will share their thoughts on our first quarter financial results, our operations and our expectations for the remainder of the year.

Other members of our senior management team are also here to help answer your questions.

Today's call will include forward-looking statements regarding our future expectations, which may differ significantly from actual results.

Information on risk factors that could affect our business can be found in our SEC filings available on our website.

Our discussion this morning includes some non-GAAP financial measures, so we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release.

This morning Alaska Air Group reported a first quarter GAAP profit of $74.2 million.

Excluding the impact of significant mark to market adjustments related to our fuel hedge portfolio and charges related to the fleet transition at Horizon, Air Group reported an adjusted net income of $29.5 million or $0.80 per share.

This compares to a First Call mean estimate of $0.71 per share, and to last year's adjusted net income of $13.1 million or $0.36 per share.

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

And now I will turn the call over to Bill.

Thanks, Chris.

And good morning everyone.

We are pleased to report a more than twofold increase in our first quarter adjusted profit, resulting in our second consecutive first quarter profit and another record.

These results are due to strong passenger demand, leading to a 16% or $136 million improvement in operating revenues.

Our results were driven by record load factors and improving yields, partially offset by a significant increase in our economic fuel costs.

The capacity increase this quarter, combined with growth in our unit revenues, supports our belief that we can grow our business profitably, even in times of higher oil prices, although our projected growth going forward is more modest than in the first quarter.

We are encouraged by these results given the significant increase in fuel costs.

Our people are working hard to take great care of customers, and I want to thank them for their efforts.

As we look ahead, fuel will continue to be a challenge, as oil prices have risen to levels not seen since 2008.

We believe we are very well positioned to deal with rising fuel prices, given our fuel efficient young fleet, our fuel hedging program, and our ability to redeploy or adjust capacity to maintain high load factors.

We are watching fuel prices very closely and believe we have a good understanding of the unit revenue increases required on a market by market basis to offset fuel at various prices, and our revenue management folks are focused on achieving these increases.

Alaska's main line operational performance continues to be at the top of the industry.

We again reported the highest on-time performance in January among the ten largest US airlines, and second highest in February.

We don't have March data yet, but as of February we remain first in on-time performance for the last 12 months.

We also had record load factors at both Alaska and Horizon for each of the three months in the quarter.

In fact, we had 80% or higher load factors at Alaska in both January and February for the first time in our history.

The Horizon transformation, led by Glenn Johnson and his team, is proceeding on schedule.

As you recall, that transformation includes moving to an all Q400 fleet, working to achieve market-based labor costs, outsourcing heavy maintenance, adopting an all CPA model, and changing to the Alaska livery.

We are now flying four Q400s with the Eskimo on the tail and will be completely out of the CJR aircraft by the end of this quarter.

As we look at the next few months, demand continues to be strong.

Advance book load factors remain solid, two to three points up in the second quarter on an expected consolidated capacity increase of 7%.

With our load factors at record levels, we are focusing on yields to help offset rising fuel prices, and Brad will talk more about this in a few minutes.

We are optimistic, but also cautious about the remainder of the year.

Optimistic because of the strength of the demand environment and the recent success of industry-wide fare increases.

But also cautious, because we know as fares go up with rising fuel prices, demand will be impacted at some point.

And before I close, I want to take a moment to again thank our employees for our tremendous efforts this quarter and make sure they know that their hard work is paying off as we work together to build a stronger and more competitive company.

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

Thanks, Bill, and hello, everyone.

As Chris said, Air Group reported an adjusted record net profit of $29.5 million, compared to a $13.1 million profit last year.

This result brings our trailing 12 month return on invested capital to 11.3%.

Not only did our profit more than double, we increased our pretax margin to 5.1%, up more than two points compared to the first quarter of 2010.

As most of you know, the first quarter has historically been our weakest quarter of the year.

On a pretax basis, profit improved by $26 million, driven by the $136 million increase in operating revenues that Bill mentioned.

However, the increase in revenue was offset by an $82 million increase in our economic fuel costs.

Our raw fuel costs increased nearly $94 million or 48%, but our hedges saved us $12.5 million.

As jet fuel prices continue to rise, I want to remind you of the two important advantages that we have that protect us against increasing fuel costs.

