Q4 2019 Earnings Call
Good morning, My name is Catherine and I'll be your conference operator today at this time I'd like to welcome everyone to the Alaska Air group's fourth quarter and full year earnings release Conference call.
We'll be accessible for future play back at Alaska Air Dotcom.
All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session for analysts.
Like Cascade question. Please press star one on your telephone keypad.
If you'd like to withdraw your question, Chris the town key.
Thank you I would now like to turn the call over to Alaska Air Group's director Investor Relations Emilie Halverson.
Thanks, Catherine good afternoon, and thank you for joining us for fourth quarter and full year 2019 earnings call in today's prepared remarks, you'll hear updates from Brad Ben Andrew Brandon and Shane Tackett. Several other members of our management team are also on hand to answer your questions during the Q and a portion of the call.
This afternoon, Alaska Air Group reported fourth quarter net income of $181 million on both a GAAP and adjusted basis with the latter excluding merger related costs and mark to market fuel hedging adjustment.
Air group's adjusted earnings per share for one dollar and 46 cents five cents ahead of the first call consensus.
These results compared to adjusted net income of 93 million, an adjusted earnings per share of 75 cents in the fourth quarter of 2018.
Our fourth quarter adjusted pre tax margin expanded 470 basis points to 10.9%. This marks the fourth quarter of sequential improvement in our margin expansion.
For the full year 2019 Air Group reported record record revenues of 8.8 billion adjusted net income of 798 million and adjusted earnings per share of $6.42.
Pre tax margin was 12% with adjusted operating cash flow of 1.8 billion, an adjusted free cash flow of 1.1 billion, our debt to capitalization ratio declined to 41% and our return on invested capital was 12.2%.
As a reminder, our comments today will include forward looking statements on our expected future performance, which may differ materially from actual result information on risk factors that could affect our business can be found in our FCC filings on today's call. We refer to certain non-GAAP financial measures such as adjusted earnings and unit cost excluding fuel and as usual.
We've provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in today's earnings release.
And now I'll turn the call over some Brad for his opening remarks.
Thank you Emily and good afternoon everybody.
As we've discussed on the last couple of calls we feel that 2019 marked a turning point for us as we got through the bulk of our Virgin America integration and began to see the returns on that investment.
More importantly, as we focused our energy on running a fantastic airline and on executing initiatives, which we designed to strengthen our long term competitive advantage.
As Emily shared today, we reported that are 20 like gene adjusted pre tax income grew by 43% to nearly $1.1 billion and are adjusted pre tax margin expanded 3.1 point to 12%.
Our operating cash flow was exceptional as it grew 37% to $1.8 billion.
Our free cash flow of $1.1 billion and our net income to free cash flow conversion of about 140%. We're also very strong.
Now paid down 75% of the $2 billion, we borrowed to buy Virgin America, and Assembly said, our debt to cap ratio is now down to 41%.
These results delivered terrific value for for our owners and 2019, our ROI. She grew 280 basis points to 12.2% at our earnings per share for the full year grew 44%, which is the highest growth rate of any airline that's reported so far.
Of this value, we returned $250 million to shareholders in 2019 through dividends and share repurchases.
Brandon will talk in a moment about our capital return plans for 2020, which will include the Tencent increased our annual dividend, which we announced today.
[noise], we've made progress on many fronts, but we're especially pleased with our momentum on commercial initiatives designed to improve the guest experience and drive revenue gains for both the fourth quarter and the full year, we expect our unit revenue growth will be the best in the industry.
I want to congratulate Andrew and his team for this exceptional performance and I want to thank our frontline employees for operating safely and reliably and for operating and for offering genuine and carrying service to our customers.
These things are sometimes overlooked but I think we all know that nowhere line, nor any business for that matter can deliver on value creation opportunities. If the underlying product is not inherently good.
It's not just the leaders of Alaska. The believe we have outstanding people.
JD power condo in August Newsweek, and the U.S. News and all you use news World report all spoke up in 2019 to validate our views.
Tomorrow over $130 million, an annual performance based pay bonuses will go out to all Alaska and horizon employees. This is the temp here that our program, which focuses all of us on safety low cost remarkable service and financial performance will pay out and the average over those 10 years.
Is about an extra month of pay per year.
Even with these results we've got work to do at our 2018 Investor Day, we shared our roadmap detailing plans to return pre tax margins to the range of 13% to 15% over the cycle by improving performance on the controllable parts of our operation.
This is our number one financial priority in 2020.
And as I close I wanted to take a minute to recognize that this will be branded last earnings call.
Brandon has been with Alaska for 16 years and has served as our CFO for almost 10 of those years.
As you know Brandon is an exceptional CFO and he has been recognized as one of the best Cfos in the industry because of his financial abilities and because of the clarity with which you communicates our plan to use the investment community as well as to our employees.
We will Miss Brandon dearly, and all of Us at Alaska wish him and his wife Jan at the very best in retirement.
[noise], Shane Tackett will be Alaska's, new CFO effective March threerd.
Many of you know Shane well and we're excited to see him step into this role Jane has been with Alaska for nearly 20 years and has led financial planning and analysis.
Commerce revenue management and Labor relations. He has a terrific understanding of our business and of how we work with people to continue to grow and nurture Alaska, We're confident and his leadership and we're anxious to see the imprint. He leaves on Alaska in his new role as CFO .
Last week leadership team and I return from two weeks on the road for employee meetings and seven cities across our network. The goal of these meetings was to share our strategy for 2025, and we found employees throughout the operation We're energized about the road ahead.
This industry can be challenging, but our people know what it takes to with.
A relentless focus on safety and on time operation.
Truly remarkable service and a low fare low cost high efficiency financial profile.
We continue to do these things well and we'll continue to grow.
We'll hear more about this from others today and with that I'll turn the call over to Ben.
Thanks, Brad and good afternoon, everyone.
At our Investor day in the fall of 2018, we laid out a roadmap to achieving our goal of 13% to 15% pre tax margins a series of revenue and cost initiatives that would move us closer to that goal.
