Alaska Air Group, Inc. (ALK)

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Alaska Airlines (ALK)

Q2 2008 Earnings Call Transcript

July 24, 2008 11:30 am ET


Shannon Alberts - Managing Director IR

Bill Ayer - Chairman and CEO

Brad Tilden - CFO

Jeff Pinneo - CFO

Brandon Pedersen - Controller

Glenn Johnson - EVP, Airport Services and Maintenance and Engineering

Jay Schaefer - VP of Finance and Treasurer

Gregg Saretsky - EVP of Flight and Marketing

Caroline Boren - Managing Director of Corporate and Strategic Communications


Ray Neidl - Calyon Securities

Jamie Baker - J.P. Morgan

Mike Linenberg - Merrill Lynch

Peter Jacobs - Ragen MacKenzie

David Simpson - Lehman Brothers

Daniel McKenzie - Credit Suisse

Kevin Crissey - UBS

Ted Reed -

Hugo Miller - Bloomberg News



Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). We ask that you please limit your questions to one question and one follow-up question. Also, ladies and gentlemen, today's conference is being recorded for future playback at

Thank you. I would now like to turn the conference over to Ms. Shannon Alberts, Managing Director of Investor Relations. Please go ahead, ma'am.

Shannon Alberts

Thanks, Jody. Hello, everyone, and thank you for joining us for Alaska Air Group's second quarter 2008 conference call. Alaska Air Group Chairman and CEO Bill Ayer; CFO Brad Tilden, and Horizon Air CFO 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 profit of $63.1 million or $1.74 per diluted share for the second quarter. Excluding the impact of unprecedented mark-to-market adjustments for fuel and the MD-80 and CRJ fleet transition charges, Air Group reported an adjusted net loss of $14.1 million or $0.39 per share. This compares to a first call mean loss of $0.40 and to a net profit of $47.2 million or $1.16 per share last year.

Again, excluding special items, Air Group reported a year-to-date loss of $50.4 million or $1.38 per share, compared to a profit of $31.4 million or $0.77 per share for the first six months of 2007. Additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures and fleet count can be found on 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.

Bill Ayer

Thanks, Shannon, and good morning, everyone. Well, in spite of the great strides made by employees to improve our operation and deliver an exceptional customer experience, the skyrocketing increase in fuel costs combined with a relatively modest yield improvement resulted in a second quarter adjusted loss. This result is particularly disappointing in light of the operational improvements our employees have achieved over the past several months. We're all aware of the impact of fuel on the industry, so I won't dwell on that other than to note the significant role that it played in our second quarter results.

In addition to fuel costs, increased competition in a few of our West Coast markets created a drag on unit revenues and kept us from recouping a greater portion of our fuel cost increase.

In light of this, we are taking action to cut capacity and adjust several other areas of our business. Our plan includes, one, preserving and enhancing our cash balance, two, cutting capacity and redeploying aircraft, three, boosting unit revenues through fare increases, improved load factors and ancillary fees, four, conserving fuel, and five, controlling our non-fuel costs. Brad and Jeff will talk more about these in a moment but let me elaborate on a couple of points.

It's obvious that fare levels in many of our markets must go up. For example, with oil at $130 per barrel, the unhedged cost of fuel to fly one passenger from Los Angeles to Seattle is approximately $66 on a 737-800 and about $69 on an A-320. That means that $79 fares simply don't work.

We all recognize that as fares rise, capacity must come out to match lower demand. Both the industry and customers will be best served over the long run if the airplanes that continue to fly are those that are the most fuel efficient and economical. Therefore, given our young fleet, and our fuel efficient fleet, our capacity cuts will likely be less severe. That said, you will see us initiate reductions in a number of markets, and if our competitive position weakens significantly, we'll be prepared to reverse the action.

As we reduce our schedule, we'll need to reduce the number of gates and other facilities we use and the number of people we have on our payroll. We expect to provide further information in early September but are announcing today a 5% reduction in our management headcount that will take effect September 1. This will result in annual savings of approximately $7 million.

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