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Q3 2017 Results - Result Call Transcript Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Airlines, Inc.

Alaska Air Group, Inc. I would like to take this opportunity to welcome everyone to the conference call on the publication of the third quarter results of the Alaska Air Group.

Today's call will be logged and available for later replay at www.alaskaair.com. Now I would like to forward the call to the Managing Director of Investor Relations and Financial Planning and Analysis of the Alaska Air Group, Lavanya Sareen. Alaska Air Group, Inc. Many thanks for agreeing to our third quarterly 2017 Alaska Air Group results survey.

I would like to briefly present Matt Grady, our new Director of Investor Relations, before we come to the conference call today. Today, Brad Tilden, Chief Executive Officer of Virgin America, who will give an outline of the company and report on the company's success in integrating Virgin America, our Chief Commercial Officer Andrew Harrison, who will give an updated on our sales, and Brandon Pedersen, our CFO, who will talk about our results and prospects, will be in attendance.

Alaska Air Group today announced net income of $266 million for the third fiscal third quarter according to Alaska Air Group guidance. In other words, the Virgin business was positive in the third and nine-month periods after the completion of our combination. Some additional non-audited additional information, referred to as composite comparison statistic, has been added to page 7 of our Results Announcement, which has been updated to help assist our investor in making significant comparison with the composite results of both carriers in the third fiscal year of last year.

For more information on expected costs, schedules, safety margins, investments and other issues, please refer to our Investor Update contained in our 8-K Investor Update published this mornings and available on our website at alaskaair.com. Alaska Air Group, Inc. Our West Coast activities continued to be buoyant and our main businesses continued to do well.

Whilst our third quarterly results have been affected by some operative and price pressures in the sector, we are going to address these topics as we will be discussing them shortly. Our quarterly total gross profit rose to a all-time high of $2.12 billion. These sales generated a pre-tax profit of $446 million and a pre-tax profit of 21%, an increase of 4.4% compared to the third quarter of last year.

Our company ranks second among the six biggest carrier in the quarterly period in terms of punctuality, after almost bottoming out in the first three months. For long-haul traffic, the long-haul planes are departing at higher fares than in the past and at higher fares than we had expected.

We have also made a number of management changes, and we are also strengthening our Horizon management teams and our Seattle operation centre, which gives us a much better opportunity to grow talents in Horizon and Alaska. Well, let's discuss our regrowth. For those of you who have followed Alaska for many years, you know that for us growing is nothing new.

Since 2010, new stores in Alaska alone will make up about a quarter of this year's sales and earnings. This year, our main focus of expansion was on California. Of the 44 new stores we are opening this year, 32 will benefit the state. Our expansion will create the conditions for us to broaden our customer loyalty basis.

Nevertheless, this increase will not be without challenge. As we know, our rates of increase will also be high for us in the coming months at a time of weak returns in the sector. However, as others have pointed out, in this third month we saw price pressures mainly in our transcontinental and intercalary exchanges, with price level well below historic standards.

Although we believe that these rates are not sustained, they will continue into the 4th trimester. A number of important landmarks have been reached this quarter, among them the Miles & Attendances Agreement' reciprocity, co-location of stations at 11 of the 24 stations and the introduction of an in-house development enabling gates to move between Alaska and Virgin check-in and passenger boards.

We start with the introduction of Wi-Fi satellites in the entire aircraft fleets and paint our first Airbus aircraft in Alaska. In October we will be configuring our first Airbus cabin according to the design of Alaska. I' m going to forward the call to Andrew. Alaska Air Group, Inc.

During the third three months, as Brad already noted, sales increased 5.4% to $2.1 billion. Virgin America's capabilities are focused on creating an extensive ecosystem on the firm foundations of Virgin America. We have also made significant strides in integrating Virgin, as approximately a fourth of all Virgin entries are now made as .com (09:37).

We have a fully-integrated Revenue Mangement System, a clear vision to deploy new products and capabilities for both the Airbus and Boeing fleet, as well as the consolidation of Virgin and Alaska facilities at large L.A., San Francisco, Portland, Seattle and New York airport locations for our customers.

Well, some paint for the third trimester. Branch stores or stores that have been in use for more than a year developed well. I will go into more detail when I come to the forecast for the final three months. But, as Brad has already said, we have adapted the timetable, and Horizon is now going well, and we anticipate that these sales losses will be much smaller in the 4th trimester and will be behind us by the end of the year.

Now to the new boom in the industry that I know is on everyone's lips. Of the 20 new stores that we entered in the first nine month of the second quater of 2017, around one third accounted for sales in the third quater, with 60% already operating profitably and many achieving double-digit margin levels.