Selling building on that momentum we've been working on our strategic plan for the last six months that sets the vision for Alaska for the next five years. The plan builds on our strengths and addresses key areas of opportunities for our company to thrive on a consolidated and increasingly competitive industry. The plan is comprehensive and for obvious reasons, we won't.
Sure specific details, but at a high level is focused on three areas.
First as growth, which includes how we build our network and hubs.
We unlock the value proposition of our brand in California.
Well, we build the best in class Merchandisers I would become the best in class Merchandisers, and how we drive guest and employee facing innovation.
Second as people, which addresses how we continue to nurture our fantastic culture, how we build excellent labor relations and how we develop best leaders in the industry.
And third as our business model, which builds on our strong safety culture and operational excellence.
Our path to being leaders and sustainability.
And our focus on creating a robust financial engine that allows us to generate appropriate financial returns over the long term.
Alaska always has been and we'll continue to be a growth airline.
Since 2000, we've grown at a rate that outpaced industry three to one we were able to do this because of our durable competitive advantages are safe we run a good operation our people provide remarkable service.
And we have low costs. So we can offer our guess low fares.
Building these muscles has required enormous discipline.
The last 10 years, we've demonstrated our ability to be at or near the top of the industry in each of these areas. We know that preserving these competitive advantages is key to continued profitable growth, but we're seeing increasing congestion in our largest hubs that is challenging us Gary back our new Chief operating officer and his leadership team.
We will be laser focused on operational excellence and changing processes. So we can continue to operate in our congested hubs with a low cost high productivity mindset.
Recently, we began building another muscle that is key to our future as a growth airline holding our commercial advantage through improved merchandising and demand generation.
We saw the impact these efforts had on our performance in 2019 and believe there is additional opportunity to improve in these areas Andrew will be sharing more about these plans and if it.
Finally, our business model.
You know that we are committed to achieving a 13% to 15% pretax margin and that remains unchanged.
Additionally, we've been working on concrete goals around capital allocation, specifically related to free cash flow generation and returns of capital.
Do you hear us talk often about the value we create for our guests and employees and our board has always been supportive of this they've challenged us to also model the same clarity and our long term commitments to owners. So we've created a document that we hope to share with investors. This spring that provides insights on our management philosophy and that.
Covers the financial targets that we should be held accountable.
The working title of this document is called the owners manual we plan to share more about it at our annual shareholder meeting on May 12.
If you don't typically dial in for that I suggest that you do so this year.
Before I hand, it over to Andrew I'd like to mentioned several achievements during the quarter.
First we completed our busiest holiday travel season ever are fantastic people helped over 11 million guess get through their destinations this quarter that both Christmas and new year's falling midweek demand was higher than usual as evidenced by elevated load factors and yield throughout two holiday weeks and despite a rough Christmas week operationally our people provided exit.
Service to our guests and they want to thank them for their efforts over busy couple of weeks second with the recent ratification of a joint collective bargaining agreement with our Airbus and Boeing aircraft technicians, all work groups across the company or integrated completing a significant milestone in under three years after the merger with Virgin America.
Third horizon delivered one of the best financial and operational performances and its history and 2019, but its lowest unit cost ever Gary back and then and the entire team had a ryzen have let a remarkable transformation congratulations to them and looking for I'm eager to see how new horizon President Joe.
Sprague and the team build on the success, including continued cost management and moving even more to best in class Eone hundred 75 operational performance.
As I reflect on my almost 16 years with Alaska I know that our success has been fueled by our fantastic people, many of whom I've been here for decades building our brand and the special connection we have with our guests our culture and focus on kindness is truly unique and we will continue to nurture that even as we continue to grow.
Our employee meetings over seven cities. The last two weeks were inspiring and energizing and it gives me confidence we can execute this ambitious plan.
And now over to Andrew.
Thanks, Ben and good afternoon, everyone.
Echo what you've heard from others. The commercial business ended the year on a very strong no.
Total revenue grew 7.9% in the fourth quarter.
Just 3.5% capacity increase.
This translates to unit revenue growth of 4.2%, which we believe will exceed the industry by over 350 basis points.
Both leisure and business demand was solid this quarter I'm pleased to report that New York in California, Transcom performance were both among the top three TRASM improvements stories for Alaska.
Teams have worked hard this year to recover from the challenges we faced early in 2019 and have made a positive impact turning those markets around this is a testament to what we know to be true putting the right aircraft in the right markets. When combined with Alaska is high quality product and service is a win for both our guests and Alaska Airlines.
An important contributor to our revenue growth has been out premium product you may recall that prior to 2017, our mainline fleet was segmented into just two classes.
First in mind cabin with the regional fleet only main cabin.
At that time premium product revenues comprised just 7% of coal revenues were 70% of revenues generated by main Kevin seats today first class and premium costs represent 22% about total revenues. This mix will grow as we complete the reconfiguration of the Airbus to bring the premium product mix in.
And with the rest of the fleet.
On the regional side of our business. We also see solid demand for premium seating on the Embraer one seven fives.
Where intentional about how we manage our premium product business. Our goal is to keep how premium cabins affordable provide generous benefits to our loyalty members, while competing effectively against our peers.
In the fourth quarter first cost revenue was up 19% on 13% to 613.6% more seats premium cost revenues were up 16% on 14.5% more seats. This momentum will continue into 2020.
As we complete the remainder of the retrofits and focus on more effective merchandising about premium cabin.
RASM from our premium products was 54% high than generated by our main Kevin at a six point improvement from the fourth quarter of 2018.
On the loyalty front, we once again saw double digit percentage growth in our revenues this quarter.
When you include mileage plan commissions on a credit card as well as redemption revenues included in passenger revenue.
This quarter's performance caps off three incredible years of growth in our loyalty program since the acquisition.
I'd also like to note that this quarter's results concluded four consecutive quarters of year over year RASM growth and a strong close to the year total revenues in 2019 grew 6.3% to 8.8 billion on 2% capacity both.
RASM for the full year is up 4.2% more than 200 basis points of industry.
And Additionally, this represents approximately 50 basis points of expectations with shared with you at our Investor day in the full of 2018 and represents our highest full year relative RASM increase since 2011.
