EX-99.1 2 dex991.htm INVESTOR UPDATE Investor Update

Exhibit 99.1

LOGO

Investor Update – September 12, 2008

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 the cash we receive from hedge counterparties for hedges that settle during the period, offset by the premium expense that we recognize. 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, 2007. Some of these risks include increased competition, significant fuel costs, general economic conditions, 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. These risk factors may not be exhaustive. 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.

 

1

ALASKA AIRLINES – MAINLINE

Fourth Quarter 2008 and Initial 2009 Capacity Guidance and Impact of Capacity Reductions

We currently expect fourth quarter 2008 capacity (as measured by Available Seat Miles) to be 6.5% to 7% lower than the fourth quarter of 2007. We expect capacity in the first quarter of 2009 to be down 10% compared to the first quarter of 2008 as a result of a planned 16% decline in the number of departures, offset by larger average aircraft size and an increase in our average stage length. Currently, our expectation is that full-year 2009 capacity will decline by 8%, although plans for the full year have not been finalized and are dependent on the general economic environment and fuel costs.

Since August 1, we have reduced the number of non-union management employees by approximately 5% (or 80 employees), roughly half through the elimination of open positions and half through layoffs. We expect to record a $1.6 million charge in the third quarter of 2008 for severance payments and medical benefits for affected management employees.

Because of the planned first quarter 2009 capacity reductions and 8% capacity reduction expected for 2009, we will be reducing the number of employees by an additional 850 to 1000, or approximately 9% to 10%. Impacted employees will include pilots, flight attendants, reservations and customer service agents, mechanics and some employees from other groups.

The company is working with the labor unions that represent these employees on ways to minimize the impact of the capacity reductions and reduce the need to furlough front-line employees. The company plans to offer extended leaves, a voluntary furlough program, and an early-out package with a lump sum payment based on years of service. These programs will also include continuation of medical coverage and travel benefits for a specified period of time.

The table below shows estimated reductions by workgroup:

 

   
Impacted employee group    Likely number of
employees impacted

Pilots

    150 – 190

Flight Attendants

    325 – 350

Reservations Agents

    130 – 150

Mechanics / Technicians

    10 – 35

Customer Service Agents

    185 – 200

Ramp Service and Cargo Agents

    55 – 60

All other groups

    5 – 10

We expect that the pilot reductions will take place between November 2008 and March 2009. Reductions in other employee groups will take place in the fourth quarter of 2008, with the majority of those reductions coming in November.

At this time, we are unable to estimate the amount of the charge associated with any severance and extended medical benefits for the impacted employees because the number of employees that will elect the early-out packages is still unknown. However, we do expect that some portion of the charge will be recorded in the third quarter.

 

2

ALASKA AIRLINES – MAINLINE (continued)

August 2008 Statistics

         
     

August

2008

     

Change

Y-O-Y

     

QTD

2008

     

Change

Y-O-Y

Capacity (ASMs in millions)

    2,174      0.0%      4,418      1.2%

Traffic (RPMs in millions)

    1,793      (1.0)%      3,582      (1.6)%

Revenue passengers (000s)

    1,619      (7.6)%      3,237      (7.1)%

Load factor*

    82.5%      (0.8)pts      81.1%      (2.3)pts

RASM (cents)

    13.45      1.8%      13.21      1.1%

Passenger RASM (cents)

    12.48      1.9%      12.25      1.4%

Raw fuel cost ($ in millions)

    $115.1      51.9%      $244.1      60.7%

Raw fuel cost/gal.

    $3.84      62.7%      $4.02      70.3%

Economic fuel expense ($ in millions)

    $103.4      43.5%      $214.5      49.1%

Economic fuel expense/gal.

