Alaska Air Group Inc. Q1 2010 Earnings Call Transcript

| About: Alaska Air (ALK)

Alaska Air Group Inc. (NYSE:ALK)

Q1 2010 Earnings Call

April 22, 2010 11:30 am ET

Executives

Shannon Albert - Managing Director IR

Bill Ayer - Chairman, President, CEO

Glenn Johnson - CFO

Brad Tilden - President

Jeff Pinneo - President and CEO

Andrew Harrison - VP Planning/Revenue Management

Brandon Pedersen – Vice President/Finance and Controller

Joe Sprague – Vice President of Marketing

Analysts

Bill Greene - Morgan Stanley

Hunter Keay – Stifel Nicolaus

Helane Becker - Jesup & Lamont

Steve O’Hara - Sidoti & Company

Dan McKenzie – Hudson Securities

Gary Chase - Barclays Capital

Operator

Welcome everyone to the Alaska Air Group first quarter 2010 earnings conference call. (Operator Instructions) I would now like to turn the call over to Alaska Air Group’s Managing Director of Investor Relations, Shannon Albert.

Shannon Albert

Thanks, Christie. Hello, everyone and thank you for joining us for Alaska Air Group’s first quarter 2010 earnings call. Today Alaska Air Group’s CEO, Bill Ayer, will provide a company overview; CFO, Glenn Johnson, will talk about Air Group’s financial position and Alaska President Brad Tilden and Horizon Air President and CEO Jeff Pinneo will comment on the financial and operational performance and future initiatives of Alaska and Horizon. Other members of the senior management team are also present to help answer your questions including Alaska’s recently elected Vice President of Marketing,

Joe Sprague.

We are making a slight change to our Q&A process today and will invite both analysts and journalists to queue up together at the end of our prepared remarks.

Today’s call will include forward-looking statements that may differ materially from actual results. Additional information on risk factors that could affect our business can be found in our periodic SEC filings available on our website. Our presentation includes some non-GAAP financial measures and we have provided reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release.

This morning, Alaska Air Group reported a first quarter GAAP profit of $5.3 million. Excluding the impact of mark to market adjustments related to our fuel hedge portfolio, Air Group reported an adjusted net profit of $13.1 million or $0.36 per share. This compares to a first call estimated mean net profit of $0.35 per share and to last year’s adjusted net loss of $25.4 million or $0.70 per share. To look at it another way our first quarter results improved by $38.5 million or more than $1.00 per share. Additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures and fleet count can be found in our investor update included in our form 8-K and available on our website at alaskaair.com.

With that I will turn the call over to Bill Ayer.

Bill Ayer

Thanks Shannon and good morning everyone. We are very pleased to report our best first quarter since 1999 and our results were driven by a record first quarter load factor, improving yields and first bag fee revenues partially offset by an increase in the cost of fuel. In addition our ongoing network restructuring has continued substantially to the quarter’s profit.

As you know, this is seasonally our weakest quarter of the year and one in which we usually post a loss. In fact, the last time we announced a first quarter profit was in 2006 when we reported less than $3 million in net income and prior to that in 1999 when we earned $20 million. As in 2009 our biggest opportunity this year is to improve the top line with a specific focus on increasing network and ancillary revenues. To that end we are continuing to redeploy capacity to new markets. In addition to the new Portland/Honolulu service we announced last week today we announced new service to Hawaii from San Diego along with some other changes Brad will touch on in a few minutes.

While our fleet size as remained essentially flat, over the past 24 months Air Group has entered 26 new markets including those announced today. In addition we have initiatives underway to improve ancillary revenues and to do it in a way that is understandable and viewed by customers as fair and reasonable. One important source of ancillary revenue is checked baggage and today we’re announcing a modification to those fees. Beginning June 16th we will charge $20 each for the first three bags.