First, we have a simple, easy to understand insurance-like hedge program that provides protection from oil price spikes yet allows us to take advantage of declines in the price of oil without triggering payments to counter parties.

For the rest of 2011, half of our planned consumption is hedged at $86 per barrel, with an average premium cost of $11 per barrel, putting our caps in the money at $97 oil.

In the near term, we also have protection against high jet fuel refining margins, using swaps that extend through the third quarter.

For the refining margin, we are hedged at $0.59 per gallon for half of our planned consumption in the second quarter.

Second, and even more importantly over the long term, we have a young, fuel efficient fleet of 737s at Alaska and Q400 at Horizon.

These are arguably the most fuel efficient and environmentally friendly fleets in the domestic industry today, and provide what we believe to be the best protection against rising fuel prices.

That is, simply burning less fuel.

Non-fuel costs, excluding the CRJ fleet transition charges, increased by $30 million, or 5% over last year's first quarter.

Consolidated CASM, ex-fuel, declined 6.3% on the 12% increase in capacity.

We are again pleased with the momentum we have been seeing with our cost performance.

We are meeting our cost goals because the employees at both Alaska and Horizon continue to work on improving productivity and keeping overhead in check, and I want to thank them for their hard work in these areas.

Productivity across Air Group increased by 8% compared to the first quarter of 2010 on a passenger per FTE basis.

That improvement comes on top of an 8% increase in the first quarter of 2010.

As Bill said, Horizon's transition to an all Q400 fleet is on track to be complete next month.

During the quarter we subleased four of Horizon's RJs, resulting in a $10.1 million charge.

We plan to remove the last nine RJs from the Horizon's fleet in the second quarter and expect to record an additional $18 million to $20 million charge.

Moving to our balance sheet, we ended the quarter with just over $1 billion in cash and short term investments.

This represents 26% of trailing 12 months revenue, and down from the $1.2 billion reported December 31.

Much of the decline can be attributed to aircraft delivery payments, the prepayment of an additional $52 million of long term debt, and typical seasonal fluctuations.

We generated over $115 million of cash flow from operations in the first quarter, compared to $55 million last year.

Operating cash flows were offset by capital expenditures of $149 million as we took delivery of and paid cash for three 737-800 aircraft, and four Q400 aircraft.

For all of 2011 we still expect total capital expenditures to be approximately $385 million, excluding construction funding at LAX terminal six.

Although we had negative precash flow in the quarter because of the aircraft deliveries, we are focused on generating free cash flow for the full year, which remains an important goal for us.

During the quarter, we repurchased another 434,000 shares of our common stock for approximately $26 million.

Just last week we completed our latest $50 million share repurchase program, nearly two months before its expiration.

Since we started our repurchase programs back in December 2007, we have returned $212 million to shareholders by repurchased 7.6 million shares of our stock, or 19% of the amount outstanding at that time, at an average price of $28 per share.

We repaid $89 million of debt during the quarter, including the $52 million of prepayments that I mentioned.

Our debt to cap ratio now stands at 65%, 15 points better than where we were at the end of the first quarter of 2009.

That improvement has come from a $500 million profit driven increase in equity, and a $550 million reduction in debt, including the value of leases.

We will likely finance the Q400 deliveries later this year because of the attractive interest rates available to us from Export Development Canada, but don't expect to borrow any money beyond that.

Finally, you have probably noticed that our earnings release includes more abbreviated subsidiary-level results and large year-over-year changes in Alaska's regional revenues and costs, and Horizon's total revenues and expenses.

With Horizon's transition to an all CPA carrier, substantially all of Horizon's revenues are now related to capacity purchased by Alaska.

Passenger revenues for flights operated by Horizon are captured on Alaska's books, as are related expenses such as selling and distribution costs, landing fees and fuel costs.

Horizon's expenses now look much like other al-CPA providers and reflect its singular mission of providing safe, reliable, ASMs to Alaska, and predominately include ownership, maintenance, and crew costs.

Bottom line is that we moved some things around a bit to get what we believe is industry standard, and that's creating some challenges when comparing year-over-year results at the operating subsidiary level.

What I can report, however, is that Horizon's CPA operations posted a $2.9 million adjusted pretax profit, right on track with where we thought we would be at this point in the transformation plan.

