Q3 2019 Earnings Call
Good afternoon. My name is Thea they will be your conference operator today at this time I would like to welcome everyone to the Alaska Air Group's third quarter earnings release Conference call. Today's call is being recorded and will be a sensible for future playback at Alaska Air Dot Com.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question answer session for analyst. If you wish to ask a question. Please press star one on your telephone keypad.
If he would like to withdraw your question press the pound Keith Thank you.
I would now like to turn the call over to Alaska Air Group's director Investor Relations Emily Halverson.
Thanks.
Good afternoon, and thank you for joining us for third quarter 2019 earnings call I've started to get to know many of you bought for those who I haven't gotten that I've been with Alaska for four years in the accounting World and I'm looking forward to working with each of you and my new role.
In today's prepared remarks fuel her up gains from our leaders, Brad Tilden, Andrew Harrison, Brendan Peterson and Ben Minicucci. Several other members of our management team are also on hand to answer your questions during the Q and a portion of the called.
This afternoon, Alaska Air Group reported third quarter GAAP net income of 322 million, excluding merger related costs and mark to market fuel hedging adjustments Air Group reported adjusted net income of 326 million an adjusted earnings per share of $2.63 I had a first call consensus these results.
Compared to adjusted net income of 237 million, an adjusted earnings per share other dollar and 91 cents in the third quarter of 2018.
Our third quarter, adjusted pretax margin expanded 360 basis points to 17.6%.
As a reminder, our comments today will include forward looking statements on our expected future performance, which may differ materially from actual results.
Information on risk factors that could affect our business can be found in our FCC filings on today's call. We will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel and as usual we've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release filed today and now I'll turn the call over.
Brad for his opening remarks thank.
Thanks, very much Emily and good afternoon everybody.
Before I get into this quarter's results I want to take just a moment to acknowledge the recent incident at one of our Codeshare partners in the state of Alaska and they are.
One of their Saab 2000 aircraft overran the wrong way in Dutch Harbor, one week ago today, and this tragically resulted in one passenger fatality in one gas being and critical condition for one day.
Our thoughts and prayers go out to the guests who are on board to their families and loved ones, Andrew or partners that pentair.
This is a summer reminder, to me into the rest of our leadership team of the grave responsibility that we shoulder and have continued need for us to underscore the importance of safety with our people and our partners at every opportunity and to backup this understanding with our actions everyday.
Now moving to our third quarter results I want to congratulate the fantastic folks at Alaska Horizon, and Magee for delivering the industry's best customer service and operational performance, which together drove our strong results.
Revenue was up 8% for the quarter on 3.4% more capacity.
In a rising at a terrific quarters, they grew capacity by 24%, while reducing non fuel costs by wanting to have points as they absorb all 30 of their new Eone hundred 75 aircrafts that had been delivered over the past three years.
The team at a rise in led by Gary back is increased productivity for the fifth quarter in a row and has met our goal for guest satisfaction and all but one month this year.
Additionally, our commercial team has been working very hard and they produced industry, leading unit revenue growth of 4.5% on solid demand as evidenced by our highest quarterly load factor in the last five years.
It is fantastic work like this that expanded our pre tax margin by 360 basis points to 17.6%. Our best result in two years.
If we look at our results on an absolute basis, our adjusted net income for the last 12 months was $709 million and that's up nearly 30% from the prior 12 months.
We converted that net income to $1.6 billion of operating cash flow.
And with our effort in the last couple of years to adjust capital spending our free cash flow was very strong at $695 million.
Other words were converting 98% of our net income to free cash flow.
Our company is producing good earnings and converting those earnings into solid free cash flow.
We view free cash flow conversion as one of the critical measures of how we drive value for our shareholders.
While it won't be the case in the next couple of years in the last two years, we've been using our free cash flow to pay down acquisition debt and also to return cash to shareholders through our dividend and share repurchases.
On debt reduction by year end, we will have repaid $1.5 billion or 75% of the $2 billion, we borrowed to buy Virgin America.
And at 42%, we're quickly approaching our long term adjusted debt to cap goal of 40%.
Strengthening our fortress balance sheet positions us to be flexible and opportunistic and to make the best strategic and capital allocation decisions in the future.
We carried a record number of guess this past summer our teams full focus has returned to running a great airline and it is showing I'd like to see or two recent achievements first our people were once again recognize is the best US airline by contrast traveler and its annual readers choice Awards.
This is the second you are the ROE that we've won this award and we're continuing an 11 year run that Virgin America had before US we can't thank our employees enough for their skill and dedication and serving our guests.
Second three important labor deals, which represent over 6000 of our people were ratified this quarter.
We're proud to get these deals done for our folks and then we'll tell you more about them at just a moment.
Have you done the math on a recent guidance you've likely estimated that our 2019 margins will be somewhere around 11% to 12% up from just below 9% last year, we're encouraged by our progress, but we do not believe we're at the destination.
On the subject of our Oh I see.
Expect to end 2019 in the range of 12% to 13%, which is up significantly from 9.4% last year.
As we look beyond 2019, we're developing plans that will put us into our stated pre tax margin range of 13% to 15% over the business cycle.
Andrew Andrew and brand and will now share more detail about the quarter and then Ben will rounded out with some discussion on our five year strategic plan.
The plan addresses our product and loyalty strategy, our revenue initiatives, our cost structure, our network structure vision for our fleet and more.
