Q2 2019 Earnings Call
After the speakers remarks, there will be a question and answer session for analyst.
If you wish to ask a question. Please press star one on your telephone keypad. If you would like to withdraw your question press the pound key thank you.
I would now like to turn the call over to Alaska Air Group's Vice President of Finance and controller, Chris Berry.
Thank you for you I'm good afternoon, everyone and thank you for joining us for our second quarter 2019 earnings call. It's good to be back to you.
In today's prepared remarks, if you will hear updates from our leaders, Brad Tilden, Ben Minicucci, Andrew Harrison and Brandon Peterson.
Several other members of our management team are also here to answer your questions during the Q and a portion of the call.
This afternoon, Alaska Air Group reported second quarter, GAAP net income of $262 million, excluding merger related costs Mark to market fuel hedging adjustments Air Group reported adjusted net income of $270 million and adjusted earnings per share of $2.17 ahead of the first call consensus.
These results compare to adjusted net income of $206 million and adjusted earnings per share of $1.66 in the second quarter of 2018.
Our adjusted pre tax margin expanded 300 basis points and our earnings per share grew 31%.
We generated $735 million and free cash flow and we paid down an additional $140 million of debt during the quarter, bringing our total debt payment up to $1.2 billion of the 2 billion, we borrowed for the Virgin America acquisition.
This quarter marked great progress toward our long term goal of 13% to 15% pretax margins.
And as a reminder, our comments today will include forward looking statements under expected future performance, which may differ materially from actual results.
Information on risk factors that could affect our business can be found in our SEC filings.
On today's call, we will refer to certain non-GAAP financial measures such as adjusted earnings and unit cost excluding fuel and as usual we have 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 to Brad for his opening remarks.
Thanks, very much Chris and good afternoon everybody.
We're pleased to come to these agreements with the finest employees in the business and we're hopeful that the agreement with our I am represented folks ratifies in the coming weeks.
On the revenue side I thought we also had a good result this quarter.
I want to thank our teams and revenue management E Commerce, and marketing who had the best improvement in unit revenue that we've seen in the past 30 quarters.
We're currently in the middle of the busy summer travel season, and our people are running an excellent operation and taking great care of our guests.
Genuine and caring service is what makes Alaska different and we're also proud of our 22000 folks at Alaska and horizon for earning their 12 consecutive JD Power Award.
Along with other recognition we've received from the American customer satisfaction index, causing us travel and leisure wallet hub and many more it's clear that our folks are doing a terrific job.
The JD Power award is especially gratifying this year.
As we passed the 800 point Mark for the first time in our history and as it was the final award and the traditional network category carrier category as the categories of change going forward.
Our results for the first half of the year make us optimistic about the rest of 2019 and beyond.
As you all know we're running our business. So this will be a great place for our people to work a great place for our customers to fly and very importantly, a great place for our owners to invest.
We've got more work to do to execute our plan and we're fully focused on getting that work done and with that I'll turn the call over to Beth.
Thanks, Brad and good afternoon, everyone in the second quarter total revenues grew 6.1% to $2.3 billion on a 1% increasing capacity as unit revenues increased 5.2% well ahead of our initial guide of 3.5%.
Our pre tax margin was 15.8% 300 basis points better than prior year and our adjusted earnings per share improved 31%.
As Brad mentioned, we still have plenty of work ahead of us, but the momentum is encouraging for example, the recently ratified transition agreement and integrated seniority list with our technicians brings our Boeing and Airbus mechanics, together and provides a two year extension, giving our technicians and the company more certainty through 2023.
The agreement recognizes the high caliber of our maintenance team with pay increases signing bonus and enhance productivity.
This integrated agreement is a significant milestone at Alaska as we now have joint agreements and integrated seniority list with all of our work groups and less than three years from the date, we acquired Virgin America. It has a huge accomplishment.
And allows us to come together as one team continue to build on our strong culture and fully leverage the synergies we plan from the acquisition.
