Investor Update – September 22, 2009
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, 2008. 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 |
August 2009 Statistics
| | August 2009 | Change Y-O-Y | QTD 2009 | Change Y-O-Y |
| Capacity (ASMs in millions) | 2,112 | (2.9)% | 4,235 | (4.1)% |
| Traffic (RPMs in millions) | 1,779 | (0.8)% | 3,570 | (0.3)% |
| Revenue passengers (000s) | 1,498 | (7.5)% | 3,006 | (7.1)% |
| Load factor* | 84.3% | 1.8pts | 84.3% | 3.2pts |
| RASM (cents)** | 13.21 | (1.8)% | 13.14 | (0.5)% |
| Passenger RASM (cents)** | 12.04 | (3.5)% | 11.96 | (2.4)% |
| Raw fuel cost/gal. | $2.06 | (46.4)% | $1.98 | (50.7)% |
| Economic fuel expense/gal. | $2.19 | (36.4)% | $2.13 | (39.8)% |
*percentage of available seats occupied by fare-paying passengers
** RASM and Passenger RASM were favorably impacted by first bag fee revenue of approximately $6.7 million for August 2009 and $11.6 million for the first two months of the third quarter for Alaska mainline operations (first bag fee was effective July 7, 2009). Given the seasonally high passenger count for July and August, this amount is in line with our previously disclosed estimate of $70 million in incremental annual revenue for Air Group. RASM was also favorably impacted by the revised Mileage Plan affinity card agreement described in our second quarter 10Q which we estimate will provide approximately $15 million in incremental revenue for the last six months of 2009, or approximately $2.5 million per month.
Changes in Advance Booked Load Factors (percentage of available seat miles that are sold)
| | | | |
| | September | October | November |
| Point Change Y-O-Y | +2.0 pts | +2.0 pts | -1.0 pt |
| | | | |
Forecast Information
| | Forecast Q3 2009 | Change Y-O-Y | Forecast Full Year 2009 | Change Y-O-Y |
| Capacity (ASMs in millions) | 6,050 | (4)% | 22,900 | (5)% |
| | | | | |
| Cost per ASM excluding fuel and special items (cents)* | 8.0 – 8.1 | 12% – 13% | 8.2 | 10% |
| | | | | |
| Fuel Gallons (000,000) | 79 | (8)% | 300 | (10)% |
| Economic fuel cost per gallon** | $2.15 | (38)% | ** | ** |
| | * 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. Because of the unpredictable nature of oil prices, our full-year 2009 forecast is not meaningful at this time. Our economic fuel cost per gallon estimate for the third quarter includes the following per-gallon assumptions: crude oil cost – $1.66 ($70 per barrel); refining margin – 20 cents; taxes and fees – 13 cents; cost of settled hedges – 16 cents. |
| 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.
August 2009 Statistics
The following data represents only the Horizon CPA flying as that flying represents approximately 95% of the total purchased capacity.
| | August 2009 | Change Y-O-Y | QTD 2009 | Change Y-O-Y |
| Capacity (ASMs in millions) | 125 | (6.7)% | 254 | (4.8)% |
| Traffic (RPMs in millions) | 100 | (8.3)% | 203 | (5.1)% |
| Load factor* | 79.6% | (1.4)pts | 80.1% | (0.2)pts |
| Yield (cents) | 27.72 | 2.3% | 26.81 | (0.7)% |
| Passenger RASM (cents)** | 22.08 | 0.5% | 21.48 | (1.0)% |
* Percentage of available seats occupied by fare-paying passengers
** Passenger RASM was favorably impacted by first bag fee revenue of approximately $1.0 million for August 2009 and $1.7 million for the first two months of the third quarter for the purchased capacity flying, respectively (first bag fee was effective July 7, 2009).