We're challenging ourselves to create specific blueprints, so that we can deliver in critical areas and thereby honor our commitments to all of the people who are depending on US. We're excited about the plan and we look forward to sharing components of it with you in the quarters ahead with that I'll turn this over to Andrew.
Thanks, Brad and good afternoon, everyone.
My comments. This afternoon, we will focus on third quarter revenue performance.
Progress on guest facing initiatives and revenue guidance for the fourth quarter.
A 4.5% improvement in unit revenues is 260 basis points better than the industry and highlights the effectiveness of our revenue initiatives and the work we're doing to harness merger synergies.
Third quarter result was our best absolute RASM in the past three is and as Brad mentioned.
Load factor was the highest we've seen in five years.
Demand was healthy across our network during the quarter. This was demonstrated by one point improvement in load factor and three and a half percentage point improvement in yield.
Hawaii, which has been experiencing elevated industry capacity in soft pricing performed well.
Withstanding the fact that industry capacity and our own capacity were both up nearly 7% we still produced a modest unit revenue increase.
We have continued the strong momentum that we started in Q2 transcon markets out of California, and New York.
Earlier this year. These regions were under a lot of yield pressure.
Teams across the organization came together to diagnose the problems develop a plan and execute the plan.
Through cross leading the additional of satellite Wi Fi dialing in the schedule in fare structure and a committed focus to improving the guest experience, we achieved meaningful RASM and margin improvements.
Value proposition hinges on offering low fares, while providing award winning service generous rewards in premium product and how people are delivering on this.
Our revenue improvement is a direct result of our initiatives and synergies.
And Investor Day, we shared a roadmap we view that laid out our intention to deliver $330 million in incremental 2019 revenues.
Like in the first and second quarter now initiatives delivered their full annual run rate this quarter.
Three quarters into the yeah, we're confident we'll deliver on the 330 million I'm going to share more on go forward initiatives and strategies in a moment.
We also continue to see double digit percentage growth in our royalty revenues, which as a reminder, comprise award redemptions and credit card commissions a large driver of this result was the 8% increasing redemption revenue on our metal evidence about generous availability for award travel.
We continue to see growth in both mileage plan members and credit card holders and particularly encouraged to see that nearly one third of our year to date growth in credit card holders a guest living in California.
Nearly half of all about guests are members of our loyalty program, which has consistently been recognizes the best in the industry.
Another bright spot was the improvement in the sales of premium cabin products.
This class revenue was up 16% on tenant a half the sent more seats premium cost revenue was up 13% on 12% more seats.
Network has shifted over the years to where nearly 50% about capacity is that trip length of five hours or longer.
Drive strong demand for our premium products and we're very pleased with these results as we build out our Airbus interiors to add more premium seating. We expect premium revenue growth will continue to outpace system wide revenue increases.
Besides premium seating, we've made significant investments over the past few using our product well building out our hubs in focus cities on the West coast.
Improvements include satellite Wi Fi you interiors on Airbus aircraft and investment in allowances.
This quarter, we expanded our lounge capacity nearly 60% when we opened 15000 square foot lounge, and see tax Nols terminal.
Yes satisfaction scores at the new lounge out 15 points higher than the sift system average.
And Dave Pos sales have doubled we've also seen record breaking trends in land membership growth.
First month after opening new member enrollments will quadruple our program average.
We're applying learnings from the North satellite lounge to anew, San Francisco Lounge set to open in early 2020 as you know LNG members I'm, mostly relates and high frequency travel is so these facilities are very important to us.
Before I move to guidance I'd like to highlight that we made network adjustments that we announced during the third quarter, which are aimed at creating more desirable connections for our guests between now hubs and focus cities in California.
And our focus cities in the northwest. These include flights from California to Spokane, Redmond, Missoula Boise in Anchorage.
As we grow capacity at a lower right than we have historically our focus is on careful reallocation of capacity given the seasonality in our network as well as growing market share and strategically important markets on the west coast initial signs are encouraging as we are already seeing positive results in demand and margin generation from these types of change.
Yes.
Looking into Q4 now capacity will grow modestly at approximately 4%. Our Q4 RASM guidance range is up 1% to 4% on much hotter comes from Q4 2018. This guidance reflects our optimism in our revenue initiatives as well as the continuation of demand and pricing try.
Wins, we account leasing.
Many of you asked regularly about how we're doing on revenue synergies, which we laid out at our Investor day in November of 2018.
As we shared with you at that time now total expected merger synergies with $300 million.
240 million of which our revenue synergies.
We realized 65 million of these through 2018 and as mentioned earlier, we're on pace to realize the full 130 million that we expected this year.
All of our cost synergies have effectively being realized to date, leaving 105 million of revenue synergies that we still need to achieve.
Approximately 60 million of this is slated for 2020 45 million 2021.
So we'd like to sort of tie off base historical synergies and commitments and established for the recall that our remaining commitment heading into 2020 is for 60 million in revenue synergies and the Annualization of out 2019 revenue initiatives, which will be approximately $65 million.
So in total that's 125 million in 2020 for about one of the half points of RASM.
We will be adding out 2020 revenue initiatives to this commitment and we'll share with the share. These with you on our coal in January .
Continued delivery of revenue growth is my team's top priority and we're optimistic about what we can bring in 2020 and with that I'll turn the call over to Brian .
Thanks, Andrew and good afternoon, everybody. We're pleased to report a 38% improvement and both adjusted net income and earnings per share as well as our third consecutive quarter of margin improvement as others have highlighted our 17.6% pre tax margin reflects a 360 basis point expansion year over year.