We started talking to you about an inflection at the beginning of 2019 and we are pleased that our results. This year demonstrates that we achieved.
As Ben mentioned.
Imperative that we carry the momentum we've built in 2019 forward and we will be squarely focused on building strength in the areas of merchandising demand generation and innovation.
Improve the execution of revenue initiatives and the guest experience. My organization has recently undergone a structural realignment to better anticipate and serve the needs and desires of our guests.
The drivers of our revenue have fundamentally changed over the past decade.
Well I will once predominantly driven by main cabin ticket sales, we now manage a fully segmented Kevin that houses numerous billion dollar segments, including first class premium class save affairs, and loyalty revenue and new organizational structure better reflects how we do business today, and we will improve both the guest experience.
And our revenue performance.
The company has long been a leader in merchandising and technology, a key enhancement to the commercial organization was appointing chart, James as senior VP of merchandising and innovation.
This new Division will also include responsibilities over distribution and E Commerce true who was previously Alaska.
Oh brings deep technology experience.
We'll be working with all our leaders to not only drive merchandising, but innovation that will be squarely anchored in revenue generation improving the guest experience and developing tools for employees. So we can deliver out products and service excellence, we're very confident that Trues leadership will drive us to regain a top position in these disciplines.
Also on the technology from the implementation of our new revenue management system is well underway. This project is a multiyear investment which will bring advance forecasting capabilities, along with revenue and network optimization support we pant plan to complete the first phase in the back half of 2020.
While the incremental revenue delivered in the first year is small at around $20 million.
The capability it supports will unlock more significant revenue potential in years to follow.
As I shared on our last call out 2020 revenue includes the carryover of 2019 revenue initiatives and synergies of approximately $125 million.
This will be concentrated in the first half of the year.
Half of this represents synergy such as cross fleeting and the other half revenue initiatives such as the Annualization of save a fair and all that and celery price changes.
Additionally, the focus we're putting on merchandising demand generation and innovation is expected to drive additional revenue growth with most of the opportunity skewing to the second half of the years some of the larger initiatives require the activation of new technology, we will be updating you on the progress of at 2020 initiatives throughout quarterly revenue guidance.
This afternoon, we established our first quarter guidance ranges capacity growth will be approximately 4% and unit revenue is expected to grow between a half a point and three and a half percentage.
While Q1 is the weakest seasonal period in the industry, we've seen indications of strength in the early weeks of the quarter relative to last year.
To date pricing has been stable and structural changes to our network in January and February to better match, our network to demand patents is resulting in some nice load factor increases and we expect to outperform industries unit revenues this quarter.
29 team was a strong year accompanied by great momentum delivering margin improvement through higher RASM and a better guest experience remains the commercial teams number one priority as we enter 2020.
We've demonstrated our ability to identify and execute against high quality self help measures in 2019, and I'm confident that the additional opportunities. We've identified will be simply successful in 2020 and with that I'll turn it over to Brandon and Shane.
Thanks, Andrew Good afternoon, everybody as part of our transition you're going to hear from both chain and meet today as we walk through our Q4 and full year performance and talk about 2020.
We were pleased with our fourth quarter results net income and earnings per share both nearly doubled our 10.9% pre tax margin was 470 basis points better than last year on the strength of unit revenues solid execution against our cost plan again, and a modest decline in fuel prices. This was our fourth consecutive quarter of a.
Movement and the largest.
For the full year adjusted pre tax margin was 12% a 3.1 point improvement over last year and meaningful progress on our path to 13% to 15% margin profits increased because our teams executed well on the initiatives, we laid out at our 2018 Investor day.
Our fourth quarter unit costs increased seven tenths the percent of a percent on 3.5% increase in capacity, we weren't happy with the result, we did have a modest reduction in capacity given decembers weather and some related costs, but we also saw some late adjustments to employee benefit accruals, including high dollar adjustments to pilot disability accruals.
And large medical claims that came into the last couple of weeks of the year.
Brad mentioned, our performance based pay program and I thought it might be useful to connect one.
Excuse me connect our year end benefits related adjustments to the PBP payouts earned by our people. These late adjustments reduced the payout of an employee making $50000 a year by $275, we need to improve the structure. These programs to better manage these costs perspectively.
Overall, our full year cost performance was solid our teams across the company both an operational roles and support roles did a nice job developing aggressive plans and then hitting that it's notable that our full year CASM increased only two excuse me, 2.3% on 2% SM growth you might recall.
Paul that our initial guidance for 2019 was for 2% to 2.5% unit cost growth, we achieved that while absorbing $48 million of costs associated with the new collective bargaining agreements with our I am and Amp represented employees not in the original guide.
Productivity was good but we still have lots of opportunity to get back to peak performance overhead was down 3.5% or $25 million year over year helped by the outstanding work of our supply chain team and they're very successful initiative to improve terms with our business partners and the steps we took to rightsize our corporate staff.
Factors more work underway to simplify reporting structures and make us more agile.
Now over to Shane.
Thank you Brannan and good afternoon everybody.
My remarks today will touch on both capacity in cost guidance for 2020, and then briefly on our fleet plan and owners manual.
Regarding capacity it remains our intent to grow between 3% and 4%. This year. This does assume a mid year Max returned to service, which given Boeing's press release last week and the likely requirement for Sim based training from active pilots is still uncertain.
Regarding cost guidance, we believe unit costs will be up about 2% for 2020, excluding the impact of a new agreement with Alaska's pilots I would also note. The two percentage excludes any impact to capacity due to the Max delivery timing as well as any costs associated with potentially required training related to returning the Max to service.
Well continue to update both our capacity in cost guidance as we gain more certainty about the timing of the 10 Max aircraft. We are scheduled to receive this year.
To discuss costs a little further we just wrapped our annual budget process and although I'm happy that we have a plan that will again grow our pre tax margin. We continue to have opportunity on our cost structure.
As you know during integration, we intentionally de prioritized to a modest degree our cost focus.
That is now behind us and we know that our long term health the secured only with the ability to offer low fares and high value targets.