Changes in Advance Booked Load Factors (percentage of ASMs that are sold)
| | | | |
| | September | October | November |
| Point Change Y-O-Y | +0.5 pts | +1.5 pts | -0.5 pts |
| | | | |
Forecast Information (Horizon CPA)
| | Forecast Q3 2009 | Change Y-O-Y | Forecast Full Year 2009 | Change Y-O-Y |
| Capacity (ASMs in millions) | 365 | (3)% | 1,350 | (3)% |
| Cost per ASM (cents)* | 19.4 | (11)% | 19.5 | (9)% |
* 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.
| | August 2009 Statistics (includes brand and CPA flying) |
| | August 2009 | Change Y-O-Y | QTD 2009 | Change Y-O-Y |
| Capacity (ASMs in millions) | 289 | (12.9)% | 585 | (12.5)% |
| Traffic (RPMs in millions) | 229 | (11.7)% | 468 | (10.0)% |
| Revenue passengers (000s) | 622 | (11.0)% | 1,260 | (10.3)% |
| Load factor* | 79.2% | 1.1 pts | 79.9% | 2.2 pts |
| System RASM (cents)** | 21.26 | (1.7)% | 21.06 | (2.6)% |
| Passenger RASM – brand flying (cents)** | 22.40 | 4.7% | 22.17 | 4.3% |
| Raw fuel cost/gal. | $2.08 | (45.4)% | $2.01 | (50.0)% |
| Economic fuel expense/gal. | $2.22 | (34.9)% | $2.16 | (38.5)% |
*percentage of available seats occupied by fare-paying passengers
**RASM and Passenger RASM were favorably impacted by first bag fee revenue of approximately $1.4 million for August 2009 and $2.4 million for the first two months in the third quarter for Horizon brand flying (first bag fee was effective July 7, 2009).
Line-of-Business Information
Horizon’s line-of-business traffic and revenue information is presented below. In CPA arrangements, Horizon is 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. The actual passenger revenue generated on CPA flights is noted in the Alaska – Purchased Capacity section on page 3.
August 2009
| | | 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 | | | 164 | | | | (17.1 | )% | | | 57 | % | | | 78.9 | % | | | 2.7 | | pts | | | 28.37 | ¢ | | | 1.0 | % | | | 22.90 | ¢ | | | 4.8 | % |
| Alaska CPA | | | 125 | | | | (6.7 | )% | | | 43 | % | | NM | | | NM | | | | NM | | | NM | | | | 19.11 | ¢ | | | (10.4 | )% |
| Total | | | 289 | | | | (12.9 | )% | | | 100 | % | | | 79.2 | % | | | 1.1 | | pts | | | 26.47 | ¢ | | | (3.2 | )% | | | 21.26 | ¢ | | | (1.7 | )% |
NM = Not Meaningful
July and August 2009
| | | 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 | | | 331 | | | | (17.6 | )% | | | 57 | % | | | 79.8 | % | | | 3.8 | | pts | | | 27.78 | ¢ | | | (0.8 | )% | | | 22.80 | ¢ | | | 5.0 | % |
| Alaska CPA | | | 254 | | | | (4.8 | )% | | | 43 | % | | NM | | | NM | | | | NM | | | NM | | | | 18.80 | ¢ | | | (12.6 | )% |
| Total | | | 585 | | | | (12.5 | )% | | | 100 | % | | | 79.9 | % | | | 2.2 | | pts | | | 25.91 | ¢ | | | (5.8 | )% | | | 21.06 | ¢ | | | (2.6 | )% |
NM = Not Meaningful
Changes in Advance Booked Load Factors – Brand Flying (percentage of ASMs that are sold)
| | | | |
| | September | October | November |
| Point Change Y-O-Y | +1.0 pt | +0.5 pts | -1.5 pts |
| | | | |
Forecast Information (includes brand and CPA flying)
| | Forecast Q3 2009 | Change Y-O-Y | Forecast Full Year 2009 | Change Y-O-Y |
| System-wide capacity (ASMs in millions) | 850 | (10)% | 3,300 | (9)% |
| | | | | |
| Cost per ASM excluding fuel and CRJ-700 fleet transition charges (cents)* | 14.4 – 14.5 | 6% – 7% | 15.3 – 15.4 | 5% – 6% |
| | | | | |
| Cost per ASM excluding fuel and all fleet transition charges (cents)* | 14.4 – 14.5 | 6% – 7% | 15.0 – 15.1 | 5% -- 6% |