    $3.45      54.0%      $3.53      58.3%

*percentage of available seats occupied by fare-paying passengers

Advance Booked Load Factors

       
            September                  October                  November      

Point Change Y-O-Y

    +2 pts      +2 pts      flat

Forecast Information

         
     

Forecast

Q3 2008

     

Change

Y-O-Y

  

Forecast

FY 2008

     

Change

Y-O-Y

Capacity (ASMs in millions)

    6,200 – 6,300     

(1)% – (2)%

   24,200      0%
   

Unit Costs:

                 

    Cost per ASM on a GAAP basis (cents)*

    14.5 – 14.6     

39% – 40%

   N/A      N/A

    Less: Fuel cost per ASM (cents)*

    6.8      113%   N/A      N/A

    Less: Fleet transition charges

    0.4      N/A   N/A      N/A
      

    Cost per ASM excluding fuel and fleet transition charges (cents)*

    7.3 – 7.4      2% – 3%   7.5 – 7.6      0%  – 1%
      
   

Fuel Gallons (000,000)

    86      (7)%   335      (5)%

Economic fuel cost per gallon**

    $3.42      53%   N/A      N/A

*For Alaska, our forecasts of mainline cost per ASM and fuel cost per ASM are based on forward-looking estimates, which will likely differ from actual results due to several factors including, but not limited to, the volatility of fuel prices. Fuel cost per ASM is stated on a GAAP basis and thus includes actual quarter-to-date mark-to-market adjustments related to hedge accounting. We expect that our economic fuel cost per ASM will differ from the fuel cost per ASM amount above.

**Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates. We are unable to forecast economic fuel cost per gallon for the full year 2008.

Fleet Transition and Restructuring Charges Expected in Third Quarter

As disclosed previously, Alaska has four MD-80 aircraft under long-term leases. As these aircraft cease operating, we will have charges reflecting the aggregate lease payments and maintenance obligations remaining under the lease terms. Two of these aircraft were retired and placed in a storage facility during the second quarter, and the other two were retired at the end of August. We expect a charge of approximately $22 million during the third quarter associated with the retirement of these two aircraft.

 

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ALASKA – PURCHASED CAPACITY

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

August 2008 Statistics

The following data represents on the Horizon CPA flying as that flying represents approximately 95% of the total purchased capacity.

         
     

August

2008

     

Change

Y-O-Y

     

QTD

2008

     

Change

Y-O-Y

Capacity (ASMs in millions)

    134      (0.1)%      266      (0.1)%

Traffic (RPMs in millions)

    109      (2.6)%      214      (2.4)%

Load factor*

    81.0%      (2.0)pts      80.3%      (2.5)pts

Passenger RASM (cents)

    21.97      5.3%      21.68      3.8%

*Percentage of available seats occupied by fare-paying passengers

Advance Booked Load Factors

       
            September                  October                  November      

Point Change Y-O-Y

    -4 pts      -2 pts      flat

 

Forecast Information (Horizon CPA)

         
     

Forecast

Q3 2008

     

Change

Y-O-Y

  

Forecast

FY 2008

     

Change

Y-O-Y

Capacity (ASMs in millions)

    375      0%   1,400      3%

Cost per ASM (cents)*

    22.4      9%   22.1 – 22.2     

4% – 5%

*Costs associated with the Horizon CPA agreement are eliminated in consolidation

Initial 2009 Capacity Guidance

We currently estimate that capacity under the Horizon CPA will decline approximately 11% in the first quarter of 2009 compared to the first quarter of 2008. We expect full-year 2009 capacity to decline by 10%, although full-year plans have not yet been finalized.

 

4

HORIZON AIR

Fourth Quarter 2008 and Initial 2009 Capacity Guidance and Impact of Capacity Reductions

We currently expect fourth quarter 2008 capacity (as measured by Available Seat Miles) to decline approximately 20% compared to the fourth quarter of 2007. We expect capacity in the first quarter of 2009 to be 14% to 15% lower than the first quarter of 2008 as a result of an 18% to 19% decline in the number of departures, offset by larger gauge resulting from the completed transition out of our fleet of 37-seat Q200 aircraft. Currently, our expectation is that full year 2009 capacity will decline by approximately 9%, although plans for the full year have not been finalized and are dependent on the general economic environment and fuel costs.

As a result of our Q200 transition and 2008 capacity reductions, we have taken or will be taking the following staffing actions during the third and fourth quarters of 2008:

 

  —  

Voluntary early retirement package accepted by a small number of pilots, resulting in a third quarter charge of approximately $0.7 million.

