Alaska Air Group, Inc. (ALK)

ALK 
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Industry: Transportation
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Alaska Air Group (ALK)

Q3 2012 Earnings Call

October 25, 2012 12:00 pm ET

Executives

Chris Berry - Managing Director of Investor Relations

Bradley D. Tilden - Chief Executive Officer, Director, Member of Management Executive Committee, Chief Executive Officer of Horizon Air, Chief Executive Officer of Alaska Airlines and President of Alaska Airlines

Brandon S. Pedersen - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance and Vice President of Finance-Alaska Airlines Inc

Mark Eliasen - Vice President of Finance

Joseph A. Sprague - Vice President of Air Cargo

Andrew Harrison - Vice President of Planning & Revenue Management

George Newman - Managing Director of Accounting and Controller

Glenn S. Johnson - Member of Management Executive Committee, President of Horizone Air Industries Inc, Chief Financial Officer of Alaska Airlines and Executive Vice President of Finance - Alaska Airlines

Analysts

Hunter K. Keay - Wolfe Trahan & Co.

Michael Linenberg - Deutsche Bank AG, Research Division

Helane R. Becker - Dahlman Rose & Company, LLC, Research Division

John D. Godyn - Morgan Stanley, Research Division

Raymond Neidl - Maxim Group LLC, Research Division

Glenn D. Engel - BofA Merrill Lynch, Research Division

Savanthi Syth - Raymond James & Associates, Inc., Research Division

David E. Fintzen - Barclays Capital, Research Division

Stephen O'Hara - Sidoti & Company, LLC

Duane Pfennigwerth - Evercore Partners Inc., Research Division

Kevin Crissey - UBS Investment Bank, Research Division

Presentation

Operator

Good morning. My name is Jonathan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Alaska Air Group Third Quarter 2012 Earnings Conference Call. Today's call is being recorded and will be accessible for future playback at www.alaskaair.com. [Operator Instructions] I would now like to turn the call over to Alaska Air Group's Managing Director of Investor Relations, Chris Berry.

Chris Berry

Thanks, Jonathan, and good morning, everybody. Thank you so much for joining us for Alaska Air Group's Third Quarter 2012 Earnings Call.

Today, our CEO, Brad Tilden; and our CFO, Brandon Pedersen, will share their thoughts on our third quarter financial results, our operations and our outlook for the remainder of this year. Several members of our senior management team are also here to help answer your questions.

Our discussion today will include forward-looking statements regarding 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.

We will refer often to certain non-GAAP financial measures, such as adjusted earnings or unit costs, excluding fuel. We have 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 profit of $163.4 million. Excluding the impact of mark-to-market adjustments related to our fuel hedge portfolio, Air Group reported a record adjusted net income of $150.3 million or $2.09 per share. This result is basically in line with the First Call consensus and exceeds last year's adjusted net income of $131.1 million or $1.79 per share.

Additional information about our unit cost expectations, capacity plans, future fuel hedge positions, capital expenditures and other items can be found in our Investor Update included in our Form 8-K issued this morning and available on our website at alaskaair.com.

With that, I'll turn the call over to Brad.

Bradley D. Tilden

Thanks, Chris, and good morning, everyone. As Chris said, Alaska Air Group reported an adjusted net profit of $150.3 million this quarter versus $131.1 million last year. Our revenues increased 6.2% to nearly $1.3 billion on the strength of our low fares and the preference for our product. This is the highest quarterly profit in our history and is the 14th consecutive quarterly profit that we've reported.

Our people are working together better than ever. And to the employees listening today, I want to thank you and your colleagues for everything you did to make these results possible.

Our pretax profit margin was 19.2% this quarter versus 17.7% last year. We believe this margin leads the domestic industry. Seasonally, this is our strongest quarter. Our pretax margin for the last 12 months is 11.5%.

On a year-to-date basis, we produced $289 million of adjusted net income, and for the last 12 months that figure is $327 million. These strong earnings are driving our return on invested capital, which is 12.7% for the last 12 months and they're also enabling us to improve our balance sheet, reward our shareholders and reinvest in our business.

You've probably seen that on September 26, we announced a $250 million share buyback program. The size is roughly 10% of our current market cap and it's significantly larger than anything we have done before. The program comes on the heels of 6 programs since 2007, 5 of which have been fully executed and which together have amounted to $312 million of share repurchases and a net reduction in shares outstanding of 13%. Given what many of you have said about our valuation, we think share repurchases have been and will continue to be an excellent use of capital that will materially benefit our long-term investors.

We also just announced an order for 50 Boeing 737s, including the new 737 MAX. The new order provides for mainline fleet replacement over the next 10 years. With options, we'll have the ability to flex up if economic conditions warrant and if we are achieving our ROIC objectives. Over the last several years, we've seen the material advantage that comes from having modern, fuel-efficient aircraft that are bought at the right prices, and we're extremely pleased that we secured airplanes to continue this pattern well into the future.

The reason we're able to make commitments like the share buyback and the aircraft order is because of our earnings and our strong balance sheet. Looking at the changes in our balance sheet since 2004, which might be viewed as the peak of the post 9/11 industry crisis, our equity has increased from $665 million to $1.4 billion. Our debt and lease obligations have declined from $2.3 billion to $1.7 billion. And we've moved from 78% of our capital structure being represented by debt to 54% today. In those same 8 years, our revenues have increased from $2.7 billion to over $4.5 billion, and we've added 93 737-800s and Q400s to our fleet, 36 of which are owned free and clear.

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