I also want to thank our 5200 I am represented employees for their absolute professionalism over the past several months as we finalize the recently announced tentative agreement for a new five year collective bargaining agreement.
With our last deal signed over five years ago. This group was the further out of market among amongst all of our labor groups and represents about 25% of our employees.
We won't know the results of the vote for a few more weeks, but I'm excited to get these well deserved raises and improvements to our folks represent Alaska, so well and deliver outstanding guest service day in and day out.
These two agreements will increase our wages and benefit costs by approximately 50 million annually and about $48 million this year, including onetime signing bonuses and other costs of approximately $24 million. The impact of these new agreements is included in our cost guidance today.
We are pleased the company these agreements and we want to thank the I am an emphasis for their continued partnership as we work together to provide great wages and benefits for our people and set the stage for a successful financial future.
Our focus over the next few years is on implementing the initiatives on our roadmap to build brand strength.
And prove our product and guest experience and to strengthen our financial muscle as we strive to where to best in class investment for long term owners.
Looking back on the second quarter here are some of our biggest accomplishments.
First as Brad mentioned, our employees were awarded with our 12 consecutive JD Power Award a true Testament to the exceptionalism of our people.
I couldn't be more proud of the hard work they put in everyday to take care of our guests and run a great operation.
Second we are now realizing the full run rate of the $330 million revenue initiatives and synergies we launched over the last several months.
This includes the increased benefit from the cross fleeting of our higher gauge lower unit cost boring aircraft into the most capacity constrained markets with overflow demand we should see the biggest impact from these changes these changes during the peak summer travel season in Q3.
Third we completed the painting on all of our Airbus aircraft and we are 25% through the interior renovations, which will provide more premium seating and increased revenue per aircraft fourth after a rough operational start to the year due to the Pacific Northwest storms, we have climbed our way back to first place year to date for on time departures and second place and beauty on time arrivals I'd be happy to address the nuance of these two measures in Q any for the second quarter. We were first among the top carriers in both of these categories and on the regional side Horizon is topping the leaderboard when it comes to operational performance number one and the regional industry year to date by a wide margin I want to give a shout out to the entire team at horizon for a complete turnaround in their performance over the past couple of years.
Each of these along with the everyday accomplishments of our teams across the company is pushing us to be better tomorrow than we are today, we talk a lot around here about turning that dial a little each day to make incremental improvements, we're always pushing ourselves to be better says we continue to turn the dial and with the win now at our back I'm confident in our teams ability to outperform and with that I will turn the call over to Andrew first commercial uptake.
Thanks, Ben and good afternoon, everyone.
My comments this afternoon will focus on the second quarter revenue performance.
Yes pricing initiatives and revenue guidance for the third quarter.
The 5.2% improvement in unit revenues was a welcome were result of what was a volatile revenue environment in the first quarter and represents our best unit revenue improvement over the past seven years, and our best absolute Q2, RASM in the past three years.
Industry pricing stabilized for the most part as we ended the second quarter, which included the dissipation of low closing days.
As we entered this year, we had a goal of outperforming industry RASM by approximately 200 basis points.
We the industry RASM by approximately 190 basis points this quarter.
Thanks, Max related unit revenue outliers to some carriers.
Our revenue initiatives and synergies delivered on that goal.
Breaking Q2 down further.
I'd like to provide a bit more detail on the year.
The unit revenue increase first intensive challenges.
Although not as impactful as the first quarter, we continue to see softness in Hawaii pricing due to the significant year over year growth in overlapping weighted competitive capacity of 6% to 7%.
We also saw increased industry capacity from the low 48 into the state of Alaska.
Putting some pressure on our loan full Alaska yields.
This competitive capacity continues through the peak summer period.
These two regions represent about 22% of our system with unit revenues negatively impacted by about 50 basis points.
Which is less than what we had originally guided to.
Turning to the positive as strong revenue performance was driven by the following key areas.
