Alaska Airlines Q1 2008 Earnings Conference Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Ray Neidl - Calyon Securities - Analyst : Hi, Shannon. Could you give us your overall, your thoughts in an industry that may be consolidating, where you are going to have much bigger airlines out there? I know you have a partnership with a lot of them but is there a place for a special niche airline like Alaska in a world of giants? What's your thoughts on that?

Question: Ray Neidl - Calyon Securities - Analyst : Okay. Great. And I got on when you were talking about the Q400 which is a great airplane, I've ridden on that and it's very comfortable from a passenger viewpoint. But my question is with Horizon Air, I know you have to make major changes and cut costs and get those guys back to profitability and there's high fuel cost. But by going to one fleet type, a fairly big airplane like the Q400, is that going to preclude you from going into a lot smaller markets or developing newer markets that previously you had developed and turned over to Alaska Air.

Question: Ray Neidl - Calyon Securities - Analyst : Would you consider contracting out to a third party for smaller aircraft?

Question: Ray Neidl - Calyon Securities - Analyst : Great. Thank you, guys.

Question: Mike Linenberg - Merrill Lynch - Analyst : Yes, a couple questions here. I guess maybe as a starting point with the new competition coming into the LA and San Francisco to Seattle market, at the same time that you guys are going to hourly service. I'm not sure if you've actually started the hourly service. What are you LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. seeing with bookings and how are loads holding up and, of course, should we expect that pricing in that market will be depressed given the competition and the additional feeds?

Question: Mike Linenberg - Merrill Lynch - Analyst : Okay. And then I don't know if Gregg is there.

Question: Mike Linenberg - Merrill Lynch - Analyst : Good. My second question and this is either to Jeff or Brad. I think, Jeff, had you commented about Horizon as you think about each airplane coming in, there are these return on investment, these ROIC hurdles. Can you share with us what those hurdles are or even just give us the rough range as an investor or as one who follows the company, when you look at historically the returns generated by the Horizon business? And I realize there could be some transfer costs, call it inefficiencies between the two models. But historically it has seemed -- it has appeared from the outside that you have been in violation or not able to -- of our covenant. Violation of not able to meet those sort of return prerequisites. So based on what it has been historically, it seems like would you take no additional 70-seater. So I know it's a philosophical question but it does sounds like you are onto the right track going to a single aircraft type. It does seem to be what will make that model work.

Question: Mike Linenberg - Merrill Lynch - Analyst : Okay. Fair enough. Thanks for the full answer. Thank you.

Question: Peter Jacobs - Ragen MacKenzie - Analyst : Good morning, gentlemen. Let's see, first question, I guess for Brad, could you expand a little bit on your comments regarding the $10 in extra average fare that you'd need for break even and then the $25 per share to make the acceptable kind of returns that you want, is that relative to the first quarter or is that how you look at it over the entire year? I'm just trying to understand kind of how that is matched into the seasonality of the businesses, so on and so forth.

Question: Peter Jacobs - Ragen MacKenzie - Analyst : Okay. I'm glad they have transcripts of these calls because that's how I'm going to have to follow that, but thank you for the response. Second question is the $0.70 refining margin that you talked about, the crack spread, that's not including the taxes and fees you pay, is it? Or should I think about another $0.14 on top of that?

Question: Peter Jacobs - Ragen MacKenzie - Analyst : And that's how you then get to that 363.

Question: Peter Jacobs - Ragen MacKenzie - Analyst : Because I couldn't get the math to work.

Question: Peter Jacobs - Ragen MacKenzie - Analyst : Also could you talk a little bit more just about some of the competition and how you're holding up in other parts of your system, maybe transcon, Mexico and areas like that and what kind of competitive reaction you are getting with your flights to Hawaii.

Question: Peter Jacobs - Ragen MacKenzie - Analyst : One last short one, please, and that is what kind of sense do you in terms of the -- when we'll see some of these fare or revenue initiatives start to take hold? Is that something we should look at as being maybe material in the third or fourth quarter this year or should we be a little bit more muted in our expectations?

Question: Peter Jacobs - Ragen MacKenzie - Analyst : Okay. Thank you. I will give somebody else a crack.

Question: Frank Boroch - Bear Stearns - Analyst : Good morning, everyone. Bill, I was wondering if you could share have you had opportunity to communicate the slower growth plans with labor or maybe Jeff, you can both comment on this, and how does that sort of impact their expectations and maybe the pace of negotiations?

