EX-99.2 3 ex99-2.htm OCTOBER 21, 2010 INVESTOR UPDATE ex99-2.htm
 
 
Exhibit 99.2


Investor Update – October 21, 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 actual third quarter 2010 consolidated statistical information and 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.”

Please see our press release dated today for actual financial and statistical information for the third quarter of 2010.


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

Forecast Information
   
Forecast
Q4 2010
    
Change
Y-O-Y
    
Forecast
Full Year 2010
    
Change
Y-O-Y
  
Capacity (ASMs in millions)
     6,200       9 %     24,400       5.5 %
Cost per ASM excluding fuel and special items (cents)*
     8.0 – 8.2       (4)% – (6) %     7.90 – 7.95       (4 )%
Fuel Gallons (000,000)
     81       8 %     318       4 %
Economic fuel cost per gallon**
   $ 2.52       11.5 %   $ 2.36       16 %
* 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 fourth quarter includes the following per-gallon assumptions:  crude oil cost – $1.98 ($83 per barrel); refining margin – 38 cents; taxes and fees – 15 cents; cost of settled hedges – 1 cent.

Changes in Advance Booked Load Factors (percentage of ASMs that are sold)*
       
 
October
November
December
Point Change Y-O-Y
+4.0 pts
+2.5 pts
-1.5 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.

Forecast Information (Horizon CPA)
 
 
Forecast
Q4 2010
 
Change
Y-O-Y
 
Forecast
Full Year 2010
 
Change
Y-O-Y
Capacity (ASMs in millions)
365
2%
1,440
5%
Cost per ASM (cents)*
19.4 – 19.5
(3)%
19.5
(0.5)%
* Costs associated with the Horizon CPA agreement represent the amount paid by Alaska to Horizon for operating costs plus a specified profit margin and are eliminated in consolidation.

Changes in Advance Booked Load Factors (percentage of ASMs that are sold)*
       
 
October
November
December
Point Change Y-O-Y
+2.0 pts
-2.0 pts
-5.5 pts
* Percentage point change compared to the same point in time last year.
 
 


 
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HORIZON AIR

Forecast Information (includes brand and CPA flying)
 
 
Forecast
Q4 2010
 
Change
Y-O-Y
 
Forecast
Full Year 2010
 
Change
Y-O-Y
System-wide capacity (ASMs in millions)*
775
(6)%
3,235
 (2)%
Cost per ASM excluding fuel and special items (cents)**
15.9 – 16.2
0% – 2%
15.25 – 15.35
flat
Fuel gallons (in millions)
13
(14)%
57
(5)%
Economic fuel cost per gallon***
$2.57
11%
$2.40
17%
* Capacity includes brand flying and CPA flying for Alaska.  Brand capacity is expected to decline approximately 12% and 7% in the fourth 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 fourth quarter includes the following per-gallon assumptions:    crude oil cost – $1.98 ($83 per barrel); refining margin – 38 cents; taxes and fees – 19 cents; cost of settled hedges –2 cents.

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

Pilot Tentative Agreement
Horizon and the International Brotherhood of Teamsters (IBT), representing Horizon’s pilots, have reached a tentative agreement on a new collective bargaining agreement.  The IBT has indicated that Horizon’s pilots will hold a ratification vote in November 2010.











 
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AIR GROUP – CONSOLIDATED

 
Actual Third Quarter 2010 Statistics
   
Three Months Ended September 30,
  
   
2010
    
2009
    
Change
  
Capacity (ASMs in millions)
     7,394       6,967       6.1 %
Traffic (RPMs in millions)
     6,258       5,696       9.9 %
Revenue passengers (000s)
     6,389       6,055       5.5 %
Load factor
     84.6 %     81.8 %  
2.8
 pts 
RASM (cents)
     14.44       13.89       4.0 %
Passenger RASM (cents)
     13.17       12.70       3.7 %
Cost per ASM excluding fuel and special    items (cents)
     8.38       8.72       (4.1 )%
Economic fuel expense/gallon
   $ 2.37     $ 2.16       9.7 %
* Statistics include Alaska mainline operations, Horizon brand flying, and all CPA flying.

Forecast Information
 
Forecast
Q4 2010
Change
Y-O-Y
Forecast
Full Year 2010
Change
Y-O-Y
Capacity (ASMs in millions) (a)
6,990
7%
27,700
4.5%
Cost per ASM excluding fuel and special items (cents) (b) (c)
8.9 – 9.2
(4)% – (6)%
8.8 – 8.9
(3)% – (4)%
Fuel Gallons (000,000)
94
4%
375
3%
Economic fuel cost per gallon(d)
$2.53
12%
$2.37
16%
(a) Capacity forecast includes Alaska mainline operations, Horizon brand flying, and CPA flying with Horizon only.
(b) Our forecasted CASM amounts are based on consolidated costs per ASM using total ASMs, which include Alaska mainline operations, Horizon brand flying, and all CPA flying.  Capacity for third-party CPA flying is expected to be approximately 15 million ASMs and 65 million ASMs for the fourth quarter and full-year 2010, respectively.
(c) Our forecast of cost per ASM excluding fuel is based on forward-looking estimates, which may differ from actual results.
(d) Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates.