| | | | | |
| Fuel gallons (in millions) | 15.5 | (10)% | 60 | (10)% |
| Economic fuel cost per gallon** | $2.19 | (36)% | ** | ** |
| | * 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. Because of the unpredictable nature of oil prices, our full-year 2009 forecast is not meaningful at this time. Our economic fuel cost per gallon estimate for the third quarter includes the following per-gallon assumptions: crude oil cost – $1.66 ($70 per barrel); refining margin – 20 cents; taxes and fees – 17 cents; cost of settled hedges – 16 cents. |
Consolidated August 2009 Stats
| | August 2009 | Change Y-O-Y | QTD 2009 | Change Y-O-Y |
| Capacity (ASMs in millions)* | 2,401 | (4.2)% | 4,820 | (5.2)% |
| Traffic (RPMs in millions) | 2,008 | (2.2)% | 4,038 | (1.5)% |
| Revenue passengers (000s) | 2,120 | (8.5)% | 4,266 | (8.1)% |
| Load factor | 83.6% | 1.7 pts | 83.8% | 3.2 pts |
| RASM (cents) | 14.41 | (1.6)% | 14.31 | (0.6)% |
| Passenger RASM (cents) | 13.34 | (3.1)% | 13.19 | (2.4)% |
| Economic fuel expense/gal. | $2.20 | (36.2)% | $2.13 | (39.5)% |
* Capacity includes Alaska mainline operations, Horizon brand flying, and CPA flying with Horizon only.
Consolidated Forecast Information
| | Forecast Q3 2009 | Change Y-O-Y | Forecast Full Year 2009 | Change Y-O-Y |
| Capacity (ASMs in millions)* | 6,900 | (5)% | 26,200 | (6)% |
| Cost per ASM excluding fuel and special items (cents)** | 8.8 – 8.9 | 9% – 11% | 9.1 – 9.2 | 7% – 9% |
| Fuel Gallons (000,000) | 94.5 | (8)% | 360 | (10)% |
| Economic fuel cost per gallon*** | $2.16 | (38)% | ** | ** |
* Capacity includes 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. Q200 fleet transition charges for Horizon are not considered special items for purposes of this forecast. |
| | ***Because of the volatility of fuel prices, actual amounts may differ significantly from our estimates. Because of the unpredictable nature of oil prices, our full-year 2009 forecast is not meaningful at this time. |
Consolidated Nonoperating Expense
We expect that our consolidated nonoperating expense will be approximately $18 million for the third quarter 2009.
Future Fuel Hedge Positions*
| | Approximate % of Expected Fuel Requirements | Approximate Crude Oil Price per Barrel |
| Third Quarter 2009 | 50% | $76 |
| Fourth Quarter 2009 | 50% | $76 |
| Full Year 2009 | 50% | $76 |
| First Quarter 2010 | 47% | $68 |
| Second Quarter 2010 | 48% | $68 |
| Third Quarter 2010 | 46% | $72 |
| Fourth Quarter 2010 | 34% | $78 |
| Full Year 2010 | 44% | $71 |
| First Quarter 2011 | 27% | $86 |
| Second Quarter 2011 | 25% | $79 |
| Third Quarter 2011 | 22% | $80 |
| Fourth Quarter 2011 | 15% | $81 |
| Full Year 2011 | 22% | $82 |
| First Quarter 2012 | 10% | $87 |
| Full Year 2012 | 2% | $87 |
*All of our 2010 through 2012 positions and the majority of our 2009 positions are call options, which are designed to effectively cap our 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.
In addition to crude oil contracts, we have used both fixed-price physical contracts and financial swaps to fix the refining margin component for approximately 47% of our third and fourth quarter 2009 estimated jet fuel purchases at an average price of 22 cents per gallon and 24% of our first quarter 2010 estimated jet fuel purchases at an average price of 25 cents per gallon.
