Alaska Air Group, Inc. (ALK)

ALK 
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Alaska Air Group, Inc. (ALK)

Q1 2008 Earnings Call

April 24, 2008 11:30 am ET

Executives

Shannon K. Alberts – Managing Director, Investor Relations & Corporate Assistant Secretary

William S. Ayer - Chairman of the Board, President & Chief Executive Officer

Bradley D. Tilden - Chief Financial Officer & Executive Vice President, Finance & Planning

Jeffrey D. Pinneo – President & Chief Executive Officer, Horizon Air Industries, Inc.

Gregg A. Saretsky - Executive Vice President, Flight & Marketing of Alaska Airlines, Inc.

John F. Schaefer, Jr. – Senior Vice President, Finance & Treasurer

Glenn S. Johnson - Executive Vice President, Airport Services, Maintenance & Engineering, Alaska Airlines

Analysts

Raymond Neidl – Calyon Securities (USA), Inc.

Michael Linenberg – Merrill Lynch

Peter Jacobs – Ragen Mackenzie, a Division of Wells Fargo

Frank Boroch – Bear Stearns

Gary Chase – Lehman Brothers

Jamie Baker – J.P. Morgan

Daniel McKenzie – Credit Suisse

Presentation

Operator

Good morning. My name is Brandy and I will be your conference operator today. At this time I would like to welcome everyone to the Alaska Air Group first quarter 2008 earnings release 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) I would now like to turn the call over to Shannon Alberts, Managing Director, Investor Relations. Please go ahead, ma’am.

Shannon K. Alberts

Hello everyone and thank you for joining us for Alaska Air Group’s first quarter 2008 conference call. Alaska Air Group Chairman and CEO Bill Ayer; CFO Brad Tilden; and Horizon Air CEO Jeff Pinneo will provide an overview of the quarter after which we’ll be happy to take questions from analysts and then from journalists. Other members of the senior management team are also present to help answer 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. Our presentation includes some non-GAAP financial measures and we provided a reconciliation between the most directly comparable GAAP and non-GAAP measures on pages 8 and 11 through 13 of our earnings release.

As we reported earlier this morning the first quarter 2008 Alaska Air Group lost $35.9 million or $0.97 per share versus a net loss of $10.3 or $0.26 per share last year. Excluding the impact of fuel hedge mark-to-market adjustments in both periods Air Group reported a net loss of $36.3 million or $0.98 per share which compares to our first call mean loss estimate of $0.97 per share and to our 2007 loss of $0.39 per share. One of our fundamental objectives is to achieve an acceptable return on invested capital. According to our calculations Air Group has earned a return on invested capital over the last four quarters of 5.5% well below our goal of 10%. Additional information about expected capacity changes, unit costs, fuel hedge position, capital expenditures and fleet count can be found in our investor update which is included in our Form 8-K and on our Investor website at www.AlaskaAir.com.

Now I’ll turn the call over to Bill Ayer.

William S. Ayer

Good morning everybody. Well the big news today is the Horizon fleet change so after I make a few comments I’ll turn the call over to Jeff to explain the rationale for our decision. Then we’ll hear from Brad for an update on Alaska and the Air Group balance sheet.

With five airlines declaring bankruptcy within a two week period, oil closing at $118 yesterday and growing concerns about the economy to say that the airline industry is facing some of the most difficult challenges in its history is an understatement. Some analysts have likened the headwinds facing the industry today to the aftermath of 911. It remains to be seen to what degree those predictions play out but as I think you have already concluded a significant change is ahead for our industry. Many now believe that $100 plus oil is here for the foreseeable future. That’s also our view and the actions we are taking reflect this outlook.

In addition to the Horizon fleet transition today we are also announcing a number of changes at both carriers in response to the current economic environment. When fully implemented these changes could generate up to $150 million in revenue and cost savings. We plan to devote most of the time this morning to talking about these actions.

Reporting an Air Group adjusted net loss that is more than double lost year’s is disheartening in light of the tremendous efforts and sacrifices our people have made to control costs and to improve our operation. The fact is that the tidal wave of rising fuel costs has outstripped our progress. Our balance sheet and fuel hedge portfolio combined with our progress on costs have put us in a good relative position and they allow us to make considered, rational decisions for the long term. We have been reminded once again that things can change rapidly and we are acting now to ensure that we have a solid position for the future.

Let me take just a minute to talk about some of what we’re doing to improve revenues and reduce expenses in the face of current challenges. Starting with fleet, in addition to today’s announcement regarding Horizon’s fleet we will complete Alaska’s transition to an all 737 fleet with the returning of our last MD80 on September 30th three months ahead of our original plan. The decision to replace our MD80s was 737 800s make good sense at $50 oil and it makes even better sense today. With these changes Alaska and Horizon will each operate single [audio missing] type fleets of the most modern and fuel efficient aircraft in their class. We have attached a couple of slides to our investor update that show how the 737s at Alaska and the Q400s at Horizon compare to other narrow body and regional aircraft in terms of fuel consumption per seat. The bottom line at a time when it matters most we couldn’t have a better fleet to deal with today’s fuel environment.

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