That is an increase for the first bag from the current $15 but a decrease for the second and third. We expect this change to be accretive to revenues to the tune of about $20 million per year. With this change we expect ancillary revenue per passenger to increase to more than $11 up from $4 a couple of years ago. It is important to note that our baggage charges are still less than the industry standard and we have a unique time to carousel guarantee which we are enhancing along with this increase.

Operational performance at both carriers continues to be outstanding. For the latest 12-month DOT reporting period that ended in February Alaska held the number one spot in on-time performance among the 10 largest U.S. airlines. Horizon is also performing exceptionally well and recently a story was published in Forbes that ranked Horizon among the top five airlines in the world for on-time performance in 2009. I want to thank the thousands of Alaska and Horizon employees who make our operations run safely and on-time and provide outstanding customer service each day. It is no secret everyone is working harder and we could not succeed without the extraordinary efforts of our people working together to improve our company.

Given the seasonality of our business we are very encouraged to be starting the year with a profit we can build on instead of having to make up for a loss which has been our pattern historically. We acknowledge there are risks. Rising fuel prices and the slow economic recovery present challenges but we are doing a number of things to counter them.

First, maintaining low capacity growth and a stable fleet size helps ensure we don’t over-serve existing markets and we choose new markets carefully. This should keep load factors strong and create more pricing power.

Next, we are continuing our fuel hedge program using caps exclusively on the crude oil portion of our program which protect against fuel price increases yet allow us to take advantage of decreases in the price of oil without the risk of triggering payments to counterparties. Third, we are limiting capital expenditures and last but not least we are maintaining a healthy cash balance.

Most important of all we continue to focus on the things we can control; running a safe, compliant and on-time airline, improving revenue, managing costs and delivering that special brand of customer service that sets Alaska and Horizon apart.

With that I will turn the call over to Glenn.

Glenn Johnson

Thanks Bill and good morning everybody. As Shannon said Air Group had an adjusted net profit of $13.1 million or $0.36 a share in Q1 2010 versus an adjusted net loss of $25.4 million in the same quarter last year. Those adjusted results equate to a 12-month trailing return on invested capital of 6.9% at the Air Group level which compares to 4.1% in the 12 months ended Q1 2009 and is approaching our weighted average cost of capital.

On a pre-tax basis our first quarter results improved by $62 million. A couple of things drove the improvement. First, consolidated revenues increased by $87 million primarily driven by strong load factors at both carriers but revenues were also bolstered by two other items, $23 million in bag fees and I would note we will see this again in the second quarter from the annualization of the first bag fee. Second, $10 million of changes attributable to the Affinity Card agreement which we revised in the second quarter of 2009.

The revenue gains were offset by $27 million increase in economic fuel costs. With oil on the rise a couple of people have asked whether or not we would consider increasing our hedge coverage. The simple answer is no. Our practice of hedging 50% with caps for crude oil works really well for us. There is a table in our investor update that summarizes our hedged coverage over the next few years but we are well positioned with 50% of our planned consumption for the balance of this year at $75 per barrel.

Our consolidated non-fuel operating costs were about flat. On the positive side we had lower pension costs than we anticipated and we have seen savings from our productivity initiatives and fewer FTE’s. Those positives were offset by the increases in pilot wages reflecting our new agreement that took effect in April 2009 and increased incentive pay expense.

Last quarter I walked you through the components of incentive pay expense, the most significant of which is our performance based pay plan or as we call it PBP. As we told you on the January call our initial guidance assumes PBP would pay a target generating Air Group incentive pay expense of $50 million for the year. Our forecast for pre-tax profit now exceeds the goal that was set by our board so we are tracking to pay above target resulting in Air Group incentive pay expense of $72 million for the year.

The extra cost negatively impacts our CASM but it bodes well for the bottom line which is really what counts. I do want to reiterate, especially for the employees listening to this call that this is a very seasonal business and there are a number of estimates involved in the numbers I just shared and those estimates have a high degree of uncertainty so it is very dependent on how we all perform each day, each flight for the rest of the year.