And that to offer low fares, we need to be relentless again in our focus on efficiency and low costs.
While goals our aggressive for 2020 in light of a few large headwinds we're committed to demonstrating our continued focus on cost discipline in the quarters in years ahead.
For Q1, specifically, we expect unit cost increased roughly 3% on the 4% SM growth Andrew mentioned.
Another important area of focus is our long term we plan, we have an opportunity to replace 61, Athree 19, and Athree 20 aircraft with larger gauge more efficient asset either Mac signs intense or Airbus 320, when neos, all of which would give us the ability to generate more revenue while lowering unit costs.
The economics of up gauging over the next several years are compelling.
And we're looking forward to finalizing plans to do this as one of our main 2020 objectives. The ultimate timing of a fleet transition will be balanced to smooth incremental training costs, especially of moving to a single fleet and will also be done in a manner that ensures we can meet our free cash flow and capital return goals.
We'll have more on this topic in the quarters to come.
Lastly.
Then talk to you about our owners manual which is something we're excited to share more about later this spring.
Alaska led by brand in these past 10, plus years has established a history of balanced and consistent capital allocation balance sheet health and cash flow generation that has served the company our guests our employees and our owners well.
The owners menu oversight will serve to build on this history by documenting memorializing goals in several areas, including free cash flow generation leverage returns to shareholders ROI and pretax margins. It also discusses the factors that have driven and will drive our continued success, including the way we serve customers.
How we offer value too and create loyalty with guests and the critical importance of operating with excellence in being a great place to build a career for our people.
As Ben said, we will share the in May at our shareholder meeting and with that one last volley back over to Brandon.
Thanks, Shane turning to the balance sheet, we ended the quarter with $1.5 billion in cash and marketable securities. We produced a record $1.8 billion of operating cash flow before pension funding on net capex was approximately $700 million, resulting in $1.1 billion of free cash flow a 760 million dollar.
Improvement over last year free cash flow conversion was exceptional at approximately 140% Capex was lower than planned because of Max delivery delays, but planned Capex was also low because of the intentional constraints, we put on Capex two years ago in order to improve our ability to generate free cash flow.
Our number one capital allocation priority for 2019 was to read deleverage our balance sheet, we paid off more than $600 million a balance sheet debt and have now paid off $1.5 billion or 75% or the amount we borrowed to acquire Virgin America, we closed the quarter with a debt to cap ratio of 41%.
And with a trailing 12 months net debt to EBITDA ratio of <unk> 0.9, 0.9 acts.
We also made a 65 million dollar contribution to our defined benefit pension plans, which are now 86% and.
Last quarter, I mentioned that our treasury team was working hard not only to prepay debt, but to restructure the debt that remains to take advantage that low rate environment, they've done a great job. We have one of the half billion dollars on balance sheet debt remaining 79% of that is fixed and the overall portfolio rate is currently 3% current maturities.
Average only $250 million per year over the next three years rounding out our fortress balance sheet, our 113 unencumbered mainline Andy 175 aircraft and $400 million, an undrawn lines of credit.
On the capital return side I Hope you all saw that we once again increased the dividend. This time by 10 cents per share or 7%.
Signaling our boards confidence that were on the right track and our current expectation that 2020 profit will eclipse that of 2019.
Given that our Leverages basically where we want it we're poised to increase returns to shareholders with the going in assumption that share repurchases will increase by more than three acts to $250 million. This year when combined with the higher dividend, we expect to returned $430 million to our owners. This year, the second highest amount in our history.
Before we go to Q and a half thought it might opt for some closing thoughts through a more personal lance first you've heard about our competitive advantages they are real and durable, but the secret sauce of this company is our people sure that might sound cliche and I know investors camp model it, but it's actually the truth not just the way that connect with our gas.
Yes, but how resilient and determined they are across all corners of the special company. Despite our 87 year history of being the underdog second I couldn't be more enthusiastic about our new CFO theres nobody here better than chain at understanding the profit drivers of our business and finally, we have an awesome strategic plan thats exactly the.
Right plan for where Alaska is today and we have an exceptional group of leaders, especially those around this table that had been incredibly lucky to work with who will make it come to life, it's going to be fun to watch and with that let's go to questions.
Okay.
At this time I'd like to.
I would like to ask your question. Please press Star then the number one.
Telephone keypad, we'll pause for just a moment to compile the Q and a roster.
And your first question comes from the line of Catherine O'brien with Goldman.
Good afternoon, everyone I.
I think I'd be remiss, if not start off by saying congratulations branded on your retirement, but I'm sure you know that you'll be missed by off.
And then from there I guess I'll start off with a cost question.
Just on your 2020 cost outlook.
Thinking back this year as you know costs were up 2.3% on 2% capacity growth, which as you. Just highlighted includes about 100 basis points labor headwinds from new agreements, we starting this year.
And then in 2020 are expecting you to cost increase a similar amount and what could be 150 basis points more capacity can you just help us walk through any headwinds facing this year or any big Castilla dropping from 2019 help explain that pick up in your call. Thanks.
Yes, Hi, Kt this machine I'll take that and just to reiterate I do think we had a really good year in 2019, if you recall at Investor day in 2018, we laid out.
A multi year sort of roadmap that that.
Articulated a $160 million of cost savings that we were going to go after over the next couple of years I think we did really well on a number of those selling related expenses constraining overhead, which was down $40 million branded mentioned the supply chain work that was done this year.
So thats all really good we do have more work to do on the productivity side of the business asset utilization utilization side of the business.
In order to get those unlocks we need to be able to grow more and to do that we need more stability in our fleet plan.
We need to unlock some of some of the constraints in the way of growing which include crew training and again, just sort of knowing which aircraft are going to have over the next year too. There are a couple of headwind areas principally airport related cost. This is a place we used to be superefficient that it was maybe three or 4% of the cost structure at seven or 8% now and I.
It's going to be elevated for a while as aging infrastructure in airports does need to be upgraded and we understand support that and then we do have a big maintenance.
Sort of driven expense item this year, both on the Airbus and Boeing side, a lot of the Airbus related costs are related to beginning to account for lease returns that began in earnest next year.