Of course, none of these changes impacts Air Group's consolidated results.

And with that, I'll turn the call other to Brad.

Thanks, Brandon, and good morning, everyone.

We had another great quarter at Alaska Airlines, with an adjusted pretax profit of $46.8 million, compared to $26.6 million last year.

This result marks our second consecutive profitable first quarter, and it's another indicator that we are having success reducing our seasonality.

For the quarter, main line passenger revenue increased by $115 million or nearly 20%.

The improvement was driven by a 14.7% increase in capacity, and a 4.4% increase in passenger unit revenues.

Traffic continued to outpace capacity, resulting in a 2.4 point increase in load factor.

Yields also improved 1.4%.

As we look forward, we are very focused on yields, given the higher fuel prices, and we have taken a number of actions to push fares up in the coming months.

The load factor story merits more discussion, as it highlights some changes that have been underway for several years.

If we look at first quarter load factors for airlines with more than $2 billion in revenues, since 2001, we see that Alaska's load factor ranked in the bottom three in each first quarter between 2001 and 2009, with our figure typically being in the mid 60s or low 70s.We move to fifth place in 2010, and to first place in 2011, with our record 83% load factor.

This load factor was achieved with capacity growth of 15% and with improvement in our pretax margin.

As you have seen, our margin was 4.9%, a strong first quarter number for us by historical standards.

This turn around is something we are very proud of, and it's the result of a deliberate strategy to reduce our seasonality and optimize our network throughout the year.

Our performance is made possible by our front line folks who are handling the volumes in stride, and who continue to provide outstanding service to our customers; by a marketing organization that is very effectively stimulating winter demand for markets like Hawaii, Mexico, and California; by a planning group that is carefully at locating capacity and maximizing revenues while maintaining our low fare value proposition; and by a leadership team who is supporting all of these groups.

Recently we continued to see unit revenue increases in nearly every one of our regions, including Hawaii, where capacity has grown 75% from last year's first quarter.

We recently launched service from San Jose to Kauai, and in June service from those two cities to Maui will increase to daily frequency.

We now have 18 round trips per day to the islands, and our Hawaii franchise now represents 15% of our capacity and approximately $400 million in annual revenue.

As you all know, our big opportunity in Hawaii was created by the liquidations of Aloha and ATA, and that capacity has now largely been replaced.

Understandably there are a lot of questions about capacity, and at what point higher oil prices would cause us to adjust our plans.

Although there is not a simple answer to this question, we are very concerned about oil prices and are actively managing our network and our revenues so that we have the right capacity and the right markets and at the right times, so that we can charge fares that cover our costs.

As long as we can do this, we feel confident about our modest growth and our ability to meet our return goals.

If, however, higher oil prices lead to another downturn in the economy, we may need to redeploy aircraft or revisit capacity plans, as we did in 2008.

We expect growth to subside as we move forward, with full year mainline ASMs up between 8% and 9%.

By quarter, we expect to grow 9%, 6%, and 7% in the second, third, and fourth quarters.

Our profits are improving because of top line growth and our continuing focus on lowering non-fuel unit costs.

For the first quarter we reduced main line unit costs by nearly 7%, from 8.4 cents last year to 7.83 cents this year.

For the rest of 2011, we are still forecasting full year main line CASM, ex-fuel, of 7.6 cents, which is down 3% from 2010.

This continues a long term record of unit cost reduction, a key part of our strategy of reducing the gap between us and the lowest cost carriers.

Turning to labor, we signed a four year agreement with the bulk of our IAM represented employees on March 29, and we reached a tentative agreement with the TWU on a four year agreement covering our dispatchers on March 24.

Finally, we are looking forward to starting our capacity purchase agreement with SkyWest in mid May.

SkyWest will operate five CRJ 700s on select routes in the Santa Barbara, Long Beach, Fresno, Burbank, and Ontario markets.

As I wrap up, I would like to thank all of the folks at Alaska and Horizon for the terrific work they put forward over the last several quarters and years as we work to position ourselves to compete in an entirely new environment.

We have always known that our size gives us unique advantage, and that our fortunes are tied to each other.

If you look at our performance, it is clear that we are taking advantage of our size, working together, and adapting to the new competitive realities.