Turning to the balance sheet and cash, we had just under $1.2 billion of cash at quarter end which represented 34% of trailing 12-months revenue. We generated $55 million of cash flow from operations compared to $10 million of cash flow from ops in the first quarter 2009. Offsetting those inflows we had capital spending of $24 million, debt repayments of $40 million and we resumed our share repurchases using $11 million during the quarter to repurchase 279,000 shares.

We talked last quarter about reducing the amount of cash on hand over the next 34% to the 25-30% range which will help us to improve our return on invested capital. A little more color on our plans. First, we intend to pay cash for four new 737 deliveries in 2010. I would note we will be returning six aircraft this year so that will result in two fewer Alaska units at year-end. Second, we intend to prepay approximately $90-100 million of long-term debt by year-end. These actions will lower our invested capital base, slightly reduce our net interest costs and increase the number of unencumbered aircraft we own.

Despite these goals to lower our cash balance we are committed to a strong balance sheet and maintaining plenty of assets for liquidity should we need it. To that end, in March we announced two new lines of credit totaling $200 million which replaced our previous single $185 million line. There are three benefits to the new arrangement. First, one line is secured by accounts receivable and spare parts inventory which frees up airplanes that would be much easier to finance if the need arises. Simply said, we have done the harder financings first. Second, the terms of the two lines have staggered expiration dates. Third, the combined amount is slightly larger than what we had before.

Finally I want to close with a quick update on our CapEx plans for 2010. We expect to spend $200 million on CapEx in 2010, down substantially from prior years. Aircraft spending will be constrained. We will be down, as I said, by two Alaska Airlines units at year-end compared to year-end 2009 with a plan to be up one net aircraft at the Alaska Airlines unit by the end of next year. And we believe we have the opportunity to generate free cash flow. Even after scheduled principle payments it is likely we will have net cash flow we can use to further strengthen our balance sheet.

With that I will turn the call over to Brad and then Jeff to provide color on the individual subsidiaries’ performance and outlook.

Brad Tilden

Thanks Glenn and good morning to everyone. For the quarter Alaska Airlines reported an adjusted pre-tax profit of $26.5 million compared to a loss of $26.6 million in the first quarter of 2009. I want to thank all of our employees who have worked so hard and congratulate them on these fantastic results.

For the quarter Alaska’s mainline passenger revenue increased by $47 million or almost 9% due to a passenger unit revenue increase of 8.3%. This increase was a function of our 5-point improvement in load factor and a small improvement in yield.

Looking at the individual months, passenger RASM increased by 3% in January, a strong 13% in February and by 10% in March. Our 8.3% PRASM increase compares favorably with the domestic industry increase of 7.5%. If you compare this first quarter with the first quarter of 2008 our unit revenues increased 6% versus a decline of 3% for the industry. Nearly every one of our regions posted unit revenue increases and we saw particular strength in the Southern California, Bay Area, Arizona, Nevada and Transcon regions. As you know, we have reduced capacity in many markets in these regions over the last several scheduled periods.

Over the last year or so we focused on reducing the seasonality of our results. We have been identifying routes we can fly profitably during the fall and winter months, managing our scheduled frequency more aggressively to increase load factors to high levels during months that are traditionally soft and moving as much of our training and vacations as possible out of the busy summer months. We are very encouraged by the first quarter results. Making a profit and flying at an 80% load factor are great indications our people in the network planning area and throughout the company are on the right track.


Alaska’s April advance booked load factor is up 3.5 points and May and June are each up three points. Yield trends are positive and we are starting to see business demand return as evidenced by an increase in revenues in the middle fare classes and improved revenues in the first class cabin.

In addition to last week’s announced service between Portland and Honolulu where we are filling a void left by Delta today we announced new service in four more markets. First, the addition of Portland/Kona this fall brings to three the number of Hawaii destinations we serve from Portland and allows us to capitalize on the great response from the Portland community to our marketing efforts.

Second, our new San Diego/Maui service takes advantage of strong demand for travel to Hawaii from one of our best performing non-hub cities. This represents our fourth California city with Hawaii service.