Okay, Great and you just one quick follow up on that one so on the lease returns do you have any sense of or could you give us some color on like what portion of the CASM ex that's driving this year.
Thanks.
Yes, Katy I think we do know that but I don't think were given that level of detail out.
On the call.
Got it and maybe just one one more on the Max.
A couple of your peers were negatively impacted by loss capacity, describing the Max and 29 team has reached agreements with Boeing.
That should reduce capex going forward could we see downside to your 750 million Capex forecast not only this and the timing shifts that also for potential reduction and purchase price.
The Max remains out at service due later this year. Thanks.
Hey, Kt, it's not pieper how are you.
Thanks.
We're talking with Boeing as I think every other airline is on the planet right now with potential delivery schedules. As you know we were supposed to have three airplanes last year and take seven more in 2020.
It's part of our longer term fleet strategy and looking at growth and replacement going forward.
And there is just going to be more to come on that.
Understood. Thank you.
Okay.
Your next question comes from the line of Savvy said with Raymond James.
Hey, good afternoon.
Okay.
Just a little bit.
This side of the quantitative question on CASM ex that anything saying you mention that you're the plan is to expand pre tax margin.
Kind of curious on on the revenue size it seems like.
This I'm confident that maybe you outperform then this could you bill to continue outperforming the industry.
I'm not quite clear on kind of all the drivers than what gives you confidence as with everybody having.
Is that various revenue initiatives and I just wonder if you could talk a little bit more about that.
Hey, Savi, it's Andrew.
No I think a lot of things that we've had an opportunity to do that we're going to continue to see the first thing is as we as I said in my prepared remarks, we do have carry over synergies and initiative.
That that are quite significant.
In much the other carriers had their basic economy in already and of course, the synergies from cross leading and other things so thats a benefit thats going to come through.
The other thing is that we are really hitting our stride now we're squarely focused on running our core business. The network pain is doing a magnificent JOL, but getting seasonal schedules tied up more efficient more productive working with the ups groups and we are now moving away from integration is squarely focused on getting our revenue initiatives in.
More quickly and doing a much better job of it overall from what I'm, saying and if this quota we feel really good about how will those things are working together on the revenue momentum front.
And then brand then if I might ask your question. This is Brad Brad pointed out you've been doing a specific alaska's seniors and I think longer part of Alaska.
Just wondering over this time can now what you consider to be advantages that Alaska has today that did you didnt see.
Joined and maybe what are the challenges that you see today that that are different than that maybe kind of.
Yes.
Hi, savvy and that's an interesting question just off the cuff.
What I would say is we're way more discipline than we were 16 years ago and that just comes from us maturing as a company in getting a better leadership team and focusing more on process that cuts across the operation and how we think about our service and also things cuts across the the finance part of the business as.
Well.
In terms of challenges going forward I think it's just continuing to grow profitably in an industry, where four carriers have 85% market share, but I'm confident as I said that we've got a mix of competitive advantages. Some some tangible and some intangible that will allow us to do this going forward.
And I'm really optimistic about the company's future.
Thank you.
Okay.
Your next question comes from the line line of Joe Palmetto with Credit Suisse.
Hey, good afternoon, everyone.
Congrats again brannan chain, Congrats Kyle thing data lots of congratulations to go around over there.
As you as you work on putting together your five year plan, how is the uncertainty around the Max impacted that process internally I have you had to delay certain decisions or could even be seen as an opportunity as you revisit your delivery schedule with Boeing.
Shane you talked about how you're thinking about up gauging might this actually afford you more flexibility in terms of fleet or Capex planning as you think about putting together that five year plan.
Hey, Joe it snap deeper again.
I think what we've been focused on is really defining our fleet requirements for the next five to 10 years, covering our replacement needs and covering growth Shane mentioned, the 61 Athree Nineteens in three Twentys that we currently operate and those are the airplanes that are the primary candidates for replacement we're looking at the Max now.
And on the Max and looking at the Athree 21, Neo and then theres going to be up gauge benefits for us with that better cost performance better revenue performance.
These challenges with a Max did cause us to rework the sequencing of events and some of our timing, but we're confident.
Over the next six to nine months, we're going to come with with a good decision for Alaska.
Later this quarter, we're going to start the acquisition process, we're working through the summer and we're confident we'll come up with an answer and third quarter fourth quarter of this year.
I appreciate that thank you and then maybe just a quick question on this owners manual understand more details to come at the annual meeting. We certainly look look forward to that but just can you describe the document a little bit more in its intended purpose is that something that would.
Be accompanied by formal changes to the proxy management compensation structure is it more sort of a philosophical document or guide post for management, just how should investors think about that that document. Thank you.
Hey, Joe This is Chris Barry It really is more the latter I mean, it's it's it's a pretty comprehensive document but shares our competitive advantages our management philosophy, our style and then really sets up these guidepost for a long term financial performance and so you'll see that laid out and the owners manual will.
I will spend more time with you all after we make those announcements to share more in the detail on the sausage, making but that's generally how it's laid out.
Got it thanks, Chris.
Yes, Chris gave a great answer I might just sort of maybe add some perspective from the board are our board of directors got very interested in this process, we had two or three investors come and speak with the board 18 months or 24 months ago. When the basic idea was we feel like we do articulate how we bring value to our communities to.
Our customers to our employees and they really need us to us as they get more articulate about what the deal is for people that owned the business and.
I think we've had a lot of been putting the manual together I think I hope I don't.
We.
Put it out there I hope, you'll give us feedback, but it's.
Is that we don't want our stock to be in trading vehicle, we don't want as a shareholder roster to be filled with short term investors. We want this to be a fantastic placement for you to invest over decades, and we want to be part of.
Getting more respect for the industry getting people that invested the airlines based to have a.
Mindset with they invest that it's going to be a great long term investments. So that this is sort of us taking a stab at putting making some commitments. We know that we've done well when we made public commitments by what we want to do so.
Ben prisons that will roll this out in may, but we're anxious to get your feedback do it and then have again better as we move along.
