EX-99.1 2 ex99-1.htm INVESTOR UPDATE ex99-1.htm
 
Exhibit 99.1



 
Investor Update – August 19, 2010

References in this update to “Air Group,” “Company,” “we,” “us,” and “our” refer to Alaska Air Group, Inc. and its subsidiaries, unless otherwise specified.

This update includes forecasted operational and financial information for our subsidiaries Alaska Airlines, Inc. (Alaska) and Horizon Air Industries, Inc. (Horizon).  Our disclosure of operating cost per available seat mile, excluding fuel and other items, provides us (and may provide investors) with the ability to measure and monitor our performance without these items.  The most directly comparable GAAP measure is total operating expense per available seat mile.  However, due to the large fluctuations in fuel prices, we are unable to predict total operating expense for any future period with any degree of certainty. In addition, we believe the disclosure of fuel expense on an economic basis is useful to investors in evaluating our ongoing operational performance. Please see the cautionary statement under “Forward-Looking Information.”

We are providing unaudited information about fuel price movements and the impact of our hedging program on our financial results.  Management believes it is useful to compare results between periods on an “economic basis.” Economic fuel expense is defined as the raw or “into-plane” fuel cost less any cash we receive from hedge counterparties for hedges that settle during the period, offset by the recognition of premiums originally paid for those hedges that settle during the period.  Economic fuel expense more closely approximates the net cash outflow associated with purchasing fuel for our operation.


Forward-Looking Information
 
This update contains forward-looking statements subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements relate to future events and involve known and unknown risks and uncertainties that may cause actual outcomes to be materially different from those indicated by any forward-looking statements.  For a comprehensive discussion of potential risk factors, see Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.   Some of these risks include current economic conditions, increases in operating costs including fuel, competition, labor costs and relations, our significant indebtedness, inability to meet cost reduction goals, terrorist attacks, seasonal fluctuations in our financial results, an aircraft accident, laws and regulations, and government fees and taxes.  All of the forward-looking statements are qualified in their entirety by reference to the risk factors discussed therein. We operate in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of such new risk factors on our business or events described in any forward-looking statements. We expressly disclaim any obligation to publicly update or revise any forward-looking statements after the date of this report to conform them to actual results. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such differences might be significant and materially adverse.
 


 
 
 


ALASKA AIRLINES – MAINLINE

July 2010 Statistics
   
July
2010
    
Change
Y-O-Y
  
Capacity (ASMs in millions)
     2,274       7.1 %
Traffic (RPMs in millions)
     1,986       11.0 %
Revenue passengers (000s)
     1,619       7.4 %
Load factor*
     87.4 %  
3.1
 pts 
RASM (cents)**
     13.70       4.8 %
Passenger RASM (cents)**
     12.40       4.5 %
Raw fuel cost/gal.
   $ 2.31       21.1 %
Economic fuel expense/gal.
   $ 2.34       13.7 %
*percentage of available seats occupied by fare-paying passengers
**Alaska annualized the first bag service charge on July 7, 2010.  All else equal, year-over-year unit revenue growth will be more modest than it had been prior to reaching the anniversary date of the first bag service charge implementation.
Forecast Information
 
Forecast
Q3 2010
Change
Y-O-Y
Forecast
Full Year 2010
Change
Y-O-Y
Capacity (ASMs in millions)
6,500
7%
24,350
5%
Cost per ASM excluding fuel and special items (cents)*
7.55 – 7.65
(3)% – (4)%
7.9 – 8.0
(3)% – (4)%
Fuel Gallons (000,000)
85
6%
318
4%
Economic fuel cost per gallon**
$2.43
13%
***
***
* For Alaska, our forecasts of mainline cost per ASM excluding fuel are based on forward-looking estimates, which will likely differ from actual results.
** Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates. Our economic fuel cost per gallon estimate for the third quarter includes the following per-gallon assumptions:  crude oil cost – $1.92 ($80 per barrel); refining margin – 32 cents; taxes and fees – 15 cents; cost of settled hedges – 4 cents.  Full-year estimates would not be meaningful at this time.