We know that our future success depends on us continuing to perform at this level.

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

Thanks, Brad.

And I want to just congratulate our employees for a great first quarter, and again thank them for everything they do to take good care of customers and ensure a safe and reliability operations.

And so at this time we are ready for your questions.

(Operator Instructions).

Our first questions comes from the line of Hunter Keay with Wolfe Trahan.

Your line is open.

Thank you, good morning.

Good morning.

How are you guys.

Wondering how the reduction of Asian service to Japan by Delta and American have impacted your business, given the codeshare relationships.

Has there been any impact of PRASM?

Hunter, this Andrew.

We haven't noticed any significant changes to what our expectations have been, given the issues in Japan right now and our partners.

Okay, and you don't really expect any going forward then presumably?

No.

And if American were to divest Eagle, I'm trying to figure out if that's a threat or an opportunity.

If Eagle is suddenly providing -- whatever Eagle is going to be called -- providing hub feed for American at lower rates, if they get a contract with restructuring involved with the divestiture, is that going to maybe devalue you in terms of how you feed American's hubs?

Or is it an opportunity?

How should we think about that?

Particularly into LAX is what I'm thinking about mostly.

Hunter, this Bill.

We haven't thought about that, to be honest with you.

There's very little overlap between our operation and Eagle.

And we haven't formulated solid plans about LA.

It's obviously an important point in our system, and we are pleased with the performance of it.

But in terms of the future growth potential of LA, we obviously think there is some, but was don't have a specific plan and don't know how regional markets might play into that.

So we haven't thought much about that.

Okay, thank you.

Appreciate it.

Thanks, Hunter.

Our next question comes from the line of Bill Greene from Morgan Stanley.

Your line is open.

Hi, there, yes.

I'm curious if we can talk a little bit about the regional aspect of your markets.

I would have thought, given your exposure to Mexico and Hawaii, that at these fuel prices with the fare increases we have seen, you'd see more elasticity than you're seeing.

So is there a piece of it that I'm missing?

Maybe you have very far ahead bookings on those?

Or how do you think about the elasticity here?

Bill, this is Brad.

Maybe I'll jump in.

It is a good question.

And I think fuel prices have been increasing so we are -- as we said in the prepared remarks, we are concerned about the future, as we are starting to deal with fuel at $111 a barrel, and what that can potentially do both to our cost structure and to income that our customers would have to spend for plane tickets.

I think if you go back, I think some of the stuff we mentioned in the script.

The Company is operating very well.

We're produce -- I think the service has been fantastic.

I'm not completely current on Hawaii right now, but I think if you look over most of our three years, we have had the lowest fares from the West Coast to the United States, so it's been better value from Alaska Airlines than from other airlines.

And then I think our network group has done a good job of putting the right seats in the right markets so that on a day by day and market by market basis, we are dealing with what we call excess demand.

You've got a lot of demand that you're working with, and so you are able to work prices up to from you want them.

That's some thinking about it, Bill.

I do think fuel has been moving the last four or five weeks, and so we are all smart to kind of watch the second and third quarter and see how this plays out.

Bill, this is -- just to add one other thing.

I think I was just looking at Q1 this morning, and versus 2008, we have 28 new main line markets out of our system.

And I think as we diversify the number of points we serve out of Seattle, I think it provides increased opportunity to feed our Seattle hub with our regional network.

Yes, that's a fair point.

The -- one thing -- and maybe I missed it, because there's a lot of calls going on today.

Did you mention any comments about future buy backs?

Hi, Bill, it is Brandon.

No, we didn't talk about future buy backs yet at this point.

As I mentioned in the prepared remarks, we finish our current buy back two months early.

We have an intent to talk to the Board about it later this summer, but I didn't mention anything specifically other than that.

Okay, but that would still be on the list of things that presumably would be high up for uses of capital?

Yes.

Our Board has shown a commitment to returning capital to shareholders and has also shown a preference to using the repurchase route.

We are going to look at cash balances and what happens in the environment, and I think it's fair to say that we would view both share repurchase and continued debt paydown as being very viable opportunities for us to deploy excess cash.

Okay, great.

Thank you for the time.

Our next question comes from the line of Helane Becker from Dahlman Rose.

Your line is open.