Third, we are initiating seasonal service between San Diego and Puerto Vallarta this fall, an action that will further reduce our seasonality. Finally, Horizon will provide service beginning late this summer between San Jose, California and Los Angeles, allowing us to take advantage of alliance relationships and international connection opportunities at LAX.

Our fleet and invested capital do not change as a result of this new flying and we expect Alaska’s full-year mainline ASM growth to now be between 4-5%, up from our initial guidance of 2%. Despite the ASM increase, total departures will increase by less than 1% for the year and will remain 10% lower than 2008.

To wrap up our revenue discussion, in addition to the revised baggage service charge Bill mentioned earlier, today we announced changes to our fees for unaccompanied minors, same day standby and ticketing holds. We estimate an aggregate annual revenue benefit of about $30 million from these changes. This number includes bag fees.

Turning to costs, we ended the quarter with CASM X fuel of $0.084 about flat year-over-year on flat capacity and in line with our initial guidance of $0.084 to $0.085. For the rest of 2010 we are forecasting full-year CASM X fuel of $0.079 to $0.08, down from our initial full-year guidance of $0.08 and about 4% lower than 2009. Unit costs will benefit from the extra ASMs but as Glenn said we have a headwind on the incentive pay line that represents some risk to our guidance.

We are making very good progress with the productivity and overhead initiatives we talked about last quarter. Each of our operating divisions has aggressive productivity targets and we are pleased with the results to date. On the overhead side we are well into our effort to reduce the size of our management staff by 50 people in the first half of this year. Once complete we will have decreased the number of management positions by 168 or 10% since the beginning of 2008. Like all reductions, these are not easy but they are necessary in order to position Alaska to provide our customers with the value they demand over the long term.

At this point I will turn the call over to Jeff.

Jeff Pinneo

Thank you Brad and good day everyone. Horizon also made progress this quarter posting an adjusted pre-tax loss of $3 million compared to a loss of $12.2 million in the first quarter of 2009. About half of the improvement was the result of higher revenues driven by brand yield and load factor increases offset by higher fuel costs. The other half came from the absence of Q200 transition costs this quarter.

Touching first on revenue our total revenue for the quarter increased $11.6 million or 7.9%. Our flying between the Northwest’s four largest cities of Seattle, Portland, Spokane and Boise improved greatly during the quarter. These markets which together constitute 31% of our brand flying saw a 6% year-over-year increase in revenue and an 18% improvement in PRASM on a 10% trim in capacity. Day of week frequency reductions of selected routes also helped improve revenue quality during the quarter.

A part of our revenue story stems from customer preference driven by outstanding operational performance. Our on-time performance led the nation in 2009 and placed us as Bill said among the top five carriers in the world. So far in 2010 we have gotten off to an even better start. Our 88.8% performance in the quarter was nearly 8 points better than last year. While comparatively good weather played a role, much of the credit for this can be placed to the skill and dedicated teamwork of Horizon’s people; folks I am proud to work with and very thankful for.

Turning to expenses for the quarter our CASM X fuel and fleet transition charges increased 1.7% on less than 1% increase in capacity. Scheduled maintenance timing and accruals for broader participation in our performance based pay plan account for much of the variance. In contrast to Alaska where much attention is focused on improving revenues, our efforts remain focused on closing unit competitiveness gaps in pursuit of return on capital goals.

On the productivity front we have made great strides in reducing overhead and adjusting staffing levels. FTEs are down 6.5% while passengers per FTE are up over 9.6% over last year’s then record first quarter. In maintenance we are reviewing options for further reducing heavy maintenance expenses including the outsourcing of C-check work not currently handled by outside providers. We are actively communicating with the union and our mechanics as we review the alternatives and a decision is still pending.

Concerning our pilot costs we are now entering the federally mediated phase of negotiations that both parties recently applied for with first meetings scheduled for late May. We will continue to strive for a solution that will lead to competitive pilot costs while still recognizing the solid contributions this group makes both now and in the future. We have also been fortunate to realize many cost benefits that come with running an outstanding operation. While we have made good progress on reliability modifications to the Q400 fleet, we are working closely with Bombardier to accelerate the improvements. These improvements will provide us with ongoing cost savings and customer benefits as we progress towards our long-term, single fleet goal.