Good synergies and initiatives continue to ramp and they reached at full run rate. During this quarter. These initiatives improved out few to RASM by 350 basis points, which we guided to on our first quarter call. We say this is the largest contributor to this improvement we continue to feel confident in the 330 million of combined 2019 initiatives and synergies we guided to at Investor Day last November .
Second we had tailwinds of about a 100 basis points from the Easter shift and another 100 basis points from changes in our award redemptions structure that had negatively impacted RASM in Q2 last year. After our reservation system cutover, when redemptions got away from us.
Good underlying pricing stabilized and steadily improved through the quarter.
No one of our 11 operating regions, representing 88% about capacity experienced positive year over year unit revenues, including California Transcon market.
That were significantly impacted by pricing actions in Q1.
A quick note on transcon markets.
I want to thank all of our operational and commercial teams that have rallied around improving our performance in this region.
We've made several changes including more focused marketing.
Cross bleeding and a concerted effort to improve improve both handsome right and on time performance.
The most important most importantly, how station and in flight crews have been focused on delivering.
Consistently great guest service.
All to help improve the financial performance and guest experience of these important routes and it's working.
Although we have a ways to go.
We did experience significant improvement in RASM and double digit increases in California, Trans Con margins year over year, and we see continued momentum as we head into Q3.
And lastly, we continue to see strength in our loyalty revenues, which increased 5.7% on flat passages.
The percentage of our fly is during the quarter that will mileage plan members and credit card holders improved 2.7 point.
And 1.2 points, respectively, which is very encouraging.
As we mentioned in previous calls the commercial team is focused on a number of network and product enhancements. This year that have guests have embraced this alaska's local partners network is expanding again with our new partnership with alcohol with new direct flights out of San Francisco to Tel Aviv. This is in addition to the direct service to Hong Kong, Tokyo, Singapore in Dublin and of all being added or announce from Seattle by our partners.
17, Global partners and Molly's Prime members can earn and redeem miles to more than 900 destinations worldwide.
Second as Ben mentioned, we are installing new cabin interiors on our boss and 737 700 aircraft that both a line and improve the guest experience.
Weve completed 25, centsfive each Airbus renovation increases total seat count and builds in a greater mix of first and premium class seats.
These are beautiful aircraft and have guest reaction has been extremely positive.
Third we have now completed satellite Wi Fi installation on 44 of our mainline aircraft and the feedback from our guests has just been fantastic.
This along with our in flight Entertainment boasting the most movies in the Sky provides our guests with a top notch in flight experience.
In fact, our entire regional jet fleet is also equipped Wi Fi and onboard entertainment.
And finally, two weeks ago, we open phase one of a stunning new wing of the North satellite terminal here in Seattle, featuring a new 16000 square foot flagship lounge for I guess, we've also started construction on a rooftop lands in San Francisco that we expect to open.
Next year.
So looking to Q3, our capacity growth picks up modestly to approximately 3%.
And now Q through RASM guidance.
Our range is 2% to 5%.
Reflecting the benefit of our many revenue initiatives and merger synergies.
Our expectation of stable pricing through the peak summer season.
Offset by continued pressures we are seeing in Hawaii.
Ask a flying that I mentioned earlier.
We are designing a product network and revenue management processes to enable growth the financial objective to achieve our 13% to 15% long term pre tax margin goals. In fact, we recently announced that we are implementing a new state of the yacht Amadeus revenue management system, which will be fully deployed by next year by the middle of next year.
And will result in better revenue performance, you know 2020 and beyond.
With the structural changes we made to our revenue model. We continue to feel confident now 2019 objective outperform industry RASM.
And look forward to building on the solid platform.
And with that I'll turn the call I got to Brian .
Thanks, Andrew and good afternoon, everybody, our second quarter, adjusted net profit of $270 million and earnings per share of $2.17 for both 31% better than the second quarter of 2018. This marks our second consecutive year over year improvement in quarterly margins and as the largest year over year margin increase since Q2 of 2016, it's evidenced that our plan to improve returns is working.