Nevertheless, we fully recognize that our rate of growing new businesses is very high, but it is crucial to developing the value of Virgin America. With 44 lines this year, the new market's expansion will not proceed at the present rate, slowing in 2018 to only a few new stores, most of them in the Pacific Northwest.

Our figures confirm that greater relevancy results in greater loyalties as our loyalties programme grows well with the expansion of our team. Furthermore, Alaska Airlines' owners of affiliate cards grew significantly faster than the number of passengers. Alaska Airlines' own Alaska Airlines is continuing to make good headway in the Bay Area as well, with its independent recognition gaining a further 5 points and its preferences rising by 4 points since May.

The unrestrained consciousness for Alaska, now at 50%, surpasses what Virgin America had in the Bay Area before the takeover. Sales will be impacted by our 11% percentage rate expansion, which involves a 6% step length improvement, and by new market opportunities. We are seeing in some major Californian transcontinental economies a 20% to 35% drop in the number of corporate travellers who do not buy up to seven day in advance, whilst still experiencing robust levels of consumer activity and, in some cases, relatively constant industrial capacities.

We are focusing on the maturation of what we have begun this year, focusing mainly on the overall 2018 expansion that will result from the stores launched this year, but without the sales force that is likely to begin payment at the end of 2018. In 2019, we anticipate that our economic output will continue to decline, to 6-7%.

I would like to emphasize once again, before forwarding the call to Brandon, that while the Virgin America deal has resulted in a number of changes, our dedication to controlled expansion has not altered. If we do not see a way to achieve our targets for expansion with an appropriate return on our investment, we will adapt our share price quickly.

I' ll use it to forward the call to Brandon. Alaska Air Group, Inc. Thank you, Andrew, and good morrow, everyone.

so I' m gonna take over the expenses. Excluding propellant, per capita production increased by 1% compared to the 7% increase for ASM. Interruptions during the course of the period resulted in additional expenses of approximately $6 million, with airport and call centre operations most affected. Over the past few month, our call centre staff has worked very closely, and our staff there merit a big round of applause.

Looking ahead to the final three months, we anticipate that output cost will be around 1.5% higher than the 11% rise in production throughput. Secondly, as already stated, we have scheduled some Q4 service operations that have been postponed compared to Q3, and we are also targeting further promotion and promotion efforts in the 4th fiscal month to help us make the move to a unified Alaska franchise.

Even though the household is still in work, I thought I could mention a few important points. Lastly, what I call integrational friction continues, i.e. charges that are not included in the merger-related line item of our P&L but are actual. Our quarterly closing balance was $1.7 billion in cash and we have achieved an OIBD of $1.4 billion since the beginning of the year, without merger-related charges.

Loan levels dropped by a further 2 points to 53% this month, and we anticipate that we will end the year at roughly the same high. We have reduced our indebtedness by 6 points less than a year after completing the Virgin America transaction and are well on track to achieve our longer-term goal in the lower to mid 40s.

While financing our expansion and de-leveraging continues to be our main goal of allocating our equity, balancing our business is still important. With this in mind, we bought back a further 350,000 stocks in the past three months. To summarise, this is and will be a very sound quarterly for us in a transition time. And Andrew described a somewhat demanding but not demand-driven business climate that weighs on revenue, and I have been covering some short-term pressure on costs that we will have to deal with.

Alaska Air Group, Inc. In 2018, for expansion, I wonder if you can put some parts on the meter and a little more paint on where that expansion will take place. Alaska Air Group, Inc. That'?s Andrew. Next year's increase, I think a few points of it, is actually more like step length, longer step length.

In fact, it will collapse to around 10 points of expansion in the first half of the year. Then there are second points of increase in the second half of the year. And, as I said in my preliminary comments, all this increase is basically just the annualized presentation of what we began in 2017, which, as we mentioned before, will be a great deal of California and then some transcontinental, Pacific Northwest and Mexico City flights.

Alaska Air Group, Inc. We' ve got other costs pressure just - they are just these are the realities ones - the realities of doing business are like the service agreement, really good economics but where the expenses effect is different than what I would call the net effect.

Alaska Air Group, Inc. Well, I suppose I'm just amazed that after we talked about it in the second trimester, we're still discussing how it refers to the third trimester. Alaska Air Group, Inc. However, I think we're speaking about this quarterly because it affected the third quarterly results on September 8th, so a half months ago, we lowered the timetable, and frankly, since these cuts, Horizon are going pretty well.

Alaska Air Group, Inc. Jamie, Andrew. We really discussed September, looking into the 4th trimester, what we said was that the 4th trimester will rather look like the sales development in September, although we think it's better than that, but that's a way of seeing things right now.