I appreciate that insight thanks, Brad.
Your next question comes from the line of Hunter, Okay with Wolfe research.
Brandon congratulations than it's been a real pleasure working with you do.
Thanks Hunter.
Sure.
So I had a question.
Did you want me to say, it's been great working with.
Yes, no that's enough for now thanks.
Given your comments ban on hub congested and changed some of the comments you made about rising airport costs. So what's the company view on this proposed second airport in the Seatac region. Thanks.
I think you're talking a painful.
No I'm talking about the proposed didn't the city Council talk about those me. Some proposal is going to be debate at some point in 2022 about building a second airport in the region just completely from scratch.
Yes. This is a great chance for Diana Bergen Rocco to jump in and she has been working on this hotter and I and why do you share sure sure. Thanks Hunter you've been.
Leading some good Washington State news so on the legislature passed a bill last year to set up Buck.
Governor Commission to answer Governor commissioned.
Board to look at potential options for growing capacity across the region.
That could be it pain field that could be at another airport in the region and asked for a recommendation to the governor by January one 2020 to change owners, who is our vice president of airports is on that commission along with many others and we're very interested in the results, we certainly know that.
We have fantastic growth in this region, we have constrained airport space and we want to make sure that we can continue to grow.
Yes, what's your what's your view on a do you do you wanted to happen or I mean, what's your what's your company view.
Yes, we do want it to happen, we're really glad that that commission was set up we don't have a bias yet as to where that capacity.
Increase occurs obviously theres some underway at sea Tac, but we need more than that and we're anxious to get through the evaluation to make sure we'd have a thoughtful answer about where anymore, maybe one location it maybe more than one location at the end.
Okay, Great. Thanks, and then second question, Andrew you talked about dumb.
Sort of the revenue initiatives and network initiatives. It looks like seasonality is kind of creeping back into the TNL little bit and that means that margins Q1 in really good margins in Threeq. You you can kind of got away from that a few years ago and the balance was something you talked about.
As you make network changes to sort of return to areas of strength does it also reintroduce a little bit of sort of quarter to quarter seasonal imbalance in your annual earnings results is that something you're trying to manage.
Yes, that's being squarely on my teams radar in fact just to be.
Frank I'm watching January and February of this quarter very very closely.
Because we made some very significant network moves and what I'm seeing right now is very decent load factor increases accompanied by yield increases so I think going forward.
Our job will still be in the first in the fourth quarter, but the first quarter is really our biggest challenge and I think.
As we move the network around as we upped gauge as we do a lot of other stop I think we'll get this a little more in line, but this quarter is probably going to be always the weakest.
Okay. Thank you.
Our next question comes from the line, Michael Linenberg with Deutsche Bank.
Oh, Hey, everybody just echo the sentiment of everyone else unbranded, it's been a great rod.
So.
On that note I'm going ask a pension question, but you can flip.
Wow.
One more pension question right, but I don't know if you may have mentioned earlier, but do we see.
2020, do we see a benefit in the nano from.
Good returns in your pension in 2019.
Yes, definitely the non a portion will be a small favorable improvement year over year.
Okay, Great and then just my second question and maybe this is more to two Andrew when we think about you talk about growth.
I sense that.
All about margin growth and earnings growth, but we also look at sort of where your supply growth is relative to the industry and the 3% to 4% number if we were to go back.
12, plus months pre Max was that was that where the planning was for 2020, maybe 2021 or is that maybe even a bit on the low side, because you had some pretty meaningful network changes. It does seem like you pulled back some transcons and some longer hauls that three 4% how how.
Has that changed there maybe maybe post Max is what I'm asking that yet.
That's good question I think well for 19, we were more.
Deliberate about slowing outgrowth as we tried to get the integration behind us.
I would say for 2020 outgrowth is lower than we would like just to be honest and the Max for sure has pushed on that a little bit but also.
We're working through this multi fleet and crew.
At the end of the dive as we've shared is 4% to 6% growth and I'm I'm looking forward to I'm getting through some of these decisions and challenges. So that we can move this bullet.
Okay, Great just one just let last word of brand and I, presumably you pick the March we the first week of March because thats when S&P upgrade seed investment grade right, we should assume less you man.
[laughter] congratulations.
Thanks.
Your next question comes from the line of Helane Becker with Cowen.
Thank you very much operator, and brand and I will echo everybody else's comments, we'll miss working with you Shane we're looking forward to working with Theo.
And brand and I'm looking forward to seeing what your next.
Chapter is going to look like.
So two questions one is.
Are you doing any accrual for prospective contracts like for the pilot contract or is that and after the fact item.
No. It's an after the fact item for us.
Okay and then my next question is kind of unrelated to some other things we've talked about so far.
Would you know I know you guys have a lot of.
Co chair agreements and interline agreements with various international Airlines, especially ones in Asia, and China, and I'm wondering if you're seeing any.
You know declines in passenger transfers.
Between.
Your airline and and those airlines or if it's way too soon with with what's going on in China.
Hey Lane, it's Andrew.
Yeah, we've looked at it the international connectivity to and from especially China, and some Asia has a very small number for us and so.
As we look at AD growth and traffic right now it has not been impacted at this time because of this.
Okay and then just one other question on Trans Con do you have to rethink your decision not to have lie flat seats.
Do you know grow that business or are you not gonna grow that business going forward. Thank you.
Yeah. Thanks, Helane, you know actually that's a fair question, but I have been extremely encouraged.
By what's happened in the Trans Con business, how we've restructured our pricing in the product and the loyalty growth that we've seen so right now the product that we have onboard is working very well for us and I still see upside even going forward. So for me right now lie flat seats.
Not something that I'm consider that we're looking at.
Okay, great. Thank you think line.
Your next question comes from the line of Joseph Denardi with Stifel.
Hey, good good evening, everybody brand and congrats.
Yes.
I feel like some of the commentary around the fleet transition and the the capital that could go with that was a little bit cryptic. So can you just maybe provide a little bit more clarity around.
Maybe how capital intensive the business could get over that period or what your commitments in terms of returning cash to shareholders would be through that thank you.