Andrew touched on the revenue performance, so I'll touch on cost performance for Q2, and the outlook for the rest of 2019.
We set up this year with an aggressive plan to keep unit cost growth to between 2% and 2.5% on a roughly 2% increase in capacity no small task given the cost pressures, we faced and before the impact of any new labor deals.
Teams across the company have risen to the occasion and manage cost in the first half of the year in such a way that we have been able to maintain full year cost guidance that falls at the low end of our initial range, even after absorbing the impact of the APA and I am deals that Ben talked about.
These agreements will add approximately $50 million annually with approximately $48 million impacting this year, including $24 million in the back half of this year, a base wages and $24 million in signing bonuses that we expect to pay in Q3.
For the full year, we now expect non fuel unit costs to grow by 2.2% all in.
Looking at the quarter unit cost ex fuel rose by 2.3% much better than our initial guidance of plus 5%.
Much of the beat is solid execution, although some of the outperformance as a result of certain costs shifting to the back half of 2019.
Pilot training costs are a great example, as cross bidding between mainline fleet types is now happening, but a little later than expected. This will put pressure on pilot productivity shifting up to $15 million of training cost into Q3, and Q4 from the first half of the year.
Nevertheless, we continue to see encouraging improvements in productivity and our ability to control overhead costs. Let me provide a few examples first horizons overall productivity measured by passengers per FTD is up 3.3% this quarter and unit cost ex fuel are down 16% on 20% capacity growth productivity and the flight Ops Division is a particularly bright spot as training costs have declined significantly and hard time has improved especially on the Eone hundred 70, fives I want to congratulate the horizon team on these fantastic results second as we mentioned on our last call. Our supply chain team has been working a plan to lower prices, we pay to our vendor partners. Their results have been outstanding we expect to save more than $30 million. This year positively impacting costs across many divisions. A third example relates to flight attendant premium pay during the transition we had a heavy reliance on.
Premium pay to make sure our flights were all covered today our in flight team is having to use much less of it because of a much more normalized operation and better processes in the department.
And finally overhead as down by more than $15 million or about 5%. So far this year.
Over the last year, we've made changes to the size of our management staff not only to save payroll costs, but more importantly to improve our speed and agility and reduced the number of layers between our leaders and both our customers and our frontline employees. These changes are important as we seek to more positively and tightly manage our company toward the future that we are seeking.
Looking to Q3, we expect CASM to be up approximately 5% on a 3% increase in capacity, which given our full year guidance would imply a 1.2% decline in unit costs in the fourth quarter. The third quarter increase reflects the cost shifts I mentioned timing of expected variable pay accruals and the impact of the new labor agreements, including our expectation that we'll pay as I said earlier $24 million in one time cost during the quarter.
July marks the beginning of our annual planning process as we think about 2020, we are mindful of our need to continue to aggressively manage our unit costs in a way that maintains or expands our competitive cost mode versus the legacy carriers doing so ensures that we can offer low fares grow and achieve our 13% to 15% long term margin target.
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 six months of the year was nearly $1.1 billion ex merger related costs, while net capex was $330 million. This resulted in $735 million or free cash flow again ex integration costs.
Which was nearly $400 million higher than the first six months of 2018.
At consensus full year operating cash flow would be about $1.5 billion and free cash flow would be about $775 million, assuming capex of $725 million. This year, that's more than three times the amount we produced in 2018.
The result is a direct outcome of our decision in early 2018 to reduce capital spending in order to improve free cash flow.
We've produced free cash flow and not for nine years in a row and positive operating cash flow for more than 30 consecutive years, maintaining this track record of positive free cash flow as an important part of our capital allocation strategy.