Thank you very much, operator.

Hi, everybody.

Hi, Helane.

The question I have is with respect -- two questions, really.

One is with respect to plans -- transcon plans -- plans to maybe serve more cities in the East from your base in Seattle?

And my second question is with respect to Mexico and the drug issues that are going on there.

We're definitely hearing that we are seeing more people from the West Coast flying to Hawaii than Mexico, but you have increased Mexico I think a lot in the first quarter.

So I was wondering if you could compare the markets?

Helane, it is Andrew.

Firstly, on the transcon, as Brad and Bill laid out earlier, we have set out our growth plans for the year, and I think most of it coming from Hawaii growth and Mexico growth.

So I think that's where our mindset is.

As far as Mexico goes, it still sits around 8% of our capacity, and we hear much the same that you have heard about some of the challenges that are in Mexico.

As far as our growth goes, in Q2, Q3 and Q4, it is about 20% of our growth is still in Mexico with the Guadalajara, Mexico City.

But what we are finding, Helane, is that there was a huge void created when Mexicana that stopped flying.

And I think what we are seeing is that void in our markets, at least, is basically being returned by either ourselves or other carriers.

And so we have still seen decent strength.

In fact, even this quarter our Mexico yield increases were above the norm.

So we aren't seeing anything that's hugely concerning to us in the markets that we serve.

Would you consider plans to fly further Central American markets?

Further south of Mexico?

We always consider looking at things like that.

I think Panama is about as far as the 800 can take us.

But again, we are very focused on the core beach markets and Guadalajara, Mexico City at this time, and establishing ourselves in a very strong way.

Great, thanks very much for your help, Andrew.

Thank you.

Our next question comes from the line of Michael Linenberg with Deutsche Bank.

Hey, good morning, guys.

Hi, Mike.

A couple of questions here.

When you look out at your forecast, I mean your capacity is up a bit relative to others, and yet your bookings look very strong.

I mean up to two to three points I think is what Bill said.

And I know that -- I don't think you are out there actively stimulating really trying to bring fares down.

I mean, fares are going up because of higher fuel.

What are you guys seeing maybe that is specific to your markets?

Can you give us maybe some of the -- what the competitive capacity changes look like?

Or maybe it's just overall very strong demand that you are seeing in your core markets?

Mike, it's Brad.

Maybe I will start, and we can see if Andrew wants to jump in.

The first thing with our capacity is it's -- if you look at it, it was fair bit of capacity growth in the first quarter, and there's 9% in the second.

You look at it regionally, that amounts to five Hawaii flights; it's five flights into Mexico with markets like Guadalajara and Mexico City, which were opportunities created by the Mexicana bankruptcy; and it's Seattle / St.

Louis.

That's it for the capacity growth.

Okay.

If you look at California, Phoenix, Vegas, Anchorage, everything else, the core markets are basically flat with the prior year.

So that's kind of our thinking about capacity growth and maybe why we are continuing to see nice load factory increases on what we have put out there.

Okay, and then just -- my second question, with respect to the operations.

I mean, it's just -- it's absolutely amazing to see Alaska being number one, not just in on-time over 12 month average, but like the month of January.

And I think back to the days where it was very difficult for this Company to get top 10, and you think about a lot of the markets that you are in.

I mean, I know the seasonality of the business -- or you definitely reduced or changed just through your network and some diversification.

But is it cultural?

Or is it just maybe operating all 737s?

Sort of a single aircraft type with -- I mean I recognize there's different variants from the 400s on up.

But you -- there definitely has been a sea change in the operations over the last couple of years, and I'm just -- I'm wondering what may be driving that?

Hi, Mike --

It's not increase block time, that's for sure.

Because it would show up in your costs.

Yes.

Hi, Mike.

Ben Minicucci here.

Hi, Ben.

No, we haven't increased block time.

In fact, we've done the complete opposite.

In the last three years we have taken -- we have embarked on a whole transformation strategy on the operations.

With great employees and focusing on a great ground operation, we have been able to reduce block times and simply drive a great operation cost effectively, focusing on productivity as well.

So when you do that, you provide a lot of goodness to the operation and to the bottom line.

And , Ben, I may add a couple of things.

Ben is right about our employees.