Looking ahead to the rest of 2010 our plan is still to [grow] capacity growth to between 0-1% and we are forecasting a decrease between 2-3% in CASM X fuel for the full year.

At this point I will turn the call back to Bill.

Bill Ayer

Thanks Jeff. Let me once again congratulate our employees for a great first quarter as we prepare for what looks like a very busy summer. Operator, with that we are ready for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Bill Greene - Morgan Stanley.

Bill Greene - Morgan Stanley

I am wondering if we can talk a little bit about the fact that historically it is safe to say you really haven’t been viewed as a company that would acquire other airlines but you have clearly found a model that is certainly driving success financially which is a pretty powerful statement in this industry. What would the world look like or what sort of situational facts that would allow to reconsider that view and maybe think about acquiring another company and maybe applying this or even just acquiring assets? How do you think about that?

Bill Ayer

We have been spending the last decade restructuring the business and that has been 100% of our focus and we are not there yet. We have work left to do. We haven’t spent a lot of time thinking about that. The M&A question in the other direction is one that we have been asked a lot and the answer is really the same. It is really a question about what is the best path for shareholders. That is what all of this comes down to. How do we improve and optimize over the long-term the shareholder value? We believe that the path we are on which is remaining independent, growing organically profitable growth is the way to go. We are not to the ROIC number we want yet. We are getting closer which is really good but we have work to do. We are sticking with the plan and making good progress. I think that is as much as we think about it today. We still have more to go and we are pleased with the results.

Bill Greene - Morgan Stanley

This is sort of a little bit of a different question and you kind of answered it a little bit with your comment just there. Would you ever consider a bigger aircraft to take you to non-North American destinations?

Bill Ayer

The same kind of answer. We really like the single fleet that we have, the simple fleet of all 737’s and the fact that we have got this difference within this family from 700’s, 800’s, 900’s and 400’s that allow us to match capacity with demand. The 737 does all our missions really, really well and we have realized a lot of synergy and a lot of cost savings with a single fleet. It is a remarkable airplane. We think again we are focused on it. And we haven’t got all the synergies out probably in the MD80 transition. There is probably still more to go. Then over at Horizon of course we want to do the same thing with the single fleet there. So when there are market opportunities to move out of the [yard chase] we are going to do that and we are going to be really good at operating Q400’s and hopefully a growing fleet of profitably deployed Q400’s.

Operator

The next question comes from the line of Hunter Keay – Stifel Nicolaus.

Hunter Keay – Stifel Nicolaus

I noticed in your prepared remarks you pointed out some regions of strength that are really heavily served by Southwest. Should we assume that you have been specifically targeting price increases in those markets where Southwest plays given the fact that your competitive capacity is really coming down against them?

Brad Tilden

My general sense is that all of the players in the markets we mentioned, the Bay area, Southern Cal, Arizona and Nevada have been pulling capacity in. That has been really good for the economics for all of us. I think if you look at Southwest frequency you would find that. So pulling the frequency down in those markets has been really good for the load factor and good for RASM. You saw that we had 5 point improvement in load factor for the first quarter. Then the opportunity Alaska has as a smaller airline is to move those airplanes into Atlanta, Houston and a lot more frequency in Hawaii and those are all places that all of that revenue we know is new to the company.

Hunter Keay – Stifel Nicolaus

I guess then in that sense a little more color on March PRASM would be helpful because it looks like the first quarter number implies a little bit sequential degradation in March PRASM despite the fact you had an easier comp. Was there maybe some pricing opportunities that maybe you missed? Were you focusing on loads or maybe a bit more color there would be helpful.