Cash and Share Count
(in millions) | August 31, 2009 | December 31, 2008 |
| Cash and marketable securities | $1,185 | $1,077 |
| Common shares outstanding | 35.131 | 36.275 |
As previously disclosed, on June 11, 2009 Alaska Air Group’s Board of Directors authorized a $50 million share repurchase program. Through September 18, 2009, we had purchased 1,324,578 shares totaling $23.8 million.
Capital Expenditures
Total expected gross capital expenditures for 2009 are as follows (in millions):
| | | Total 2009 Estimate* | |
| | | Aircraft-related | | | Non-aircraft | | | Total | |
| Alaska | | $ | 290 | | | $ | 75 | | | $ | 365 | |
| Horizon | | | 75 | | | | 5 | | | | 80 | |
| Air Group | | $ | 365 | | | $ | 80 | | | $ | 445 | |
*Amounts exclude any proceeds from the sale of assets.
Firm Aircraft Commitments
The table below reflects the current delivery schedules for firm aircraft.
| | Remainder of 2009 | 2010 | 2011 | 2012 | 2013 | Beyond 2013 | Total |
| Alaska (B737-800) | - | 7 | - | 2 | 2 | 4 | 15 |
| Horizon (Q400) | 3 | - | - | 4 | 4 | - | 11 |
| Totals | 3 | 7 | - | 6 | 6 | 4 | 26 |
| | | | | | | | |
In addition to the firm orders noted above, Alaska has options to acquire 40 additional B737-800s and Horizon has options to acquire 10 Q400s.
Projected Fleet Count
| | | Actual Fleet Count | | Expected Fleet Activity |
| | | | | | | Changes by Quarter | | | |
Alaska | Seats | Dec. 31, 2007 | Dec. 31, 2008 | June 30, 2009 | | Q3 | Q4 | Dec. 31, 2009 2 | 2010 Changes | Dec. 31, 2010 2 |
737-400F 1 | --- | 1 | 1 | 1 | | --- | --- | 1 | --- | 1 |
737-400C 1 | 72 | 5 | 5 | 5 | | --- | --- | 5 | --- | 5 |
| 737-400 | 144 | 34 | 31 | 28 | | --- | --- | 28 | (5) | 23 |
| 737-700 | 124 | 20 | 20 | 19 | | --- | --- | 19 | (2) | 17 |
| 737-800 | 157 | 29 | 41 | 51 | | --- | --- | 51 | 7 | 58 |
| 737-900 | 172 | 12 | 12 | 12 | | --- | --- | 12 | --- | 12 |
| MD-80 | 140 | 14 | --- | --- | | --- | --- | --- | --- | --- |
| Totals | | 115 | 110 | 116 | | --- | --- | 116 | --- | 116 |
| | | Actual Fleet Count | | Expected Fleet Activity |
| | | | | | | Changes by Quarter | | | |
Horizon | Seats | Dec. 31, 2007 | Dec. 31, 2008 | June 30, 2009 | | Q3 | Q4 | Dec. 31, 2009 | 2010 Changes | Dec. 31, 2010 |
| Q200 | 37 | 16 | 6 | --- | | --- | --- | --- | --- | --- |
| Q400 | 74-76 | 33 | 35 | 37 | | --- | 3 | 40 | --- | 40 |
CRJ-700 3 | 70 | 21 | 18 | 18 | | --- | (3) | 15 | --- | 15 |
| Totals | | 70 | 59 | 55 | | --- | --- | 55 | --- | 55 |
1 F=Freighter; C=Combination freighter/passenger
2 The expected fleet counts at December 31, 2009 and 2010 are subject to change as we continue to refine capacity and aircraft utilization plans.
3 The planned CRJ fleet activity is subject to change as we finalize the fleet transition plan and is dependent on our ability to remarket the CRJ aircraft. If we are unable to dispose of the CRJ aircraft to coincide with the delivery of the Q400 aircraft, we may remove the CRJ aircraft from service and place them in temporary storage until a suitable disposal alternative is arranged. Alternatively, older Q400 aircraft may be removed from service in lieu of CRJ aircraft if that alternative is more economical.