And was a direct result of the initiatives, we laid out at Investor Day last year with our Q3 results and our Q4 guidance issued today, we're on pace to have a full year pre tax margin of between 11, and 12%, which would be up two to 300 basis points from last year and meaningful progress on our path to 13 to 15.
Percent margins.
Substandard touched on the revenues all focused on the cost performance for Q3 and the outlook for the remainder of the year our unit costs increased 3.4% on a similar increasing capacity and the result was about 150 basis points better than our and our initial guidance in July .
Bears mentioning that the quarter included $24 million and signing bonuses associated with the ratification of new deals with Alaska's amplify and I am represented employees without the signing bonus our CASM would've been up less than 2%. We saw excellent cost performance for most of our operating divisions, although some costs did ship.
Our Q4, and even a little bit into Q1 of next year pilot Cross training as an example, we've talked many times about our dual pronged strategy to manage costs those being high productivity and low overhead productivity was strong during the quarter aggregate aired group productivity, which we measure using guests per FTD.
Came in better than plan and improved nearly two points from prior year year to date productivity for our airports team and our guest contact team deserves special mention as both have exceeded productivity targets for both planned and prior year and over prior year on the overhead side. There is another good story here to overhead is tracking.
Nearly 3% or $16 million under prior year for the first nine months of 2019.
Looking ahead to the fourth quarter, we expect CASM X to be up slightly on just less than 4% increasing capacity. This would be the best quarterly unit cost performance since the fourth quarter of 2016, we're benefiting from higher growth offset by some of the timing shifts we've been talking about over the last couple of quarters and high.
Our raid wage rates following ratification of the new contracts.
The modest increase in Q4 costs will bring the whole year result to 2.2% CASM ex growth on a 2%.
Excuse me, 2.1% capacity growth normally we would celebrate unit cost declines not increases, but given the step change increase in labor costs. We've had this year and the very low growth relative to our recent history. We're pleased with the result, and it demonstrates what we can achieve with a bass back to basics approach to cost execute.
And with a sharp focus on productivity and operating our business with a low overhead mindset.
As you've heard our teams are working diligently on our 2020 plan, including our cost plan, we recognize that low cost widen the competitive moat, we have versus higher cost legacy carriers and our critical Presto eventually return to the higher growth levels that we've historically enjoyed.
While we don't plan to share guidance, we see today I can share some higher level context for the cost challenges and opportunities we faced in 2020.
First notable headwinds include first a higher number a scheduled engine and airframe events in 2022nd we'll begin to see the cost impact of Airbus lease returns. Although we only have one return scheduled for 2020, we have nine returned scheduled for 2021, and we began accruing for these lease return costs.
12 months in advance and third increased airport costs offsetting those headwinds. However, we see the following opportunities first higher asset growth over which to Fred are spread our fixed costs will grow between 3% to 4% next year with that growth nearly all coming from lower unit cost mainline growth as horizon has.
Now taken all of their Eone hundred 75 deliveries second further productivity gains third continued simplification of our overhead structure, including changes that will allow us to be more agile and one more quick with our decision, making and fourth annualization of many of the benefits of our supplier cost reduction initiatives, which gen.
Operated more than $35 million in savings in 2019.
Our planning mindset is one of aggressive cost management and progress toward our 13% to 15% pre tax margin goal and I look forward to sharing more detail with you on our year end call in January .
Turning to the balance sheet, we ended the quarter with $1.6 billion in cash and marketable securities total cash flow from operations for the first nine months of the year was nearly $1.5 billion, excluding merger related costs and the pension contribution while net capex.
Was $525 million. This resulted in approximately $950 million a free cash flow, which marked a nearly 460 million dollar improvement upon last year's results at full year consensus free cash flow yield is almost 11% free cash flow conversion over the first nine months.
Year was exceptional, but we're benefiting from very low cash taxes combined with a low capex year.
Our number one capital allocation priority for the year has been deleveraging our balance sheet as Brad said, we closed the quarter with a debt to cap ratio of 42% and a trailing 12 month net debt to EBITDA ratio of one by year end debt to cap will be at 41% and as you've already heard will have paid off 75.
Percent of the merger related debt our treasury team has done a phenomenal job this year not only working to read deleverage the balance sheet, but has also taken advantage of the historically low interest rates to refinance and our restructure our debt to low fixed rates at the end of the third quarter. Our weighted average interest rate is at 3.2.
Percent with over 75% of our portfolio now fixed at historically low interest rates rounding out our fortress balance sheet. Our 104 unencumbered mainline anyone 75 aircraft and $400 million of Undrawn lines of credit.
Our strong performance. This year has also allowed us to make some positive changes to our capital allocation allocation plan for the year first we elected to make a voluntary pension contribution of $65 million to our defined benefit pension plans, which are about 80% funded in the aggregate and second we increased our planned full year share repo.
Purchase from $50 million to $75 million, given our strong cash flow during the quarter, we bought back $28 million of our shares including $10 million over a two day period at a volume weighted average price of around $58 per share with the dividend, which we have increased six times since we initiated in 2000.
14, we expect to returned $248 million to our shareholders this year or more than 25% of our free cash flow.
Coming back to our five year plan, our fortress balance sheet positions us to substantially increase returns to our owners and or place an aircraft order that with fund growth and allow us to retire smaller less efficient aircraft, which should improve which would improve both our ability to generate additional revenue and lower unit costs.