Fuel Price Sensitivity
Given our current fuel-hedge portfolio, the following table depicts the sensitivity of fuel prices under various crude oil and refining margin prices for the remainder of 2010:

   
Crude Price per Barrel
   
$60
$70
$80
$90
$100
$110
Refining Margin
(cents per Gallon)
20
$1.96
$2.18
$2.38
$2.56
$2.70
$2.82
25
$1.98
$2.20
$2.41
$2.58
$2.72
$2.85
30
$2.01
$2.23
$2.43
$2.61
$2.75
$2.87
35
$2.03
$2.25
$2.45
$2.63
$2.77
$2.90
40
$2.06
$2.27
$2.48
$2.65
$2.79
$2.92

Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $20 million in the fourth quarter of 2010.


 
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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     $ 60     $ 186  
Horizon
     20       5       25  
Air Group
   $ 146     $ 65     $ 211  

*Amounts exclude any proceeds from the sale of assets.

The increase in anticipated aircraft capital expenditures in 2010 is due an increase in advance aircraft purchase deposits because of the likely acceleration of Q400 aircraft deliveries from 2012 and 2013 into 2011.  See further discussion below.

Firm Aircraft Commitments
 
The tables below reflect the current delivery schedules for firm aircraft as of September 30, 2010.
 
 
Remainder of  2010
 
2011
 
2012
 
2013
 
2014
Beyond
2014
 
Total
Alaska (B737-800)
-
3
4
2
2
2
13
Horizon (Q400)
-
8*
-
-
-
-
8
Totals
-
11
4
2
2
2
21

*Horizon is working on an agreement to dispose of eight CRJ-700 aircraft in the first half of 2011 through either sublease or lease assignment to a third-party carrier.  If we are able to do this, we intend to accelerate the delivery of the eight remaining Q400 aircraft on order to 2011 to coincide with the anticipated exit dates of the CRJ-700 aircraft.

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

Projected Fleet Count
   
Actual Fleet Count
Expected Fleet Activity
Alaska
Seats
Dec. 31, 2009
Sept. 30, 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
---
24
(3)
21
737-700
124
19
18
(1)
17
---
17
---
17
737-800
157
51
55
---
55
3
58
4
62
737-900
172
12
12
---
12
---
12
---
12
Totals
  
115
115
(1)
114
3
117
1
118
   
Actual Fleet Count
Expected Fleet Activity
Horizon
Seats
Dec. 31, 2009
Sept. 30, 2010
Remaining 2010 Changes
Dec. 31, 20102
2011 Changes
Dec. 31, 20112
2012 Changes
Dec. 31, 20122
Q400
76
40
40
---
40
8
48
---
48
CRJ-700 3
70
18
13
---
13
(8)
5
---
5
Totals
  
58
53
---
53
---
53
---
53
1 F=Freighter; C=Combination freighter/passenger
2 The expected fleet counts at December 31, 2011 and 2012 are subject to change.
3 We are currently working on an agreement to dispose of eight CRJ-700 aircraft in 2011. 

 
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AIR GROUP – (continued)

Future Fuel Hedge Positions*
 
Approximate % of Expected Fuel Requirements
Weighted-Average Crude Oil Price per Barrel
Average Premium Cost per Barrel
Fourth Quarter 2010
50%
$83
$11
   Remainder of 2010
50%
$83
$11
First Quarter 2011
50%
$87
$11
Second Quarter 2011
50%
$86
$11
Third Quarter 2011
50%
$86
$11
Fourth Quarter 2011
50%
$86
$11
   Full Year 2011
50%
$86
$11
First Quarter 2012
37%
$86
$12
Second Quarter 2012
29%
$87
$13
Third Quarter 2012
25%
$91
$13
Fourth Quarter 2012
22%
$89
$13
   Full Year 2012
28%
$88
$13
First Quarter 2013
17%
$87
$13
Second Quarter 2013
11%
$84
$15
Third Quarter 2013
6%
$86
$15
   Full Year 2013
8%
$86
$14

*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% fourth quarter 2010 estimated jet fuel purchases at an average price of 30 cents per gallon and 15% of our first quarter 2011 estimated purchases at an average price of 34 cents per gallon.



 
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