Alaska Air Group, Inc. (ALK)

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Alaska Air Group, Inc. (ALK)

Q3 2008 Earnings Call

October 23, 2008 8:00 am ET


Shannon Alberts - Managing Director of Investor Relations William S. Ayer - Chairman, Chief Executive Officer

Bradley D. Tilden - Chief Financial Officer

Jeffrey D. Pinneo - Chief Executive Officer of Horizon Air Industries, Inc.

John Schaefer – Vice President, Finance, Treasurer

Gregg Saretsky – Executive Vice President, Flight and Marketing

Brandon Pedersen – Vice President, Finance, Controller


Raymond Neidl - Calyon Securities

Michael Linenberg - Merrill Lynch

Dave Simpson - Barclays Capital

Daniel Mckenzie - Credit Suisse

Peter Jacobs - Ragen Mackenzie



Good morning, my name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group third quarter 2008 earnings conference call. (Operator Instructions) And now I’d like to turn this over to the Managing Director of Investor Relations, Ms. Shannon Alberts.

Shannon Alberts

Hello everyone and thank you for joining us for Alaska Air Group’s third quarter 2008 conference call. Alaska Air Group Chairman and CEO Bill Ayer, CFO Brad Tilden, and Horizone Air, CEO, Jeff Pinneo will provide an overview of the quarter, after which we will be happy to address questions from analysts and then from journalists. 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 GAAP loss of $86.5 million for the third quarter excluding the impact of mark-to-market adjustments for fuel, fleet transition, and restructuring charges as well as the one-time benefit from the change in our mileage plan expiration policy, Air Group reported an adjusted net profit of $39.9 million or $1.10 per share. This compared to a recently increased First Call mean EPS of $0.93 per share and to a net profit of $78.8 million or $1.93 per share last year.

Again excluding special items, Air Group’s loss for the first nine months of this year is $12 million or $0.33 per share compared to a profit of $109.5 million or $2.67 per share for the first nine months of 2007. Additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures, and fleet count can be found in our investor update which is included in our form 8-K available on our investor website at

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

William S. Ayer

We are pleased to be one of only a few airlines so far to report an adjusted profit for the third quarter. While our net profit is only half of what we posted last year, earning a profit at all in this difficult environment indicates that our efforts to respond to high fuel costs and softer demand are paying off. We were able to increase Air Group revenues and reduce non-fuel operating expenses during the quarter, but those improvements were not enough to make up for the $110 million increase in economic fuel cost for the quarter.

Oil was now down to around $70 per barrel, about half of where it was in July, and that’s good news. However, oil was being driven lower as a result of a slowing economy which results in less demand for air travel and makes it more difficult to sustain the meaningful passenger RASM increases that we’ve begun to experience.

The biggest issue facing airlines today is the uncertainty surrounding customer demand and fuel prices for 2009 and beyond. The key is to control what we can and to continue to adapt our business to the changing conditions. Our fleet, our balance sheet, and our strong customer following put us in a great position to do just that.

Last quarter we discussed five things that we’re doing in response to the challenges we face. Maintaining healthy liquidity and a strong balance sheet, reducing and re-deploying capacity, boosting revenues through fare increases, improved load factors and ancillary fees, conserving fuel efficiency through our highly efficient fleets and operational improvements, and finally controlling non-fuel costs.

Let me spend just a minute on three of these that are particularly relevant right now. First, I’m happy to say that our liquidity remains strong and is improving. We ended the quarter with $1.07 billion in cash and short-term investments, and at the moment, we have just shy of $1.2 billion, up from almost exactly $1 billion at the end of the second quarter.

Second, we are pleased with the early returns from the scheduled reductions that we implemented in late August. In September, we saw an almost immediate double-digit unit revenue increase across all lines of business in response to our scheduled reductions. The third area of particular relevance is fuel conservation. Our hedge portfolio has been a great asset, but the best long-term hedge we have against high fuel costs is a fuel-efficient fleet.

Now, in terms of ASMs per gallon which you might think of as comparable to miles per gallon for your car, we achieved fuel efficiency of 75 ASMs per gallon in September following the retirement of our last MD-80 on August 25th. With Southwest third quarter number at 69, United’s at 62, and Americans at 61, we believe we lead the industry in this measure.

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