As we finish up our long term fleet study. We're also developing an order strategy that allows us to best leverage our market position and structure delivery timing that preserves our ability to generate free cash flow and now I'll turn the call over event.
Thanks, Brent and good afternoon, everyone.
The financial results highlight that has been a productive summer here at Alaska, but the bulk of the work of the integration largely behind US, we're focused on realizing synergies and initiatives and improving our cost profile.
A large part of that is providing visibility into our future labor costs as Brad mentioned, there were three new labor deals ratified during the quarter one with our aircraft.
Another with customer service agents and reservation agents and clinical workers and a third with our ramp cargo and stores agents. We're thrilled to have these labor agreements in place to recognize who we believe to be the best employees in the industry. While also securing long term contracts to provide line of sight for the company over the next several years.
And the case of our aircraft technicians.
That will be going to cross training on both fleet types, which we expect to be completed by the first quarter of 2020 further enhancing productivity and operational reliability.
In addition to our industry, leading financial results. Our frontline teams are delivering outstanding operational reliability and award winning service to our guests as you know we track these metrics religiously internally, but just as importantly, it has validated by external sources to to add to the recent Reagan recognition by Cardenas as the best Us airline.
Alaska was also just recognize as America's best customer service and Airlines by Newsweek Best airline rewards program by US News and World report the top rated airline in the Dow Jones sustainability Index and ranked by Forbes magazine as one of the top 100 best companies to work for into World.
Yes.
These awards are significant not only because we'd love to see our people are recognized but because they highlight that staying focused on our core competitive advantages resonates with guests and really doesn't make a difference for the bottom line.
Even while executing a complex merger.
We are creating a future that continues to build on these core principles, which drive preference for our product and operational reliability.
They include low fares and low cost.
Best in class customer service.
Industry's most generous mileage plan.
A fuel efficient fleet.
Well of brand and a fortress balance sheet.
As Weve navigated the integration for the past three years Weve admittedly put certain longer term strategic planning efforts on Pos.
We believe it was the right thing to do to ensure we completed the integration on an aggressive timeline that exceeded expectations and allowed for a singular focus on returning to the well oiled machine that Alaska is known to be.
We believe it was the right thing to do to ensure we completed the integration on an aggressive timeline that exceeded expectations and allowed for a singular focus on returning to the well oiled machine that Alaska is known to be.
This past summer our senior leadership team has been focused on building out our five year strategic plan the addresses where we want to take our network our fleet brand loyalty program and financial performance.
While we arent yet ready to share the specifics I'm pleased with how the plan is taking shape.
There's still work to do as we refine the strategy that has helped shape our past success.
We develop new strategies to build an even stronger Alaska for the future centered around sustainable growth our people and the strong business model.
We have a lot of work left to do but the improvements we've seen this year and the momentum we are building with our network our product our people and our financial results give us a ton of confidence in the future success of our company.
And with that we'll open up the line for your questions.
At this time I would like to invite analysts who would like to ask your question. Please press star and the number one on your telephone keypad now as a reminder, please ask one question and one follow up.
Just a moment to compile the Q1 day roster.
And the first question will come from Catherine O'brien with Goldman Sachs. Please go ahead.
Good afternoon, everyone. Thanks for taking the time.
Maybe one for Andrew first say you called out the 125 million and Alaska specific revenue. This is you've got next year does that include any future initiatives I'm pretty sure to those annualization of this year and then continuation of some of the merger revenue synergies. Thank you guys have a new and that is system coming online next year should that should that revenue finished.
Any incremental benefit or is that I can play the number thank you.
Yes, Thats fried Katie what I said was the.
Carry over synergies and initiatives from 2019 is going to be about one and a half points unit revenue in January on our coal we will share with you the incremental revenues, we expect from our initiatives for 2020, So we'll do that in three months time.
Thanks, and then maybe two quick ones on cost so.
Great cost performance again third quarter.
The thing that we should assume that since you maintain the full year cost outlook was that mostly timing or something else going on there and then maybe just on the lease returns that share are there any maintenance reserves that you're going to.
But those again see when the cash I think line.
Hi case branded maybe I'll take those.
On the cost of yes. Thanks, we were really pleased with our third quarter cost performance as well you're right. We maintain the full year kaslow or the cost number at the same level. So we did see some of those costs that we've been talking about shifting out of Q2 in Q3 into Q4 that explains the vast majority of at Asms are down slightly.
Yeah, that's basically it on the.
Second question maintenance or maintenance reserves, yes, that's it really complicated area of course, there will be assets associated with how we treat the maintenance reserves as we settle all these lease for lease return obligations up but thats factored in to two we'll factor that into the guidance.
Thank you very much.
Thanks Katy.
The next question is from Duane Pfennigwerth with Evercore. Please go ahead.
Hey, thanks.
Can you just remind us maybe what the.
Gating factors are on getting more aggressive on the buyback if its two completely repay.
All the debt you borrowed or to hit that leverage target, which you seem quite close to now.
Yes, Hi, Duane it's it's Brandon.
I tried to covered a little bit in the prepared remarks, you know we are awfully close to our leverage target we're going to end the year at 41%. Our goal was 40 that wasn't an exact goal I think we're going to cross into the sub 40 territory early to sort of mid ish next year I don't think we've necessarily decided if we're going to co pay off all of the Virginia.