Changes in Advance Booked Load Factors (percentage of available seat miles that are sold)
       
 
August
September
October
Point Change Y-O-Y
+1.5 pts
+2.5 pts
+4.5 pts
* Percentage point change compared to the same point in time last year.

 
 
 


ALASKA – PURCHASED CAPACITY

Alaska has Capacity Purchase Agreements (CPA) with Horizon for certain routes and with a third party for service between Anchorage and Dutch Harbor, AK.

July 2010 Statistics
The following data represents only the Horizon CPA flying as that flying represents approximately 95% of the total purchased capacity.
   
July
2010
    
Change
Y-O-Y
  
Capacity (ASMs in millions)
     126       (2.3 )%
Traffic (RPMs in millions)
     104       0.4 %
Load factor*
     82.8 %  
2.3pts
  
Yield (cents)
     28.73       10.8 %
Passenger RASM (cents)
     23.77       13.8 %
* Percentage of available seats occupied by fare-paying passengers

Forecast Information (Horizon CPA)
 
 
Forecast
Q3 2010
 
Change
Y-O-Y
 
Forecast
Full Year 2010
 
Change
Y-O-Y
Capacity (ASMs in millions)
365
flat
1,440
5%
Cost per ASM (cents)*
19.3
(0.5)%
19.5
(0.5)%
* Costs associated with the Horizon CPA agreement represent the amount paid by Alaska to Horizon for flights operated under that agreement and are eliminated in consolidation.

Changes in Advance Booked Load Factors (percentage of ASMs that are sold)
       
 
August
September
October
Point Change Y-O-Y
+2.0 pts
+1.0 pt
+2.0 pts
       
* Percentage point change compared to the same point in time last year.
 
 


 
 
 


HORIZON AIR

 
July 2010 Statistics (includes brand and CPA flying)
   
July
2010
    
Change
Y-O-Y
  
Capacity (ASMs in millions)
     296    
flat
  
Traffic (RPMs in millions)
     241       1.3 %
Revenue passengers (000s)
     645       1.3 %
Load factor*
     81.6 %  
1.0
pt 
System RASM (cents)**
     21.76       4.3 %
Passenger RASM – brand flying (cents)**
     23.56       7.3 %
Raw fuel cost/gal.
   $ 2.35       21.4 %
Economic fuel expense/gal.
   $ 2.39       13.4 %
*percentage of available seats occupied by fare-paying passengers
**Horizon annualized the first bag service charge on July 7, 2010.  All else equal, year-over-year unit revenue growth will be more modest than it had been prior to reaching the anniversary date of the first bag service charge implementation.
 
Line-of-Business Information
Horizon’s line-of-business traffic and revenue information is presented below. In CPA arrangements, Alaska assumes the market revenue risk and pays Horizon an agreed-upon rate based on capacity.  As a result, yield and load factor information is not presented.  Horizon bears the revenue risk in its brand flying markets. Revenue from the Alaska CPA is eliminated in consolidation.  The actual passenger revenue generated on CPA flights is noted in the Alaska – Purchased Capacity section on page 3.

July 2010
   
Capacity Mix
    
Load Factor
  
Yield
     RASM  
   
Actual (000s)
    
Change
Y-O-Y
    
Current %Total
    
Actual
    
Change
Y-O-Y
  
Actual
    
Change
Y-O-Y
    
Actual
    
Change Y-O-Y
Brand
     170       1.8 %     57 %     80.7 %     0.1  
pts
     29.20 ¢     7.3 %     24.07 ¢     7.3 %
Alaska CPA
     126       (2.3 )%     43 %  
NM
    
NM
      
NM
    
NM
       18.64 ¢     0.8 %
Total
     296       0.0 %     100 %     81.6 %     1.0  
pt
     26.32 ¢     3.7 %     21.46 ¢     5.0 %

NM = Not Meaningful


 
 
 


HORIZON AIR – (continued)

Forecast Information (includes brand and CPA flying)
 