Folks are working together like never before and really understand the interdependencies that exist in an airline operation.

You can't operate in silos.

The different -- the folks from different departments have got to work together to get the job done for the customer and get an on-time departure, a safe airline and all the things we have been doing here.

And one of the other things, and it sounds really simple, but you know this old adage that what gets measures gets managed?

Ben and his team have put together a very good scorecard process, a metric-driven process to look at every aspect of the operation.

I mean, a very elaborate countdown to a departure.

Get into every step of the process and making sure that our employees know what we are counting on them to do every step of the way to get the job done and get the airplane out on time.

And we have applied that to virtually every airport in the system.

We started at Sea-Tac, because that's where -- as goes Sea-Tac, so goes the airline, given that's our big hub.

We really applied that now to every city and every aspect of the operation.

And it is going really really well.

But at the end of the day it is people.

It is a real tribute to our employees that are working together, come to work every day with a smile on their face and take great care of our customers.

And we couldn't be happier about where we

Okay, very good.

Thanks.

Thank you.

Our next question comes from the line of Jamie Baker with JPMorgan.

Your line is open.

Hey, good morning, everybody.

Good morning, Jamie.

Bill, I don't want to put words in your mouth, but I have got to imagine you are fairly disappointed with the multiple the market is giving you right now?

Is that reasonably fair?

I guess our attitude, Jamie, on that is our focus is on running a good airline, and leading to good profits.

And we figure the stock price -- the market will figure out where the stock price needs to be, given our performance.

And if we can continue to perform and grow earnings.

And grow the airline.

The other thing is we are probably perceived as not much of a growth company, and in fact, we have been growing more than most of the other carriers, and especially recently, and we are doing that profitably.

So I guess our view is we focus on those things and communicating accurately about what we are doing with Wall Street on calls like this.

And the stock price will find the right point.

Well, sure, sure.

I just wanted to make sure that it was a priority.

I figured as much.

But, I mean, one of the things I asked United today was whether they would ever allow a non-airline to take a minority stake in their frequent flier program, maybe to mind some of -- all that data there.

And the point I was hoping to make with that question, if the markets is not willing to recognize the work that you are doing and the inherent value of the business, then maybe there are some better, more creative ways to create value for your stakeholders.

So I guess my real question for you is whether you are willing to think outside of the box?

Although given the comments that you just gave, maybe you prefer to just stay the course and let the market make up its mind longer term.

Is that an accurate summary?

I think running a good airline in this environment takes all of our attention and focus and effort.

And I do believe, the long term the market will get it right.

And we are going to stay the course and keep working on what we have been working on and continue to build earnings, and the stocks should follow.

Got it.

Well, I certainly wasn't try to detract from your recent accomplishments.

I hope it didn't come across that way.

Thank you for taking the question.

Thanks, Jamie.

Our next question comes from the line of Dan McKenzie with Rodman & Renshaw.

Your line is open.

Yes, hey, good morning, everybody.

A couple of questions here.

And I guess I'll save my modeling questions for Chris after the call.

But one thing that jumped out at me with respect to the competitive dynamic, at least looking ahead to the second quarter, is some incoming capacity from Delta.

And I am just wondering, is that tied to their international flying, or tied to the codeshare?

Or how should we think about that Delta -- think about the Delta relationship?

Hi, Dan.

This is Andrew.

It's -- they have already started more of their Asia gate way out of Seattle I think.

We have seen their code being carried on us.

We have got it throughout Mexico now, and some other cities so you may be seeing more of their code being applied to our markets.

That's one thing that comes to mind.

But from a competitive head to head capacity point of view nothing stands out.

Okay, thanks.

I appreciate the clarification.

And then a second question here is just with respect to the Southwest fare increases and their impact on Alaska's system-wide network.

Of course the networks overlap is not 100%, but how should we think about the portion that falls to the bottom line, just given elasticity verses demand strength, and thus the ability to extend these increases throughout the entire network?

Or is that not the right way to think about pricing for Alaska?

We've seen 13 increases in our markets since January 1.

I think we have seen Southwest honestly being as active as I have seen them in many many years in the pricing environment.

I think what we are trying to do is to, as Brad mentioned earlier, we have a very clear sight line to the unit revenues by market, by region, that we need to get with these oil increases.