  —  

Furlough of approximately 40 pilots to occur in November. This action is not expected to result in any significant financial charge. We anticipate a small number of additional pilot furloughs late in the fourth quarter of 2008 and early first quarter 2009 in response to the capacity reductions.

  —  

Early out programs, unpaid leaves, and attrition will mitigate reductions through furloughs in other work groups.

August 2008 Statistics

     

 

August

2008

     

Change

Y-O-Y

     

QTD

2008

     

Change

Y-O-Y

Capacity (ASMs in millions)

    332      (12.8)%      668      (10.9)%

Traffic (RPMs in millions)

    260      (14.7)%      519      (13.3)%

Revenue passengers (000s)

    699      (8.3)%      1,404      (6.0)%

Load factor*

    78.1%      (1.8)pts      77.7%      (2.2)pts

System RASM (cents)

    21.63      15.3%      21.63      15.7%

Raw fuel cost ($ in millions)

    $23.1      59.3%      $48.9      69.2%

Raw fuel cost/gal.

    $3.82      59.8%      $4.02      66.1%

Economic fuel expense ($ in millions)

    $20.7      50.0%      $42.8      56.2%

Economic fuel expense/gal.

    $3.42      50.0%      $3.52      53.7%

*percentage of available seats occupied by fare-paying passengers

Line-of-Business Information

Horizon’s information for line-of-business traffic and revenue information for August is not yet available. We will make this information available in our next Reg FD 8-K filing. Information from July 2007 is repeated below. In CPA arrangements, Horizon is (or was, as was the case with the Frontier CPA which ended in November 2007) insulated from market revenue factors and is guaranteed contractual revenue amounts based on operational 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.

July 2008

 

         
      Capacity Mix      Load Factor      Yield      RASM
     

Actual

(000s)

     

Change

Y-O-Y

      Current
% Total		      Actual     

Point change

Y-O-Y

      Actual     

Change

Y-O-Y

      Actual     

Change

Y-O-Y

Brand Flying

    204      8.1%      61%      75.7%      (1.4)      pts      27.91 ¢    5.4%      21.59 ¢    3.7%

Alaska CPA

    132      0%      39%      NM           NM      NM      NM      21.69 ¢    10.1%

Frontier CPA

    —      (100.0)%      0%      NM             NM      NM      NM      —      NM

System Total

    336      (8.8)%      100%      77.3%      (2.5)      pts      27.64 ¢    19.8%      21.63 ¢    16.1%

NM = Not Meaningful

 

5

HORIZON AIR - (continued)

Advance Booked Load Factors – Brand Flying Only

       
            September                  October                  November      

Point Change Y-O-Y

    +1 pt      flat      flat

Forecast Information

         
     

Forecast

Q3 2008

   

Change

Y-O-Y

  

Forecast

FY 2008

   

Change

Y-O-Y

Capacity (ASMs in millions)

    940    (13)%   3,600 – 3,650    (9)%
   

Unit Costs

             

    Cost per ASM on a GAAP basis (cents)*

    23.0 – 23.1   

35% – 36%

   N/A    N/A

    Less: Fuel cost per ASM (cents)*

    9.1    152%   N/A    N/A

    Cost per ASM excluding fuel (cents)*

    13.9 – 14.0   

3% – 4%

   14.8 – 14.9   

1% – 2%

   

Fuel Gallons (000,000)

    17    0%   67    4%

Economic fuel cost per gallon**

    $3.43    49%   N/A    N/A

*For Horizon, our forecasts of cost per ASM and fuel cost per ASM are based on forward-looking estimates, which will likely differ significantly from actual results. There are several factors impacting our estimates including, but not limited to, the volatility of fuel prices, fleet transition activity, and the actual timing of aircraft or engine maintenance events.

Fuel cost per ASM is stated on a GAAP basis and thus includes mark-to-market adjustments related to hedge accounting. We expect that our economic fuel cost per ASM will differ from the fuel cost per ASM amount above.

**Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates. We are unable to forecast economic fuel cost per gallon for fiscal 2008.