Brad Tilden

I might start and ask Andrew Harrison to help. As you know the load factor was up six points in January and February. It was up around 3 in March. But the yield did get better as we moved forward in the quarter. It was actually down in January, up a touch in February and up 5-6% in March. So we saw a pricing strength. The volcano last year might have affected March comps as well.

Andrew Harrison

You may recall Mount Redoubt erupted last year where we pulled down especially in the last week of March up to 10% of our capacity there and at the end of the day our loads got very full. The other thing, just to add to Brad’s comments, is the yield as we got to March was up 6.3 and that is on 2.2% ASM growth versus we shrunk 2.4% in February. So we are trying to find that wonderful balance between supply and demand and as we get fuller and into the 80% load factor range to really make sure we leverage that on the yield side which is what we successfully did in March.

Hunter Keay – Stifel Nicolaus

I would love to get a little bit more color on how you view your code-share partnerships mostly with AMR and Delta and how you view those ramping. Is there flexibility built into the Delta agreement that allows you to increase the code-share if theoretically Delta starts relying on Sea-Tac as sort of an Asian gateway? Is there flexibility that you could ramp up the code-share with Delta?

Andrew Harrison

We obviously don’t make public some of the agreements we have with our code-share partners but a couple of things to point out. Number one, we certainly do and you have seen us have a lot of code-share with Delta over the last six months down into Los Angeles and into Mexico. The other thing, this time last year and this is why we have been able to expand our network and get greater business presence is this time last year we were using American to put passengers beyond their Chicago hub. This year as you see here today we have beyond markets through Atlanta. We have them now with Dallas/Ft. Worth with American and we have Minneapolis. So we have substantially increased the number of places our passengers can fly in our markets across the country and we have found that to have very positive results on both our load factors and the ability for our passengers to go directly to their locations out over the Pacific Northwest versus having to try other carriers and fly through their gateways.

Bill Ayer

Delta is starting service this summer from Seattle to Beijing and a flight from Seattle to Osaka and those will have the code on them and we expect those to do very well for both of us.

Operator

The next question comes from the line of Helane Becker - Jesup & Lamont.

Helane Becker - Jesup & Lamont

Can you update us on now with these changes in Hawaii and Mexico the percent of your capacity in Hawaii, Mexico and also what percent of your capacity would be considered monopoly markets within the state of Alaska?

Brad Tilden

Hawaii has really, really grown. With these announcements today we are up to 101 flights a week, 14.5 flights a day. I will just remind everyone that is from no flights to Hawaii three years ago. We think Hawaii is going to be 15-16% of our ASMs once we kind of annualize all of this and kind of get it onto a full-year basis.

The state of Alaska was the second question. Andrew, 20-21% if we were to look at it annually?

Andrew Harrison

Yes. In the summer it gets up to 23% long haul. The other thing to note though is there has been a significant increase in capacity this summer by other airlines in the state of Alaska but we feel very good about where we have our capacity this summer in the state of Alaska.

Brad Tilden

The Mexico figure we are just pulling here. It is about 8-9%.

Andrew Harrison

For the second quarter it is about 6.5 and then for the third it is 4%. Just on that, which will become public today, but we have exited Cancun so we pulled out of Los Angeles/Cancun and now Seattle/Cancun and these are some of the reallocations you have heard us say there will be immediate return to shareholders from taking that 6 hour flight out of Mexico and putting it in the Hawaiian markets.

Brad Tilden

Mexico is maybe 6-7% if you were to annualize it now.

Helane Becker - Jesup & Lamont

So that has really come down a lot as Hawaii has gone up a lot relative to your prior plans?

Brad Tilden

I would say it has come down a point or two.

Brandon Pedersen

One clarification there that Alaska number that was thrown out that is not monopolistic. That is simply our capacity in the state of Alaska. The number of markets that we are a monopoly presence is very, very few I think. Very, very small.

Brad Tilden

The clear majority of the Alaska traffic is long-haul traffic between Anchorage and Fairbanks and the lower 48. We actually have a lot more competition in that market this summer. If you look there is nonstop service from Fairbanks down to the lower 48. I think from Anchorage to most of the big airline hubs this summer. It is quite a bit more than there was last year.