Erika debt, although we simply could the point really that we're trying to convey is that our balance sheet is rock solid and it gives us some optionality, whether it's increased returns to shareholders and or position us to do some did something with the fleet.
That doesn't.
Impact the balance sheet to negatively.
Thanks, and then sorry, I think you covered it as well, but it's been a long day already.
Currently so I apologize just just on the headwinds and tailwinds for costs, and and where those net out.
I don't know if you're in a position to give guidance yet on 20 CASM.
Hi, Yes me again.
No no we're not I mean, we're going through the planning process now and what I can say says that we've got a lot of cost momentum going into 2020, but our people are working their budgets really hard right now.
Okay. Thank you very much.
In 2000, I might jump onto the sort of capital allocation question I think everybody knows here, we strategically we felt like the industry is changing we needed to get bigger we bought Virgin America borrowed 2 billion in the last two and half years of beta billion and have dollars that often the one thing. We know is it in 2020 and 2021, where do we won't we might pay down a little bit more debt, but I think many.
We were sort of crossing the threshold here that were done dealing with the Virgin America dad, and we're going to be looking forward looking at new capital allocation opportunities for for the company.
Thank you.
Thanks Duane.
The next question is from Savi says with Raymond James. Please go ahead.
Talk a little bit about some of the network.
That you made focusing on some of the shorter haul business markets, but.
Looking at it seems like it is shorter haul and you kind of moving away from the Trans Con could you talk about.
What you're seeing on the trend.
And why.
Funding shorter haul growth.
Yes, sorry I'm.
Not quite sure on the Trans Con, we've actually increased that flying especially out of Pacific northwest with a seasonality.
Really if you look at the network moves you're seeing a number of.
What I'd call mid continent flights.
Out of California that quite frankly, a very seasonally pole in the fourth quarter and certainly the first quarter and so what we've been doing with aircraft is instead of doing that were being flying those aircraft up into out coal Pacific northwest on connecting directly with some of Elijah focus cities and then we've also increased out capacity out of that.
Perfect northwest during the winter quarters.
To take advantage of the seasonality there overall as I've mentioned notes out Trans Con network from California has significantly improved.
And it's doing good things and so we continued to commit to that.
But those that most of the changes is this really some of the short hauls going up the Pacific northwest instead of mid continent.
Got it I misunderstood that and then you just you mentioned, how why was it did well and the third quarter I know there were some easy comp just as you can I look forward any any thoughts there since that was going to one of the bigger areas.
And just a follow on to that last time, we talked about.
Alaska as well.
I think that was it mostly just like a summer seasonal pressure, but just wanted to clarify that was.
Right, yes on the Hawaii, you're right there was some.
Bad weather and volcanoes and also it's other things that were happening last year, but I think what we're seeing is still very solid demand great load factors and.
As I mentioned in my prepared remarks, we we airplanes are really configured well, especially for Hawaii with that premium costs.
Kevin The first class cabin, which has great demand on a Hawaii flights and just the service. We provide we've really made for these long haul flights and so we feel really good about that.
Yes, with why if there's more capacity comes in that puts yields on the pressure, but we feel very well prepared for that on the Alaska story you are right in the sum up we have a lot of people who like to fly to Alaska.
Some folks are flying wide bodies longer distances.
But we cater to very much demand on the west coast and we do good job connecting it so I don't see that to be a huge issue as we move into 2020.
Thank you.
Savvy.
The next question is from Jamie Baker with JP Morgan. Please go ahead.
Hey, good afternoon everybody.
Starting on a housekeeping item the fuel efficiency, that's implied by the fourth quarter Guy shows more deterioration year on year than what we've seen.
Earlier, I mean, you're also the sequential decline.
It is a bit more.
Then customary I recognize there's probably some wiggle room in the around completion factor, but is that just a modest shift to shorter stage lengths because that's been going on for a while so I'm I'm just.
I'm surprised that it's more pronounced in the fourth quarter.
Jamie its brand in are you looking at Asms per gallon or what's your metric that you're looking at certain asms per gallon, yes. The only thing I don't have that at my fingertips, but the only thing I'm guessing is that on a year over year basis. It reflects the increase in regional flying as a percentage given the fact that horizon took so many 170 fives.
Late last year, and then into this year and Im guessing thats, probably the contributing factor.
Okay cool in second and this sort of follows on Dwayne line of questioning you talked about some of the headwinds and Tailwinds puts and takes on ex fuel CASM for next year I forgot about lease return accruals. For example, so so thank you for that but I'm wondering if you could expand that narrative from costs to pre.
Tax margin.
Synergies are obviously going to be a tailwind you've talked about that but how are you thinking about the other dynamics as it relates to pre tax margin next year, you know fuel the industry impact of the Max coming back in a more southwest serve as to why what what are the three or four items in there.
In the tailwind and the headwind buckets.
He Jamie its Shane good afternoon.
Excellent question, I don't think I'm going to sort of delve into anything that gets close that guidance, but as we I'd just remind you that we laid out a roadmap to get to 13% to 15% 18 months ago Investor Day, I think as Andrew noted, we've got a bunch of commitment to you all that we need to deliver on and on the revenue side to sort of complete.
What we had talked about there and we intend to do that next year and we intend to add to that amount ultimately end up with Andrew alluded to in the script in terms of new initiatives that we'd like to talk to you guys about in the first quarter on the cost side I.
I think at Investor Day branded mentioned or I did we always faced 4% to 5% sort of just core.