Precisely on this subject, the Premier Transcon, can you remember when the Virgin Premier begins to somehow harmonise with the Alaska one? In my opinion, this is one of the most important markets for Alaska, so I ask the following one.

Alaska Airlines, Inc. Only to make it quite clear, Virgin planes are being rebuilt to look like the Boeing here (29:24) we have. Alaska Airlines, Inc. Alaska Airlines, Inc. Alaska Air Group, Inc.

Her next interview is with Andrew Didora at Bank of America. Alaska Air Group, Inc. So Andrew, we don't have, like you say, we don't have much power over our capacities, but what I would divide is that we really felt sound about this one.

Perhaps to give a little more perspective to the analyst, if we look at our RASM in the third trimester, the Alaska RASM, the nature of the old Alaska market was shallow. RASM in the Legacy Virgin market even declined by 8%. And Andrew gave you a kind of insight as we look forward to the kind of back part of the years 2018 and 2019.

Alaska Air Group, Inc. Another thing I would just like to briefly say there, Andrew, is that we are really flexible, certainly at local level. So we have a flexible approach to decommissioning the local fleets, which will be an appropriate part of our next year expansion.

Alaska Air Group, Inc. Andrew, you have a good point. Then, Andrew, perhaps more a point of clarity regarding your 4Q comment rather than your 4Q CASM. Alaska Air Group, Inc. A slight interruption of the horizon will occur in the final three months of the year.

Well, once again, I don't want to be too compliant there, but with 11% increase - I also tell you that October is our top 12% increase and will be the highest future increase in capacities and it will just come from there. Alaska Air Group, Inc.

Alaska Air Group, Inc. Alaska Air Group, Inc. Andrew, I would like to come back to how you managed to qualify your 2018 expansion. Alaska Air Group, Inc. Alaska' s motherline close rates have been 0. 5 point lower than historical benchmarks, I think as you have heard. 5 point lower than historical benchmarks.

Virgo was 1.5 points lower than, I think, historical norms, and Horizon was, I think, somehow 4 points lower than the historical norms. Then just to Brandon, in the third trimester, you had a free shortage of liquidity, and I see you obviously payed the dividends, you repurchased shares, and I'm just eager to know the fact that you might have a more seasonally shifting business with the trans-cons, if it was just a postponement in the ATL (35:20) and that, that had a greater influence now that you have Virgin in the crease.

Alaska Air Group, Inc. Alaska Air Group, Inc. Nothing significant leapt out during the period (36:01) that would lead to a free liquidity shortfall except, as you say, just ordinary saisonality coupled with the point in time of investment spending.

Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. I feel like the old kind of Alaska narratives are becoming more and more relevant to investment history at the moment, and much of it refers to cost.

Lots of other carriers have done this, but I think you really have the credentials and credentials to do it where somehow folks can actually buy into it and believe and hold on to it like something that had this kind of old Alaska before you somehow lose that mojo that I think began around Analysts Day.

Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. Then, Brad, when you say you're asking your networking staff to check out new stores, it felt like you were trying to tell us something there.

Alaska Air Group, Inc. Well, for the last 12 month, we've been buying Virgin America. Our sales are high, we have many stores that we do not have - these were not our marketing choices. In addition, we opened up 44 new stores. I think what we're saying is that I'm not only satisfied, but really excited by the capability of this unit in the legacies to enter and understanding the forces of nature in order to create a timetable for weekdays, times of days, frequency and our competing positions that is just right for that need.

I' d say yes, it's a good point that you don't do it anyway, but it's a good point, but I'd just say we didn't do it with the Virgin Network. Spectrum, market, there are those that were three per diem, that two per diem can be a better or more lucrative result, and there can be things in geography that you see changing us.

So that' what we're really trying to say is that we put our hands around the Virgin Network. You will see some changes to the part of the plan that we have taken over from Virgin America. Alaska Air Group, Inc. Alaska Air Group, Inc.

Alaska Air Group, Inc. So I just wanted to go back to your new market. On the last call, you made a remark that you thought you saw some kind of faster boot-up than the usual two to three years. Alaska Air Group, Inc.

Susan, this is Andrew. There are really two main types of market that are on track and have been sold for one, two, three years, and then, as in the third calendar year, there are 20 where we don't really have a story.

Recently, we talked to Shane and his staff and see good, promising developments in many new emerging economies. So I think there's only one true one - just to be really clear so there's no mess - what we're trying to say is that we only thrive and grow in new commodity marketplaces, but we're also in the old Virgin America networking, which sees genuine pressures in a good part of their networking, much of which is near prices and some other things.