Hey, Joe It Shane.
Yes, we're not sort of in a position to.
To have a lot of precision around that just because we don't know what this deal might look like or deals might look like as we go out and look at.
Acquiring aircraft, but certainly.
Six replacing 61 aircraft over a period of time is going to require some capital a lot of those at least today, there's a chance that we could replace some of those with leases.
But our goal is to sort of get the best value in the best deal for Alaska as we go through this process with the manufacturers and we'll say more about this when we roll up the owners manual, but but also be very committed to.
Returns to shareholders.
Assuming we have good profitability, which is what we're planning to have over the next several years and Joe its brand and maybe just a follow up thought it it's not intended to be cryptic at all it's really just the uncertainty around the timing and what we actually do that will drive capex for the year, but just to reiterate what chain said, that's really one of the purposes of the owners manual is still out.
Some guidelines to make sure that we're meeting our commitments on balance sheet strength and free cash flow generation.
Okay and then.
Brad I think either you or brand and have mentioned how much of the Virgin debt pay down about 73 times over the past 12 months. So clearly something that you think is important can you just help us understand what we should interpret that as like what happens when all the debt is paid down why is that so important in.
Thank you.
Yes, well.
We it was we've never done in M&A before I, if I recall, we paid $2.6 billion the equity value for Virgin America, We finance too.
We were $2.1 billion of that with debt brand that you can audit me as we go here, but that was different than we are super proud of a very conservative balance sheet, a conservative financial profile and it was important to us to get the balance sheet back to what investors think of what we how we think of ourselves as quickly as we could so we are really proud.
Do have paid off.
75% 2 billion and 74 times or whatever that we.
Mention that I think the other reason as important as all of this in some of the messaging we're trying to do today all of this positions us to move forward now it is.
As you go through every you always learn things but.
These are big things, there's all kinds of systems and brand loyalty and single certificates reservations. There's so much stuff that needs to be done in for a while you are actually really held into that space, but what we're trying to say that's behind US now were no more looking through the rear view mirror. We're looking forward were what are the things that may.
Good Alaska, Great what what are the things that make a great for investors and customers and investors sorry investors customers employees and let's let's.
All lines through the front windshield moving forward continuing to make a great airline even better. So that's what we're that's the messaging we're trying to do I'm not sure how well we've done it but that is our mindset.
Thanks, Brad.
Yes.
Your next question comes from the line of Jamie Baker with JP Morgan.
Hey, there another shout out to branded and you know it's important to me to try to one up 100 sentiments in particular, so I'm actually planning to send you an aircraft model was again once you've left because at that.
It won't run it fell apart.
Let's say.
Yes, Thanks, Jay what the perfect yeah.
Question on.
Two week Road show that Brad spoken previously about in the prepared remarks.
You know, presumably the mood amongst the Reg farm was positive but can you identify the typical areas of you satisfaction.
Hi, Jamie its Ben.
Im thinking back within several road so.
So our big hubs.
There were a lot of questions.
You know related to.
Some internal things internal systems that we needed to operate better within the company. So it's.
And this will be stuff that poor as you guys with time, keeping systems and scheduling systems.
I would say overall what was really good for me my Big takeaways. They were really energized about the vision in the plan over the next five years there was growth.
And.
And the Big thing one of the biggest things was that the Virgin America questions weren't there anymore.
People are showing as one team and it just fell for the first time in three years doing all these road shows that it felt like the airline was was it was one and that was so inspiring and again, we did all are big stations. There was a with a lot of fun.
Okay. That's helpful second.
When I think back you know pre merger Alaska went through a phase of innovation.
I think during the first would sell printing bag tags I remembered experiment with our key chain that would check customers and when they enter the terminals. So obviously that switching back.
Before smartphones.
Not going to impact my 2020 model or anything but.
Phase.
I'm wondering if the March to 13% to 15% margins also includes.
Once again, pushing the envelope in terms of technology and I'm thinking more about what customer experiences not so much.
Confusion is this also a mandate for choose area.
Hi, Jamie this is Andrew it absolutely is and I think if you just look at the airline industry today, it's not as much about networks anymore, obviously for the big guys I fly everywhere. It's about the guest it's about the interaction of the guest it's about making it easier.
Meaning that all together and I think on the innovation front.
We got distracted by the integration on I think what I'm really excited about is organizationally.
And I think it's okay to say two we also have a an audit excuse me at we have a subcommittee of the bullet now yes, that's focused on innovation that drew and I are accountable to so I think you're going to see some real momentum gave you are right 2020 won't be started but on the next few years is a big focus for us.
I appreciate the color take care everybody.
Thanks, Jamie.
Your next question comes from the line of Duane Pfennigwerth with Evercore.
Hey, Thanks, no not much more to a to add at this point best wishes brand and on the next chapter.
Not sure if you'd be willing to talk about it but do you have a non compete and if you do how long does it left.
I would add last 15 years.
I'm actually not willing to talk about it because it's not focused on air group going forward. So next question. Please.
Fair enough.
On free cash flow.
Great to hear your stepping back up but the buyback in 2020.
I'm just checking the math a little bit because if you truly are done re de leveraging hi feels like it could be substantially bigger than than what you've outlined so should we think about this as a starting point or are you looking to build cash for now.
Joining me I'll take that one yes, we're not looking to build cash we ended the year with 1 billion five that's probably about where we see it ending next year as well Youre absolutely right with the math that you are doing.
There will be more but it's all dependent on what we end up doing with the fleet decision. That's why we started at 250, but we're going to be flexible on that and we have capacity under our existing repurchase program to do more than 400, So we'll wait and see.
Thanks, and then if I could sneak one last one in for Andrew sorry for the baseball analogy.
What what inning would you say you're in with respect to the premium revenue push.
Both in inventory availability availability and your ability to merchandise. It. Thanks, thanks for taking the questions.
Yeah, I would say where sort of in the final innings as far as putting the inventory on the shelf. We took 20 507 fives and all the conversions were now turning over to you know Upselling and all the rest of it and we've got we've got ways to go there to do better jump there.
Thank you.
Baseline.