Cost pressure internally within the company.
We are growing 3% to 4%.
So we're trying to find ways to continue to manage ourselves to a number that's more in line with our historical norm of flattish on the cost side, but our goal would be to see margins ultimately continued to expand but we havent done all that planning yet and to your point the industry dynamic is changing so we obviously.
We'll be talk to you on more than in the coming months about next year.
All right, thanks, and thanks, everybody take care.
Thank you Jamie.
The next question is from Helane Becker with Cowen. Please go ahead.
Okay. Thanks, operator.
Hey team Thanks for taking my question.
Measure Helane.
[laughter] I appreciate it.
So here's my one question.
You know you were supposed to have some Mac. This year I think you're thinking all 10 of them are going to come next year.
And I know, they're not in the schedule et cetera, but you know are you, giving notice issues are you thinking about you know the Airbus aircraft on a more.
Serious basis.
I mean, obviously, you're not because you're you're doing lease returns, but you know are you thinking about more Airbus aircraft unless you know Boeing aircraft or are you still kind of focused on the seven threes.
Helane its brand and I want to re introduced to you and introduced to the rest of the folks on the call and that paper Nationstar Senior Vice President of fleet finance and alliances that sounds like a perfect opportunity for him to share his views on that.
Thanks.
[laughter] Thanks, Matt.
Sure Elaine.
Just a quick reminder, we of course have Airbus aircraft as well three nineteens, three twentys and Athree hundred 21 Neos.
So really part of the fleet initiative that we've been working for some time, it's a core component of our three to five your strategy and our 13% to 15% Morgan margin targets.
We're looking at near term opportunities to retire inefficient aircraft.
As well as longer term looking for the best aircraft for future network.
We're confident in the margin accretion possibilities theres going to be up gauging, both new aircraft, obviously feature a step function improvement in airframe and engine technology. So we're working closely I'm talking to manufacturers and really.
Hoping to bring something out here in the next handful of months, we're going to order in a financially prudent way, obviously and manage our capex and cash flow and end up with an airplane that we know where guests and our Alaska teammates are going to really want to fly.
Okay. Thanks. Thank you I just had one one follow up question.
Remember, who talked about airport costs, but I've heard other of your peer group.
Complained about airport cost too, but when did and actually.
At Spirit. This morning, they commented that airport costs should be a pass through.
So wouldn't you you know if as you think about this airport cost when to.
Think about raising fares in those markets. So that you recover some of that that cost.
I might jump in Helane.
The first thing.
I just one of the fun things about these jobs as you get to see your own people move up and sort of move around you see new people coming to the organization that now has a tremendous addition to the team I've known that for I don't know how long that 15 or 20 years now is just delightful to have you here.
Thank you are making an excellent point on airport cost other airlines may have different perspectives, but the truth is not only airports, but a whole lot of our infrastructure needs a lot of investment and Seatac Airport as an example, our home.
These a lot of investment and we have to we want them to invest efficiently. We wanted to build the right projects, but we've got to be their partner that we've got we've got to their investments need to be made and I think their investments that any of us would make it was our home our car or whatever so yes and of course, we do want to find a way to recover those investments through modest.
Increases and fares that help us sort of keep the whole value proposition together, but I don't I don't think ccxeight unique I sort of think airports all across the country need investment and that sort of the season, we're entering or we'd been added to some extent, but I think the next 10 15 years, we're going to be seeing this and lot of airports.
Okay I don't disagree.
Thank you.
Excellent.
The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Everybody.
Hey, So you talked a lot that the 8% growth in redemption. Shane can can you talk to me about your current assumptions on breakage, which I think are up 17% that seems high how do you feel that that number right now it's sort of the modern loyalty era and.
All else equal for with BNL for second would you rather see that 17% breakage go down or go up.
Well. This is this is Chris honor Hi, how are you Okay fair to know your answer.
I would guide.
Yes, yes, so the and I'll, let the then shade answered it too, but the 17% is we do actually look at that on a on a semiannual basis really to say is that still falling in line with our expectations of the reality is it we would change it if it were if it were materially different from that in terms of whether we.
I would want that higher or lower I can tell you my is from an accounting standpoint, but it's not probably the answer from visit standpoint, So all that much shave if he wants to take that are senior Andrew I'll, just take that I think how do I get that the accounting side and the rest of it but I think at the end of the day when prices go down.
That means people are using up program.
And we saw a lot of volume come through this quarter. So we want to grow and make it stronger and healthier. So that's just my take on it because I think breakage goes down.
The strength and loyalty go up.
Right. So if that were to change.
You would you prefer to actually force that down whether with the change the policy of miles or how people use them, giving the more opportunities they use and things like that and that gives you would probably have to lower your record assumption, but obviously for that long term benefit is that fair.
Yes, okay. Okay.
Alright fine. Thank you and then branding can you elaborate on this aircraft order strategy little what's going on with that what do you mean by that is that like smoothing of Capex is that fleet types like what do you what are you talking about.
It's all of the above its just doing in a way that makes sense. Both both for the needs of the fleet long term not just today and in a way that preserves our ability to generate free cash flow and do this in a way that allows us to do other things from a capital allocation standpoint too.
Okay.
Well thank you.
Thanks Hunter.
The next question will come from Michael Linenberg with Deutsche Bank. Please go ahead.
Hey.
Hey, good afternoon, everyone I guess, two here and I I guess for Andrew.