 

6

AIR GROUP

Future Fuel Hedge Positions

     
     

Approximate % of Expected

Fuel Requirements

     

Approximate Crude Oil

Price per Barrel

Third Quarter 2008

    50%        $78

Fourth Quarter 2008

    50%        $77

    Remainder of 2008

    50%        $78

First Quarter 2009

    50%      $108

Second Quarter 2009

    50%      $108

Third Quarter 2009

    35%      $108

Fourth Quarter 2009

    30%      $107

    Full Year 2009

    41%      $108

First Quarter 2010

    18%      $120

Second Quarter 2010

    14%      $118

Third Quarter 2010

    12%      $120

Fourth Quarter 2010

    12%      $112

    Full Year 2010

    14%      $117

First Quarter 2011

      6%      $113

    Full Year 2011

      1%      $113

Cash and Share Count

     
(in millions)    August 31,
2008		      December 31,
2007

Cash and marketable securities

    $1,032         $823

Common shares outstanding

    36.147      38.051

Capital Expenditures

Total capital expenditures for 2008 are expected to be as follows (in millions):

 

   
      Total 2008 Estimate
   
      Aircraft-related      Non-aircraft      Total

Alaska

    $390      $75      $465

Horizon

      100          5        105

Total Air Group

    $490      $80      $570

Firm Aircraft Commitments

           
      Last Six Months
of 2008		      2009      2010      Thereafter      Total

Alaska (B737-800)

    10        6      6      3      25

Horizon (Q400)

      3      11      —      —      14

Totals

    13      17      6      3      39

In addition to the firm orders noted above, Alaska has options to acquire 45 additional B737-800s and Horizon has options to acquire 20 Q400s.

 

7

AIR GROUP – (continued)

Impact of Boeing Strike

Due to the machinist strike at Boeing, Alaska may experience delays in the delivery of some of our 737-800 aircraft. We still expect to take delivery of five B737-800 aircraft in the third quarter. However, the timing of the five aircraft originally scheduled to be delivered in the fourth quarter is uncertain and dependent on the duration of the strike.

Potential Deferral of Q-400 Deliveries

Horizon is in discussions with Bombardier about deferring the 11 Q400 aircraft deliveries scheduled for delivery in 2009 and retiming them to coincide with the successful remarketing and transition out of the CRJ-700 aircraft. Horizon still plans to take delivery of the three Q400s originally scheduled for the fourth quarter of this year. However, the December delivery is now expected to arrive in January 2009.

Projected Fleet Count (subject to Boeing strike and possible deferral of Q400 deliveries)

       
            Actual Fleet Count    Expected Fleet Activity
   
                          Changes by Quarter              
Alaska    Seats       

Dec. 31,    

2006

   

Dec. 31,    

2007

    June 30,    
2008		    Q3   Q4   Dec. 31,    
2008		    2009
Changes    		   Dec. 31,
2009***    

737-200

    —        2    —    —      —       —       —        —       —

737-400F*

    —        1        1        1    —   —   1    —       1

737-400C*

      72    —        5        5    —   —   5    —       5

737-400

    144      39      34      34    —   (2)   32    (4)     28

737-700

    124      22      20      20    —   —   20    (1)     19

737-800

    157      15      29      36    5   5   46    6     52

737-900

    172      12      12      12    —   —   12    —     12

MD-80

    140      23      14        7    (7)   —   —    —     —

Totals

         114    115    115    (2)   3   116    1   117
   
            Actual Fleet Count    Expected Fleet Activity
   
                          Changes by Quarter              
Horizon    Seats   

Dec. 31,

2006

   

Dec. 31,

2007

    June 30,
2008		    Q3   Q4   Dec. 31,
2008		    2009
Changes		  

Dec. 31,

2009

Q200

         37    28    16    11    (4)   (7)   —    —   —

Q400

    74-76    20    33    34    —   3   37    11   48

CRJ700**

        70    21    21    20    (1)   (1)   18    (18)   —

Totals

         69    70    65    (5)   (5)   55    (7)   48

*F=Freighter; C=Combination freighter/passenger

**The planned CRJ fleet at December 31, 2008 and 2009 is subject to change as we finalize the fleet exit plan and is dependent on our ability to remarket these aircraft and defer Q400 deliveries.

***The expected fleet count at December 31, 2009 for Alaska is subject to change as we finalize the capacity reduction and aircraft utilization plan.

 

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