Your next question comes from the line of Brandon Oglenski with Barclays.
Hey, this is actually that was news kian for brand and first congrats brand and but I. Just had one quick question. One that is think about you give additional color on how should we thinking about growth. This year last year was focused on regional the share shift towards the mainline.
Whether that's new markets.
And then in the case of Max now returning what what levers potentially could you pull that potentially mitigate the impact whether it's usually utilization or anything else.
Yes, but basically.
The.
I'm, sorry, I got distracted growth into where it was reasonably geographically, where it's going to be Amazon com God. We grow the growth is 100% mainline regional shrinking just a little bit and then we do have some levers to pull 'em, whether its paint lines mud lines with some other things that we really don't want to but if we needed to we might be able to squeezing more out.
But possibly Airbus lease extensions as well.
Okay. Thank you thanks, Matt.
Your next question comes from the line of Myles Walton with TV.
Good evening.
Thanks for taking the question I was wondering the context of the 3% to 4% how secrets, you're looking for in 2020.
Kind of what you're looking for from the regional versus the mainline and also in the context of your fleet planning decision.
How intertwined is the exercise of the options on the 170 fives.
To the decisions on the mainline side and do they kind of have to happen in sequence.
Just on the growth as it just yet it's all mainline this year regionals, but down yet on the question about the options for you when 70 fives. We've we've done a bunch of regional growth reason, we were going to focus on mainline fleet plan over the next several months and then by the end of the year miles, we do plan to make some decisions about what we want to do with the regional fleet over.
The 10 year period as well.
And you guys have that kind of unique advantage of having in the past operated the single Cleveland going get the complexity of the second type and I know in the prepared marks.
You hinted at the devaluation of that single fleet benefit can you maybe layout.
Economically what you've seen as the complexity cost of the tool fleets and maybe what that is as a put if you decide to maintain a dual fleet.
Hey miles I might not provide a specific number we do we have looked at it there clearly some hard costs associated with just just crew and some maintenance provisioning and those sorts of things. Some training there are a lot of soft costs that sort of get lost that it's hard to quantify around just schedule efficiency and making sure you have the right planes in the right.
The right cities on every single flight and it gets more complicated during a regular ops, but.
It's not insignificant in so if we maintain a dual fleet will just need to make sure. We can get the revenue out of the aircraft.
Alright. Thanks.
Your next question comes from the line.
Darryl Kennedy senior with vertical research.
Hi, guys. Thanks for time.
They're up.
Andrew as a as a follow up to saw these are the 2019 RASM outperformance in the industry.
Really just reverse the underperformance that you saw in 2018.
Despite the synergies and commercial initiatives. So just wanted to.
Matthew when you say you will be similarly, you think you'll be cylinder successful in 2020 do you think that you have enough in the toolbox actually outperformed domestic industry RASM in 2020, particularly starting in the second quarter one the prior year comps start to get more more difficult.
Yeah, again, I'm only going to comment on the first quarter, but I think what I would share is is that we have some good initiatives and some good momentum here to continue to grow unit revenues.
Every quarter this year.
Okay.
And then brand and I apologize in advance.
Because the overall body of work speaks for itself.
But chain without completely front running the Investor day message, what do you think Brendan might have done a little differently over the last 10 years.
[laughter].
Yes.
[laughter], you know Grand and was a particular stickler for not allowing us to enjoy box lunch, but expect work at the same time, but I'll probably adopt that it was a good a good message of reality.
Yeah.
Okay.
And then brand and now that.
Machine has completed the hearing of grievances.
Horrible away as possible how sympathetic to situation where are you feeling when you came up with 2% CASM ex guide.
Uh huh.
Honestly, I am really and not to Dodge the question I actually do love the discipline, we have in the 2020 budget and I know everybody is aligned around just really getting back to a place where we reinforce that competitive advantage. We have that is the cost advantage and.
I don't know what you thought of the headline 2% number we've got some.
Uncertainty with respect to capacity, but I'll tell you we are really focused on making sure that this place rocks when it comes to cost performance.
Great. Thanks, a lot guys congrats.
Thanks, Operator, we have time for one more question.
Okay and your last question comes from the line of Dan Mckenzie with Buckingham Research.
Hey, Thanks, Good afternoon, everybody. Thanks for squeezing me in here, Congrats brand and chain nicely done.
When everybody else here of course.
So I guess, a couple of questions, Andrew or Shane I Wonder if you can elaborate a bit more on how you plan to integrate them access into the fleet once they come.
Specifically once you get the Green light from Boeing how much time are you building in for filling the plane before they go into service.
So like a one month booking window two months.
And I'm just I guess, what my question is getting at is could the shorter booking window.
On on system revenue.
And our the new revenue initiatives that you you kind of outlined it tended to offset some of those those challenges.
Yes, Dan.
We've got we've got.
Pilots.
That are available to fly I think at the end of the day, what I would sizes that we're going to stop this thing off we're just going to quite up and down the west coast, but we will have enough flexibility given the number that were getting to be able to we these into the schedule maybe first as phase and then build into revenue production over a period, depending on the market 60 to 90 days.
Andrew I think it's true we're going to sell as if we plan to lift the capacity one way or the other so I'm not going to shorten the booking window, correct, where we intend to deploy them access.
I see okay, very good and then.
The reference on the premium revenue revenue in the repaired prepared remarks, what does the planned growth and premium seats this year and.
Where are you at in the premium seeding reconfiguration of the Virgin fleet.
So were.
The growth is going to slow significantly we've got about 20 units.
Good.
Of which the front Kevin goes.
From eight seats to 12 seats.
But at the end of the day when now really down the opportunity is now we've got all the premium cost out there all the 175 out there and all the conversions, it's really the up sell and growing that nicely.
Understood. Okay. Thanks for the time you guys.
Thanks.
And I think that is my understanding is correct I think Dan Mckenzie was our last question for the quarter. Thanks, everybody for joining and thanks for being a part of this and we look forward to talking with you. After the first quarter earnings than we as Ben said I Hope many of you can join our.
Shareholder call, where we talk more about the owners manual thanks very much.
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