A fortress balance sheet was also a hallmark for this company of this company for many years and were quickly back to that moving quickly back to that position, we've repaid $280 million in debt. So far this year, including some repayments that were made in June that will offset with some new borrowings in the third quarter as part of our broader effort to take advantage of the low rate environment, lower our borrowing costs and move to more fixed rate debt given the tight spreads and in your inverted yield curve I want to give a shout out to our treasury team for the work they've been doing and thank our banking partners, who have adjusted rates downward.
We're on pace to reduce our debt balance by about $350 million in 2019, and we've already paid off $1.2 billion of the $2 billion, we borrowed for the merger with leases our quarter end adjusted debt to cap stood at 45% and we're on track to end the year at about 42% and reach our 40% goal sometime in 2020.
We have 100 unencumbered Boeing Ngs and Embraer Eone hundred 70, fives and $400 million of on Undrawn lines of credit.
Weve returned $110 million to our owners via the dividend and share repurchases.
We set a plan to return $220 million to shareholders. This year and we'll hit it which is a nice way to close Youve heard today, a number of examples of where we set a plan and we're executing on it. The results are encouraging we're delivering industry, leading operational for performance and our customer service is award winning on the financial side, we have revenue and cost momentum on our balance sheet is strong and if we continue to execute our plan will be in the top quartile in the industry from profit margins balance sheet strength and free cash flow generation and with that let's go to your questions.
At this time I'd like to invite analysts who would like to ask a question. Please press Star then the number one on your telephone keypad.
Pause for just a moment to compile Vicki.
Sure.
And as a reminder, please limit yourselves to one question and one follow up.
The first question will come from Savi Smith with Raymond James. Please go ahead.
Hi, good afternoon.
It did have an unfair question because you just said.
It looks to be delivering a really good 2019 on the cost side.
But.
What have you done for me lately, just as we think about 2020 I Wonder if you can walk through some of the headwinds and.
Tailwinds that you're seeing in 2019, and how they progressed through 2020.
Hey, Steve its Fran and I'll start and then maybe Shane can jump in that's a super important question as we start to think about the 2020 plan as I mentioned were already waiting into that process. We recognize that low costs are super important competitive advantage that we've had for a long time and will continue to be an important competitive advantage as we go forward and it's going to be a big part of us getting to our 15, 13% to 15% margin goal a lot of the initiatives that we have in place will provide benefit into 2020, we walk through a bunch of that at Investor day.
I think we've got a lot of momentum as I said on that stuff.
John you want to I might only add something I'll be a little generic I think.
The biggest sort of.
Specific challenge we have going forward is just all these lease returns theres a lot of.
Complexity that goes along with that however, there is a lot of opportunity to continue to take costs out of the out of the operation and out of the company there's tons of.
Stuff, we can do on productivity utilization all of those things we talked about at Investor day.
We really haven't fully tapped yet I would say this year is really more about getting the muscle to manage costs back in the next couple of years. It started to manage those down more aggressively.
That's helpful and then on the.
On the network side.
This unit revenue guide is is really good I was just wondering if you could talk a little bit about as you understand the network changes and how that's affecting your seasonality seated.
We should think about.
Well, if you're going to have peak year summarize here and one being kind of a much weaker or how we should think about kind of the network and how that affects the quarters.
It's obvious Andrew I think this comes back to opportunity and.
When we acquired Virgin America, It actually made us more peaky.
Now Q1 and Q4.
Deeper problems in Q2, and three with stronger so what you'll see is sort of the traditional Patton Q2 in three very solid Q1, being the worst and I think as we move forward as we look at on network for 2020, we are working hard on how we might Q1, much more balanced and much stronger going forward.
Okay.
Not necessarily in place for a 120, but just going forward is that fair.
Is there any changes being implemented in the first quarter and a way of continuing to finalize those so we are in process.
All right great. Thank you.
Thanks Debbie.
The next question will come from Jamie Baker with JP Morgan. Please go ahead.
Hey, good afternoon everybody.
You spoken foods, you ask me about loyalty in the quarter.
I assume that was a consolidated observation why wouldn't it have been.