Helane Becker - Jesup & Lamont

Can I ask one passenger related question before I go? On your frequent flyers are you able to tell what percent of your flyers have an American Advantage versus a Delta, whatever their thing is, frequent flyer number versus your own?

Joe Sprague

I don’t know we have that data available. Obviously we have a lot of frequent flyers that are members of our program that are members of multiple other programs. I am not sure we have the specific detail on that.

Operator

The next question comes from the line of Steve O’Hara - Sidoti & Company.

Steve O’Hara - Sidoti & Company

Could you talk about your CASM guidance? Does that include the payout above target?

Brandon Pedersen

Our CASM guidance does include our estimated incentive payout at this point. As Glenn mentioned it is a little bit uncertain because we don’t know exactly where the full-year is going to come out. It has been a headwind versus our original target but yes, to confirm, it does include our best estimate right now of where we will be for the year.

Steve O’Hara - Sidoti & Company

How does fuel affect that target if fuel were to substantially increase? Does that change that payout or is it based on other operational factors?

Brandon Pedersen

It does change the payout. The biggest piece of the PBP plan as we describe it is based on profit and profit is dependent on fuel. So changes in fuel prices can materially affect the PBP payout and thus the accrual for incentive pay on the books.

Steve O’Hara - Sidoti & Company

In terms of overall capacity to Hawaii it seems like it is going to be up this year. Has that affected pricing or is demand still kind of outpacing that?

Andrew Harrison

We have been very happy with that. Again, as noted earlier, there have been other reductions of 757’s and bigger gauged aircraft that were going in. The reality is we have just seen a very strong demand. We have the lowest prices out there. Again you see very low fares today in Hawaii and we have been very happy with the growth and as Glenn shared earlier we will not continue to grow markets that don’t return to the shareholder and we feel very good with the Hawaii growth right now.

Brad Tilden

There is one thing I want to point out very clear. We do have the lowest fares from the West Coast to Hawaii using DOT data. I am not sure what is happening with market fares but Alaska is bringing new, lower fares to the state of Hawaii.

Bill Ayer

The other thing I would say is going back to the great fleet that we have. The 737-800 is particularly well suited for the nonstop service to the other islands, especially where there is already a lot of wide body service to Honolulu. Our sweet spot really is the Maui, Kona and [Lihue] and it is working really well and we hear from customers their preference for the nonstop, not going through Honolulu and changing planes.

Operator

The next question comes from the line of Dan McKenzie – Hudson Securities.

Dan McKenzie – Hudson Securities

Alaska in the past has targeted non-fuel CASM of 7.25 cents. Obviously we are a ways from that today. My question is what opportunities are there for Alaska to lock the non-fuel CASM stat lower longer term versus where it is today?

Brandon Pedersen

You know, 7.25 made sense when we came out with the 2010 plan. I think where we are at now it is progress. We need to have lower costs so we can be competitive and as Brad said offer our customers the value that they demand. Whether 7.25 is ultimately the right number is unclear at this time. It depends on the revenue environment. It depends on what fuel costs. I think what we know is we need to be somewhere south of where we are now and we are going to continue to work productivity and overhead reduction and other cost reduction measures in order to get there. It is continually driving costs down so we can remain competitive.

Dan McKenzie – Hudson Securities

Circling back to the organic growth comment earlier, the fleet plan is essentially flat over the next several years. So I am wondering absent more shells how much capacity could Alaska add simply by increasing productivity?

Glenn Johnson

I will ask Andrew to jump in on this as well but we certainly still are using the airplanes we have a little less each day then we were a year ago or certainly at their peak. So we think there is some opportunity to get a few more units worth of utilization across the higher fleet of 100 plus airplanes. Beyond that we certainly have the ability and call it a buyer’s market if you will to extend leases if profitable opportunities presented themselves and we needed more units before the ability to exercise options out into the 2012 period.

Dan McKenzie – Hudson Securities

That sounds like about 2-3% capacity if I understand your comments correctly?