As a future asset class, we still thrive on our new market opportunities and their development, and we will make changes if necessary. Alaska Air Group, Inc. This is Ben Minicucci. Alaska Air Group, Inc. While you' re growing, we need to find out where the growth's coming from.

Alaska Air Group, Inc. Perhaps for Andrew, can you speak about the near price? R. Tackett - Alaska Airlines, Inc. Apparently, there has been some price pressure on airline companies. It is often the case that there is very fast economic development. Alaska Air Group, Inc.

Alaska Air Group, Inc. Your first about why you have a heavy traffic, no increase in capacities and no ticket price pressures is a great one. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc.

Andrew, if I can come back to the Transcontinental and Intra-California price pressures to ask this just a little differently, what percentage of sales in the third and final quarter will be affected by base economic prices? Alaska Air Group, Inc. Alaska Air Group, Inc.

Alaska Airlines, Inc. There are a few stores here and there where it's submitted, but not much sold. Anyway I think most market now we see it at least in the way of 21 AP (51:07) area. Alaska Air Group, Inc.

I may be able to return after the call with a few thoughts, but I suppose Andrew or Shane, I suppose, another issue here. What did you see in the third trimester? I am not just referring here to interCalifornia, but to all sorts of 44 new avenues.

So what percentage of production will be in the stores that are here 12 or less month in the 4thQ? Alaska Airlines, Inc. For Q3, the new market, it is 6% of our total production area. It is our overall economic performance mainly for the third fiscal year. Alaska Airlines, Inc.

Alaska Air Group, Inc. Wondering just, I mean, from where you blokes are sitting today, do you believe how you will be able to take up EPS expansion again in 2019? And I mean, just looking after 2019, the way you blokes see fashion fashion that your labour costs are evolving and assume a kind of stats quo, Macroeconomic Background, I mean, was there really an occasion to take up revenue-growth again in 2019?

Alaska Air Group, Inc. If we open up some of these new market places, we will be forced back, affecting some of the tariffs. Alaska Air Group, Inc. Darryl, this is Ben Minicucci. Alaska Air Group, Inc. Alaska Air Group, Inc.

I shall only return to the commentaries on the countries that are going into next year, can you perhaps discuss or measure the opportunities they offer? Alaska Air Group, Inc. How we invest in the premier segment and re-configure our aircrafts, how we expand our reward programme, how we let the market ripen, how we improve our revenues and how we optimize our future timetables.

So I can't make any comments about certain market, the portfolios, but I think it will go well. Alaska Air Group, Inc. Thank you for bringing me here at the end of the call. I just wonder if the Revenue effect is some kind of round-off mistake, A. And, B, the other part of the issue is really related to ATAs and if they can't comprehend your prices and maybe agree with what you're doing, why don't you drag your capacities out of these sellers and press all the way to alaska.com?

Alaska Airlines, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. I would like to get just one point of clarity here, Andrew or Brandon, because my incoming mail with all kinds of queries about your sales perspective is illuminated here.

Alaska Air Group, Inc. So if I dissected that call, I think I overheard three things. They were talking about new emerging market, which I suspect are ripening to the timetable you would be expecting, but I think that has affected your sales development here.

Of course, I'm not. But I suppose what worries me and I think Brad mention this early that you said your Alaskan legacy had really shallow PASM, but virgin, I believe, was it down 7% or 8% that you said, Brad? Alaska Air Group, Inc. Andrew, you're speaking of urban visibility and relevancy and everything.

Is there something that works under the interface here where you blokes have been losing some buyer loyality at Virgin, do you see books away? Alaska Air Group, Inc. So is something else going on with Virgin right now? Alaska Air Group, Inc.

No, as I said before and I don't want to go into detail, but our loyalties are growing very, very strongly. Alaska Air Group, Inc. Alaska Air Group, Inc....on this subject about every important business leverage. Alaska Air Group, Inc.

As easy as getting Virgin clients on the Alaska map, or do you have to go to BofA and re-negotiate somehow? Alaska Air Group, Inc. Alaska Air Group, Inc. Though I will say that BofA has been very useful and we anticipate that it will remain useful by creating an incentive for us to recruit members for the Alaska Airlines CDS.

We' ve got a lawsuit going on right now to get folks from Virgin America to Alaska. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc.

Alaska Airlines, Inc. Okay. Shane R. Tackett - Alaska Airlines, Inc. ...if that changes. Alaska Air Group, Inc. Alaska Air Group, Inc. Alaska Air Group, Inc. We' re looking forward to seeing you outside or discussing our call in the forth upcoming third trimester.

Many thanks for your participation in today's telephone briefing. The call will be available for later replay at www.alaskaair.com.

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