We have tied that to the capacity.

And we're also, through all of this, trying to provide a good value for our customers, whether we are building Mexico franchise or our Hawaiian franchise.

So right now, and as we come into the summer, we are very focused on the yields, and we are finding that the pricing environment is I think coming along where we need it to come along at these oil prices.

Got it.

So if I interpret that correctly, it sounds like at this point you are continuing to offset 100% of the fuel increase expenses?

100%, that's -- what I will say is that right now we are very happy -- we're not happy with the fuel, but we are very comfortable with our plan, and the environment that we're able to raise our prices, and we are coming along quite nicely.

Yes, Dan, it is Brandon.

I'll chime in with one other thought.

Fuel prices are very volatile, so for us to be able to say we are offsetting 100%, it's a long term proposition.

That's not a day-to-day question, necessarily.

But as Andrew said, we are very focused on the unit revenue requirements that we need to offset rising fuel prices.

We have really high load factors, so we are turning our attention toward yields, and that's the focus.

And certainly Southwest coming along with fare increases helps us in that cause.

Fair enough, I appreciate it.

Thank as lot, you guys.

Our next question comes from the line of Glenn Engel with Bank of American Merrill Lynch.

Your line is own.

Thanks.

A few questions.

One on Horizon.

If I look at the first quarter, revenue up 13% on 6% more seats, is that what you are actually collecting from passengers, or has there been a change in how you account for revenues?

[Because the] RASM is much more strong than the rest of your system.

Glenn, this is one of the difficulties of having the change in reporting format.

Are you focusing on Horizon operations specifically, which would be (inaudible -- multiple speakers)?

No, in the consolidated revenues, the passenger revenues you have in your --

I got you.

So consolidated passenger revenues at the regional basis.

Yes, 177 it was.

Yes, 177.

We have been very very happy with our regional business.

We actually shrank the regional business, but what we have seen fundamentally, is very good increases in both load factor and in yield.

And when we couple that with the power of the 76 seat Q400, we have seen very good results.

We have cut a lot of markets out of the Horizon network that weren't performing where they needed to be, and working with Glenn and his team, that was our part a little bit of the contribution to making this a stronger regional enterprise.

Okay, so that particular line is operational, not accounting?

The strength?

Yes, absolutely.

That's pure.

And that is really the focus here is to talk about main line and regional in terms of the market-based revenue, and then the Horizon standalone results are CPA revenue from Alaska.

But the number you are focused on is pure passenger revenue, outside of any accounting adjustments, so to speak.

Second one, I look at your fuel price from your first quarter to second quarter.

You seem to have a bigger jump than most, and yet you're probably hedged better than most.

Is that all the jet swaps?

The -- what's driving the huge increase?

Hey, this is Jay Schaefer.

My apologies, I'm not sure what other airlines are reporting, but for us it is a couple of things.

One, obviously the absolutely price in crude, but then when we look at the crack comportion, or the refine margin, we mostly consume West Coast jet, which is about $0.10 right now higher than the comparable Gulf Coast jet.

And so we are being penalize a little bit there.

So -- but right now, for our second quarter, crack swaps were are in the money, and so that's actually providing a benefit, not additional cost.

But is it the crack swaps are helping you much less in the second quarter than the first quarter?

Absolutely, yes.

They have increased significantly.

This is a less liquid market, so we are have to buy these hedges closer in than we do for our crude positions.

Finally, have you given any April RASM flavor.

No, we don't guide to April RASM, but we can talk about advances.

Advances for April on the main line we are up 1.5 points, and then consolidated after advances were 2.5 points.

What I will share, is that in the last three weeks I think the industry was able to increase yields about 10%.

And what I can tell you is in the last three weeks, the yield on all the tickets that we have sold, looking forward, has been at least 10%.

So we are definitely active in increasing yield at this time.

Andrew, we probably would not see -- that's all ticket sales in the next 330 days.

That's right.

So you probably would not see that much in April --

No.

Because some of April that was sold in January and February and March.

That's right.

That's right.

That's not April guidance, that just an observation.

Thank you.

Our next question comes from the line of Steve O'Hara from Sidoti & Company.

Hi, good afternoon.

Hello.