 
Forecast
Q3 2010
 
Change
Y-O-Y
 
Forecast
Full Year 2010
 
Change
Y-O-Y
System-wide capacity (ASMs in millions)*
830
(3)%
3,200 – 3,250
(1)% – (2)%
Cost per ASM excluding fuel and special items (cents)**
14.9 – 15.0
5%
15.2 – 15.3
(1)% – 0%
Fuel gallons (in millions)
14.5
(7)%
56
(7)%
Economic fuel cost per gallon***
$2.47
12%
***
***
* Capacity includes brand flying and CPA flying for Alaska.  Brand capacity is expected to decline approximately 5% and 7% in the third quarter and full-year of 2010, respectively, compared to the prior-year period.
** For Horizon, our forecast of cost per ASM excluding fuel and other items is based on forward-looking estimates, which will likely differ significantly from actual results.
*** Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates.  Our economic fuel cost per gallon estimate for the third quarter includes the following per-gallon assumptions:    crude oil cost – $1.92 ($80 per barrel); refining margin – 32 cents; taxes and fees – 19 cents; cost of settled hedges – 4 cents.  Full-year estimates would not be meaningful at this time.

Changes in Advance Booked Load Factors – Brand Flying (percentage of ASMs that are sold)*
       
 
August
September
October
Point Change Y-O-Y
+2.0 pts
-1.5 pts
-0.5 pts
* Percentage point change compared to the same point in time last year.

Fleet Transition Charges in Third Quarter 2010
As previously disclosed, we expect to record fleet transition charges in the third quarter associated with the removal of four CRJ-700 aircraft from our operations through lease assignment to a third-party carrier.  At this time, we expect the charge to be between $6 million and $8 million.  The forecast of cost per ASM above does not include these charges.

Horizon Changes
Aircraft Maintenance
We previously announced our decision to outsource the heavy maintenance functions for Horizon Q-400 aircraft.  Heavy maintenance for the CRJ-700 aircraft is already being provided by an outside vendor.  We believe this change will result in approximately $3 million in cost savings annually.  As a result of this decision, we will be eliminating a number of positions in the maintenance division through either early-out packages or voluntary and involuntary furloughs.  We believe these actions will result in an estimated third-quarter charge of less than $3 million.  The forecast of cost per ASM above does not include this charge.

All-CPA Structure
Effective January 1, 2011, Horizon will shift to a model whereby all of its flying will be performed on behalf of Alaska Airlines under a capacity purchase agreement (CPA).  Currently, Horizon operates approximately 43% of its schedule as CPA flying for Alaska.  We believe this change in structure will align Horizon with other regional carriers in the industry and will remove complexity and duplication between Horizon and Alaska.  We are currently working on structure and financial presentation and expect to have more information in the coming months.  This change will have no financial impact to Air Group as any payments between Alaska and Horizon will be eliminated in consolidation.

 
 
 


AIR GROUP – CONSOLIDATED

 
July 2010 Statistics
   
July
2010
    
Change
Y-O-Y
  
Capacity (ASMs in millions)*
     2,570       6.2 %
Traffic (RPMs in millions)*
     2,227       9.8 %
Revenue passengers (000s)*
     2,264       5.6 %
Load factor*
     86.7 %  
2.9
pts 
RASM (cents)
     14.93       5.1 %
Passenger RASM (cents)
     13.74       4.9 %
Economic fuel expense/gallon
   $ 2.34       13.5 %

Forecast Information
 
Forecast
Q3 2010
Change
Y-O-Y
Forecast
Full Year 2010
Change
Y-O-Y
Capacity (ASMs in millions)*
7,330
5.5%
27,550 – 27,600
4%
Cost per ASM excluding fuel and special items (cents)**
8.4 – 8.5
(2)% – (3)%
8.8 – 8.9
(3)% – (4)%
Fuel Gallons (000,000)
99.5
4%
374
2%
Economic fuel cost per gallon***
$2.43
13%
***
***
* Statistics include Alaska mainline operations, Horizon brand flying, and CPA flying with Horizon only.
** Our forecasts of cost per ASM excluding fuel are based on forward-looking estimates, which will likely differ from actual results.
***Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates.  Full-year estimates would not be meaningful at this time.

Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $17 million to $18 million in the third quarter of 2010.

Share Repurchase
Through August 17, 2010, Air Group has repurchased 34,000 shares of its common stock for approximately $1.8 million under our existing $50 million repurchase program.  The program expires in June 2011.