Glenn Johnson

About a hundred.

Operator

The next question comes from the line of Gary Chase - Barclays Capital.

Gary Chase - Barclays Capital

I wanted to follow-up a bit on the trends you are seeing the book load factors are up and are pretty strong. There are some folks that are suggesting that with improving close-in demand they have started to transition to a different paradigm in terms of the way they are looking at those advances. So I am curious if you could elaborate on your thought about how that is playing out? I know you did mention the accelerating yield trends through the quarter but your sense of how your close-in demand is looking and why the book load factor is up strong like that?

Andrew Harrison

A couple of things. You are spot on there as far as the load factors go. As we move now into traditional territory we rerun about 80% and certainly in the summer our goal is to be very aggressively managing the inventory that we have. As we said earlier, as we move 3-3.5 points we continue to see good yield growth as we move forward. With the return of business traffic our goal will be to make sure we maximize the revenue by ensuring we have the right balance between the yield and the load factor.

One other thing of note would be with all of these increased long-haul flying both transcon and even to mid-con and obviously Hawaii they run traditionally at much higher load factors than the average core network has done historically. So we have also a natural upwards pressure on our load factors as you see with all this new flying coming on.

Gary Chase - Barclays Capital

There was kind of some similarity when you did your fourth quarter call and were looking ahead into the first where you talked about the strength in book loads and I think at one point you said you expected yields to more or less offset that. I guess, looking backward on the quarter you just had close-in demand looks like it came in quite a bit better than what you were anticipating just based on the RASM performance. Should we expect that is a trend that will carry well into the second quarter? Is it from your vantage point?

Andrew Harrison

Firstly you are correct. Demand came in stronger than we had anticipated. We break our world up into our advanced traffic bookings in two worlds within 120 days and outside of 120 days. Our outside of 120 days out to 330 is booking strong. In fact our percentage increases in traffic year-over-year are almost double at this point our increase in ASMs which is a very good thing. We are also seeing similar trends in the closer in bookings but it is not as acute. In short, we are seeing good strength in the closer in bookings as it relates to all of our markets really across the board specifically in transcon and mid-con markets.

Gary Chase - Barclays Capital

I was curious, you talked about the desire to pay down debt and buy aircraft for cash, prepaid debt is your use of cash. You were talking about redesigning the airline. Certainly if you look at the last 10 years the industry has seen a lot of adversity. While your results have been cyclical they have been stable and you have been profitable through the vast majority of it of course. I am curious for your thoughts on at one point you started to do a buyback. Under what conditions would you entertain maybe taking in some of the equity just to reflect the stability that you have obviously got there?

Brad Tilden

I am not sure of your question. Are you talking about a dividend possibility?

Gary Chase - Barclays Capital

Or a share repurchase.

Brad Tilden

This gets to the commitment we have to shareholders and improving shareholder value. So this is a board decision and we are completing the last trench of our share repurchase that we have out there right now with the board authorization. Where we go from here I think is subject for a future board meeting. The principle here, the commitment is shareholder returns, returning capital to shareholders at a rate that is commensurate with the risk of their investment. It is something [inaudible] we haven’t done a good job of as you well know. It is a commitment we have and we are going to keep working it and we are encouraged, as I said, with our results and profitability is the biggest thing we can do to influence this. Driving higher earnings, getting that ROIC number and then stock appreciation should take care of itself.

Operator

At this time we have reached the allotted time for questions. I would now like to turn the conference back over to Shannon Albert for any closing remarks.

Bill Ayer

I thank everybody for participating with us today. We will talk with you next quarter. Thanks very much.

Operator

Thank you for participating in today’s conference call. This call will be available for replay beginning at 1 p.m. EST, through 11:59 p.m. EST on May 22, 2010. The conference ID number for the replay is 38150559. The number to dial for the replay is 800-642-1687 or 706-645-9291. Also, the call will be accessible for future playback at www.alaskaair.com. You may now disconnect.

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