Question: Frank Boroch - Bear Stearns - Analyst : Great. I guess just lastly, as you see the need to make the fleet changes, what's the bigger driver? Is this going to help you or is this going to hurt the 2010 CASM ex fuel goals, but you could see a larger benefit on the unit revenue side or how do you foresee getting some of the fixed costs out that previously you hadn't thought about?

Question: Frank Boroch - Bear Stearns - Analyst : I guess I was thinking about both given that the growth trajectories are now changing, but the 2010 plan I was thinking more about Alaska and the 7.25 CASM figure.

Question: Frank Boroch - Bear Stearns - Analyst : Great. Thanks.

Question: Gary Chase - Lehman Brothers - Analyst : Good morning, guys. I apologize. I've been trying to listen to some of this consolidation hearing, so if you said some of this I do apologize but I was curious, one of the things that everybody wants to do in an environment like this, fuel has moved $30 or jet fuel has in such a short period of time. And everybody is now moving to adapt to this environment and I think to a lesser extent than others you've got to act, but to a lesser extent than others given the hedge position you have and the balance sheet you've got, I guess I'm just a little surprised to hear that what you want to do now is, despite this rapidly changing environment which you knowledge is true to invest a lot of additional capital in the business. Can you talk to what the incremental investment is to do this fleet transition and how you think about this concept of, maybe at a time like this it might make sense to disinvest in the business a little bit, which I think is what some of the competition is trying to do or at least keep some powder dry to see what shakes out relative to consolidation and other things? Is this constraining in any way?

Question: Frank Boroch - Bear Stearns - Analyst : And just a couple of follow-ups to that. So invested capital will be down. That means you expect proceeds from aircraft dispositions to offset the incremental cost of buying the Q400s?

Question: Frank Boroch - Bear Stearns - Analyst : And presumably this is you think a superior alternative to just downsizing the Horizon fleet and waiting to see what plays out? Well, I guess the follow-up question is at what fuel price would you not contemplate this?

Question: Frank Boroch - Bear Stearns - Analyst : Okay. Thank you, guys, appreciate it.

Question: Jamie Baker - JPMorgan - Analyst : Good morning everybody. I saw you did have a handful of MD80 cancellations recently. Just curious as to your level of confidence that you are in complete compliance with the recent ADs on 737 rudders and fatigue issues? LSEG STREETEVENTS | www.lseg.com | Contact Us consent of LSEG. 'LSEG' and the LSEG logo are registered trademarks of LSEG and its affiliated companies. Unidentified Corporate Representative - Alaska Airlines Jamie, this is Glen. We are getting into phase II of the FAA special audit as I think you know. I think we have a high level of confidence in the work and a quality of what we've done. And but given the experiences that have occurred across the industry, I guess we are also prepared to work with the FAA in their inspections which go through June 30th and help them through evaluating our paperwork and our airplanes.

Question: Jamie Baker - JPMorgan - Analyst : Thanks for the clarity everybody. Appreciate it.

Question: Daniel McKenzie - Credit Suisse - Analyst : Yes, good morning. I had to hop off the call for a few minutes, I apologize if my questions have been asked. I wonder if you can talk about Alaska's willingness to be a bidder for any assets that might come up?

Question: Daniel McKenzie - Credit Suisse - Analyst : Sure, I understand. And then separately, a number of -- just to go back to Horizon here at the risk of kicking a dead horse, but a number of legacy carriers are dumping a significant number of RJs, so RJ flying is presumably getting cheaper here, and just wondering if you have a sense for whether the new fleet swap for Horizon will result in economics that perhaps are less than where RJ economics are already going today?

Question: Daniel McKenzie - Credit Suisse - Analyst : Sure. I guess what I'm trying to get at here is in terms of the economics of the Q400s and given where RJ economics are going, ExpressJet is renegotiating its contract with Continental, there is RJs that appear to be getting dumped on the market, the cost of RJ flying seems to be going down here, and I was just wondering, is your sense that the new Q400 flying going to be even more cost competitive than where RJ economics appear to be going now?

Question: Daniel McKenzie - Credit Suisse - Analyst : Exactly.

Question: Daniel McKenzie - Credit Suisse - Analyst : Yes.

Question: Daniel McKenzie - Credit Suisse - Analyst : Thank you. I appreciate the thorough answer and if I could just throw one last really quick one your way, if I could just flip that question around, is there any demand since it is a specialized plane, is there any demand from other legacy carriers that could perhaps be an opportunity under the CPA arrangement for the Q400?

Question: Daniel McKenzie - Credit Suisse - Analyst : Great. Thanks for all your time this morning.