You know what's going on with the American relationship. It does look like maybe there's a potential I don't know theres a phase out you know as we look into 2020 or maybe the Codeshare goes away can you just can you update us on that.
Sure Mike.
The reality is that after the acquisition and Virgin America, that's written when the fundamentals of our relationship with American actually changed the department of Justice.
Said, we couldn't do certain things around code and everything else and just given the size and overlap at the time. There was a lot of adjustments made a couple of years ago and most of that all of that economics is through our system. Today. So really what your stores, we still have a partnership with American.
Still a good partner, we have we're working together and mutual interest we still have a lounge program with them, we still connecting guests through their Chicago hopping that connecting folks here, but we've really shrunk and the footprint is smaller I think at the highest level, which is I think a testament to Alaska Airlines, a couple of years ago, 15% of all of our.
Traffic was code and into line right.
Basically dependent today, it's only 7% I think thats just a testament to the our ability to have grown the cover most of the this stations where folks go and then of course shoes partners, where we can mutually benefit and work together.
Okay, and I, just I want to make sure that you said you know that you're still going to continue to connect through Chicago is that interline or is that codeshare because like if I look at schedules today I still see the Alaska code on say Denver, L.A.R., Austin, L.A., where it's the American metal is that could go away is that going away. This spring or is that.
Yes going forward when it all winds down essentially from the Pacific Northwest you can connect through to Chicago to about 20 destinations and then on American you can connect through our hubs to about 20 destination. So the codeshare will really basically be very very small.
Okay. Okay, Great and then just one other question when I think about competitive capacity in your markets as we look into.
Not discussed this quarter and also March quarter 2020, because there has been you alluded to this on the call earlier, there has been a lot of network adjustment and in many cases, you know to fund as as you mentioned the growth into the Pacific Northwest from say La and San Fran in some cases, you pulled down a whole bunch of cups.
Lastly, in some markets, where there was a decent amount of competition. So I'm curious about what that what that number it looks like if you have that.
Finger tips for both the December quarter in March quarter, 2020, what that competitive capacity yet.
It could.
Competitive capacity.
In the fourth quarter.
Is only up about 1.6% fit the first quarter is higher than that showing about for right now but of course I think the first quarter scheduled to still influx and I'm not sure what's going to happen with schedules with the Max and everything like that but I think to your point moving around some of this capacity.
As a in some ways reduce some of the overlap but net net was still putting this roughly the same amount of seats in California at the end of the day, we just pointing the airplanes to different places.
Great that makes sense, all right well thanks, everyone.
Thanks, Mike.
The next question is from Joseph Denardi with Stifel. Please go ahead.
Thanks, Good evening.
Brad two questions for you I think.
For the last two years had been the only CEO in the industry is incentive compensation is driven in part by the airlines growth in credit cards.
Can you talk a little bit about what changed in terms of how you spend your time, how you manage the business before that was a metric versus after and then what was the motivation of the board and making that a metric for your comp. Thank you.
Thanks, Joe Good question it was.
Yes.
Honestly, we went to the board with that idea following our acquisition of Virgin America, We just realize that.
You did I would just really believe in.
Oil idea of building loyalty building preference getting people into the club and we've seen the power of that in the rest of our network in as we bought version American moved into California, If it was.
I mean, it's interesting you talk about me and that certainly true, but what we really wanted was that in the in the compensation base of 23000 people and that's what happened. So I think it was 10% credit card loyalty into a 10% mild five and five.
Yes, okay.
Yes.
Yes, I think also servers and credit card and then 10% mileage plan. We just one of the fantastic Army of people of Alaska Air group's really focused on growing customers growing loyalty and so that is that it that's what it was all about.
The leadership team went to the board and proposed in the Board said, absolutely it sounds like something that will drive long term value.
Just as early as branded just as a reminder, we have a gain sharing plan that is consistent across all of our employees not just the leadership, but across the frontline as well so it really gets down to alignment.
Got it that's helpful.
Brad I trying to ask you. This question every now and then I'll ask it again, just just given your experience to date with the Virgin transaction and.
Turning that deal into value for shareholders. How successful do you think you've been and kind of in the context of your balance sheet nearing a point, where you'd be in a position to do something.
Does M&A look more or less appealing now than it did before the Virgin deal. Thank you.
Thanks very much show.
Yes.
Thanks for giving us a chance to talk about this.
We at the time you look if you go back to when we consider this it was when we announced that it was April of 2016, I think we felt like we had an amazing economic engine a great brand.
We're really proud of our culture in the way people.
Take care of customers, we felt really positive about the long term prospects for the industries, but we did feel like industry conditions were such that we just needed more real estate and we wanted to just to have strength to be on Alaska, Seattle and Portland. So that was the idea behind the version merger. It as you guys know yet you go through like you learnt stuff when you.
When you do stuff you learn stuff and it was it was a lot of work, but we I think everyone hears feeling optimistic we're feeling good that we're getting through it and I think we really feel that we have.
Materially enhance sort of the cash producing.
Capability of this economic engine, we've we've enhanced.
Career security for our people in doing that as you mentioned, it's we're I'm extraordinarily proud that we borrowed $2 billion to do it you guys know our people did it with no investment banks with no nothing like that they just went to the banks and borrowed $2 billion on their own we're going to paid three quarters of it off in three months time. So we're really proud of the team as we look at doing more.