Could you just talk about -- and I don't know if you touched on this already, but in terms of buy backs, with fuel where it is, does that make you more cautious?

If not, have you thought about maybe being more aggressive in buy backs, something like a recap?

I mean, you have a good amount of cash in your balance sheet.

Yes, Steve, this is Brandon.

Hi.

I did address that briefly in one of the questions.

In terms of our repurchases, we did finish our current $50 million authorization two months early.

We plan to talk to our Board about it later this summer.

Our Board has certainly shown a desire to return capital to shareholders and has also shown that they prefer the repurchase route.

One of the things our Board will think about, certainly, is the volatility in the oil markets and what that is projected to do to the cash flow and the ultimate cash balance.

And so I think it would be wrong to say that there isn't a little bit more caution given the volatility in the environment, but I don't know that there's -- I guess it would be unfair for me to speak on behalf of the Board in terms of all the things they are going to want to look at.

But what I will say is that it is certainly an option that's left for us to pursue.

Okay, thank you.

Our next question comes from the line of Kevin Crissey with UBS.

Your line is open.

Hello.

Hey, Kevin.

Can you talk about Hawaii distribution?

How does that look at a percentage of sales through your website direct versus other channels.

Are you doing it with OTA.

business?

How does that compare to the rest of your network?

Kevin, hi, this is Joe Sprague with Marketing.

Overall we do about 50% of our bookings through alaskaair.com.

And it's not appreciably different for the Hawaii travel.

There is a fair bit of OTA activity in that market.

But actually we are seeing increases in the alaskaair.com share, and we know a lot of that is coming from Hawaii.

Okay, that's all I had.

Thank you.

Thanks, Kevin.

Our next question comes from the line of Duane Pfennigwerth with Evercore Partners.

Your line is open.

Hi, good morning.

Wanted to follow up on something you said.

So it wasn't April, but for some period of time in the 2Q here, advance book loads are tracking positive, so maybe up 1 to 2.

And then did you say advance book yields are tracking up 10%?

Yes, 10% for all the sales, 330 days out.

Of which [bigger] --

Duane, just to be really clear, that's the sales -- future sales that we have taken in in the last 21 days.

The yields on those sales have been up 10% over the prior year.

Without commenting on when those folks will travel.

But I assume you are booking curve isn't -- there's not a whole lot beyond the second quarter that you are booking.

So for some substantial portion of 2Q you are tracking up double digits from a RASM perspective in terms of forward RASM?

Duane, maybe -- we try really hard to not give revenue guidance to you guys.

We try really hard to tell you things we know about, and so we are tell you where advanced load -- book load factors stays, and we have told you about sales for the future.

You are right that our normal advances we take in maybe on average 30 to 60 days before the travel date, but I think that's where we want to cut it off and leave that to you guys to the analyst community to make the estimates about where the Company is going to do.

Fair enough, and do appreciate the follow up.

Wonder, just taking a look backwards, could you give us -- your RASM was up 4%.

What does that look like for the regions that you fly to?

So you looked at year to year RASM growth to Hawaii, US domestic or Alaska, and then US to Mexico.

What does that 1Q growth rate look like for those three areas?

Sorry, Duane, you are specifically referring to those specific regions?

Correct.

So specifically Mexico, are you seeing something much greater than the 4% rate US to Mexico?

Duane, it's Brandon.

We don't like to talk about regional level PRASM.

We do give you some information on changes and directional things like that, but we have had a practice of not disclosing regional level PRASM gains specifically.

Okay.

And then just lastly, can you just remind me what -- how many 700s you are going to be outsourced to SkyWest and what the term on that is?

This is Andrew, Duane.

There's five aircraft, seven year.

Great.

Thanks very much, guys.

Thanks, Duane.

See you, Duane.

We have no further questions at this time.

I'll turn the call back over to Mr.

Bill Ayer.

Okay.

We will give you an extra ten minutes or so before you next call.

I just want to thank you all for joining us today, and we look forward to talking to you next quarter.

Take care, everybody.

And this concludes today's conference call.

Thank you for participating.

This will be available for replay beginning at 11.30 PM Eastern Standard Time through 11.59 PM Eastern Standard Time on May 21, 2011.

The conference ID number for the replay is 38154259.

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