Cash and Share Count
 
(in millions)
  
July 31, 2010
    
December 31, 2009
  
Cash and marketable securities
   $ 1,217     $ 1,192  
Common shares outstanding
     35.817       35.591  


 
 
 


AIR GROUP – (continued)

Capital Expenditures
 
Total expected gross capital expenditures for 2010 are as follows (in millions):
 
   
Total 2010 Estimate*
  
   
Aircraft-related
    
Non-aircraft
    
Total
  
Alaska
   $ 126     $ 75     $ 201  
Horizon
     4       5       9  
Air Group
   $ 130     $ 80     $ 210  

*Amounts exclude any proceeds from the sale of assets.

Firm Aircraft Commitments
 
The tables below reflect the current delivery schedules for firm aircraft as of July 31, 2010.
 
 
Remainder of  2010
 
2011
 
2012
 
2013
 
2014
Beyond
2014
 
Total
Alaska (B737-800)
-
3
4
2
2
2
13
Horizon (Q400)
-
-
4
4
-
-
8
Totals
-
3
8
6
2
2
21

In addition to the firm orders noted above, Alaska has options to acquire 38 B737-800s and Horizon has options to acquire 10 Q400s.

Projected Fleet Count
   
Actual Fleet Count
Expected Fleet Activity
Alaska
Seats
Dec. 31, 2009
July 31, 2010
Remaining 2010 Changes
Dec. 31, 20102
2011 Changes
Dec. 31, 20112
2012 Changes
Dec. 31, 20122
737-400F 1
---
1
1
---
1
---
1
---
1
737-400C 1
72
5
5
---
5
---
5
---
5
737-400
144
27
24
---
24
(3)
21
---
21
737-700
124
19
19
(2)
17
---
17
---
17
737-800
157
51
55
---
55
3
58
4
62
737-900
172
12
12
---
12
---
12
---
12
Totals
  
115
116
---
114
---
114
4
118
   
 
Actual Fleet Count
Expected Fleet Activity
Horizon
Seats
Dec. 31, 2009
July 31, 2010
Remaining 2010 Changes
Dec. 31, 20102
2011 Changes
Dec. 31, 20112
2012 Changes
Dec. 31, 20122
Q400
76
40
40
---
40
---
40
4
44
CRJ-700 3
70
18
15
(2)
13
---
13
(4)
9
Totals
  
58
55
(2)
53
---
53
---
53
1 F=Freighter; C=Combination freighter/passenger
2 The expected fleet counts at December 31, 2010, 2011 and 2012 are subject to change.
3 The planned CRJ fleet activity is subject to change and is dependent on our ability to remarket the CRJ aircraft.

 
 
 


AIR GROUP – (continued)

Future Fuel Hedge Positions*
 
Approximate % of Expected Fuel Requirements
Weighted-Average Crude Oil Price per Barrel
Average Premium Cost
per Barrel
Third Quarter 2010
50%
$74
$10
Fourth Quarter 2010
50%
$83
$11
   Remainder of 2010
50%
$78
$11
First Quarter 2011
50%
$87
$11
Second Quarter 2011
50%
$86
$11
Third Quarter 2011
50%
$86
$11
Fourth Quarter 2011
43%
$86
$11
   Full Year 2011
48%
$86
$11
First Quarter 2012
30%
$87
$12
Second Quarter 2012
21%
$89
$13
Third Quarter 2012
19%
$92
$12
Fourth Quarter 2012
17%
$89
$12
   Full Year 2012
22%
$89
$12
First Quarter 2013
11%
$87
$12
Second Quarter 2013
5%
$83
$15
   Full Year 2013
4%
$86
$13

*All of our future positions are call options, which are designed to effectively cap the cost of the crude oil component of our jet fuel purchases.  With call options, we benefit from a decline in crude oil prices, as there is no cash outlay other than the premiums we pay to enter into the contracts.

Additionally, we have used either fixed-price physical contracts or financial swaps to fix the refining margin component for approximately 50% and 40% of our third quarter and fourth quarter 2010 estimated jet fuel purchases, respectively, and 1% of our first quarter 2011 estimated purchases at an average price of 30 cents per gallon for all periods.