I just think my own view of the World is it's a combination of organic growth in M&A, we've done amazing with organic growth I'll, just say in different people around this table may feel differently, but as I look at the next few years I sort of see the biggest opportunity us growing organically pushing.
Taken what we are proud of what we feel like we do well and pushing it organically into markets, where we're already strong.
Very helpful. Thank you.
Thanks, Joe.
The next question is from Brandon Oglenski with Barclays. Please go ahead.
Hey, good afternoon, everyone and thanks for taking my question.
Surprising that will come back to the puts and takes on on the cost discussion because I actually did here.
The headwind, but maybe could you elaborate again on where you see the tailwinds on cost were going in 2020, and they get I'm not looking to get guidance from yet.
No. That's that's okay I on the tailwind side, there is actually a number of those as well first of all we're going to be able to grow a little more next year than we've grown this year that will help we're going to continue to work productivity you might remember that we focus on two different things for cost control productivity and overhead.
Activities, a huge lever going into next year.
We have continued simplification of our overhead structure. That's the other prong and then you know our team just did a great job on a lot of different initiatives. The supplier cost reduction campaign was one of them and I think all of those initiatives that we worked hard to get this year's costs down we'll continue to bear fruit as we go into next year as well.
And like seems like the Airbus reselling, how far along are you in the fleet there.
Yes in terms of the number of airplanes that we reconfigured well have a 40 full body 40, so 60% of the fleet will be reconfigured went into the year Brandon This is Ben.
So we'll have we're roughly 73 airplanes will have 40 to 44 done by the end of the year.
Okay. So if anything we would see the benefits from that even more so in 2020 is that correct.
Yes.
Okay, and then I mean, maybe this is just way too premature, but you guys obviously.
Delivering pretty decent results. This year I mean does that make you go back to the drawing board on long term growth because I think Brad in the past you said, if we can get into that targeted margin range. Then we would think about expanding the network at a faster pace is that still the framework.
Branded it's Brandon.
No, we're very comfortable of 4% to 6% growth we used to talk about 4% to 8%, 8% is pretty big on accompany our size now so 4% to 6% is a pretty good clip.
And if we can grow 4% to 6% per year for over a 45678 910 years, that's a lot of growth and we want to make sure that we can do it in a prudent way that keeps our balance sheet intact, where we can achieve our margin goals. It. It all of these to fit together, but we're really optimistic about our ability to grow 4% to 6% and we feel like thats the right growth rate for the time.
Being.
Okay. Thank you.
Thanks Brandon.
The final question is from Dan Mckenzie with Buckingham Research. Please go ahead.
Hey, Thanks for squeezing me in here just following up on that last question. That's it's really sort of house cleaning the 60% of the Athree hundred Twentys that were reconfigure with a new seats what percent of the flying does that equate to.
Well, we have Cmos 53, Athree hundred Twentys and on a fleet of fleet of 235 mainline airplanes, though.
And a lot of the just a lot of the the.
The benefit from those actually comes on the revenue side just to be Frank.
We're taking the first class cabin from eight to 12, and we're going to have.
Adding premium seats and I think it's you know anywhere from.
One to three extra seats per aircraft.
So it's it's actually more of a revenue boost I think that on a cost one Joe the big thing is we're moving the airplanes, primarily north so we're doing a lot of east West line. Most airplanes as of January will be north South line.
Okay.
We'll be will be more helpful putting the borrowings.
If you 20 ones transcon.
Understood Okay.
Going back to the prepared remarks about realizing the 330 million in incremental revenues that were targeted.
Good evening are we in with respect to save Affairs, and I guess, how are you benchmarking to the industry at this point and I guess I'm just thinking the industry as a whole seems to be finding more upside in this particular bucket I'm just wondering what you guys can share.
Hey, Dan it chain.
It's a we got these out really in full force in Q1 of this year.
They've performed well they performed above what we had committed to and talks about and I don't think we've shared updated sort of take rate numbers are economics, but they've performed quite well our gas just based on what we hear other people talk about other people talking about as we're on par if not maybe a little better on the buyout of safe.
And that's really what we want we want you know as few people as a want to to be on that actual ticket. We like the fact that people buy out more than.
Than we had originally sort of estimated.
Because of the anything I think you know we've got a full quarter next year to annualize. It was only sort of partially in Q1 of this year and then we've not really done anything to try to optimize it anymore. So there's the potential that after we have used it for a year, we just get smarter about how we're managing it and it sort of a tool in the two tool kit.
So there's probably more value to be had we are not quantifying that today I don't I don't know if we will when we get here in January either but it's still more upside from saver for a little while.
Understood.
You just squeeze one last one in intra California earlier. This year I think was a headwind to revenue production or maybe it was partially last year.
No that Thats changed I think you highlighted in the prepared remarks, it's doing well.
And I'm just wondering is this isn't any that's gone from being a RASM Drake to a RASM tailwind at this point or how are you thinking about this piece of the network puzzle.
Dan I am I in my prepared remarks will more rent trends gone and we'd like to get into the details of specific regions, but what I will tell you is.
That this flying has also benefited from all the initiatives that we've shared with you a rolled out and so we are seeing improved profitability across our network, including into California as a result about changes.
That's great. Thanks, so much you guys.
Thanks, Dan Thanks, everybody for tuning in we'll talk with the again at the for our full year report out in January Thank you.
Ladies and gentlemen, thank you for participating in today's conference call. This call will be available for future playback and Alaska Air Dot Com you may now disconnect.
Oh.