Would you be willing to discuss loyal returns loyalty returns excuse me in the Seattle market, specifically I'm, obviously curious if you're losing any share there is your primary competitor.
Pushes its own.
Loyalty scheme I've got to imagine.
California is whats really driving aggregate loyalty improvement, but I'm curious if Seattle is declining.
Hi, This is Andrew Thanks for your question.
No. We don't normally talk on specifics what I can tell you without absolute question is that the Pacific Northwest loyalty continues full steam ahead, certainly we have a lower base in California and that percentage on a percentage wise increases are obviously larger there, but actually all of the things that have been going on it's just only pushed us to work harder and stronger here in the Pacific Northwest and we continue to see solid growth in mileage plan members and credit cards and revenues in the Pacific Northwest.
Excellent second question I know there have been several.
Oh, the industry attempts to raise Hawaii fares as of late as near as I can tell they have not succeeded is that the correct interpretation or did we get some fare increases during the quarter I am just curious if there is any cause for pricing optimism given that you're still calling that out.
That market out as as challenged as a RASM headwind.
In the quarter.
I think for us.
On the Hawaii side.
This being marginal attempts at pushing things up a little bit there's been nothing major at all I think what really we're facing here is significant.
Seat increases.
Year over year in this marketplace and so but we're feeling the airplanes, although you know it cheaper fares, but again, that's one of the assets that we have here with first class premium costs on new CEVA FIA product. All of these things are working to help in some cases overcome some of the softness in the phase.
That's good color. Thank you very much thanks, Jamie.
The next question will come from Duane Pfennigwerth with Evercore ISI. Please go ahead.
Hey, Thanks, good afternoon.
Given your informal outlook Brandon for north of six Bucks and free cash flow this year.
What would you need to see to get more aggressive again on on the buyback.
Oh, you just did the math based on the numbers I used in the script, yes, Sir Okay Gotcha Gotcha.
Here's what I would say is we've been really focused on what we've called re deleveraging the balance sheet as I said in my prepared remarks, a fortress balance sheet has really been a hallmark of this company for a long time, our balance sheet is super Super strong I think right now, we're really going to keep deploying.
Capital to getting the balance sheet to exactly where we want it and then think about.
Broader return to shareholders once we get there.
You've been you've been very clear and consistent on that and then just just for my follow up.
Piqued my interest with the Amadeus RM system upgrade a middle of next year.
What specific capabilities do you think this will provide for you.
And is there any sort of transition risk around that as you as you rotate over that system. Thanks.
This is Andrew that's a great question you, we always worry that transition risk were working off honestly 20 year old technology, and we've had to design and build a lot of technical reports to manage around that so this will be next generation state of the art.
It will also allow us to do a windy.
Pricing, which today, we just don't have any capabilities full and it's also going to be allow analysts and our teams to be much more focused on the macro Matt is ended the system will take off a lot of the heavy lifting there doing at the individual analysts level. So we can.
Get better results. So we will talk to you more about that as we move into 2020. It's an initiative we have real revenues tied to that we're not ready to share that yet and then on the revenue risk is always risk the team as a fantastic plan as they are going to start to layer in markets.
Independent from the system, so a little bit of an overlap if you will and so we're going to do this in a measured cautious manner. So that we don't expose ourselves to any real significant revenue led or were not going to go to a true or what the pricing out of the gate will get will correct changed vendors would go to segment pricing and then right in time.
Okay. Andy will be later on when we are ready to pull the trigger on that and we'll start with certain regions and will turn those on on the new system and then we'll just continue to roll them out.
Okay. Thank you.
Thanks Duane.
The next question is from Catherine O'brien with Goldman Sachs. Please go ahead.
Hey, everyone. Thanks for the time.
So just a couple of questions on your cost outlook here first I just want to clarify does your CASM outlook include the signing both bonus summarising contract ratification, meaning you're not excluding that special item at some of your peers do.
I can't it's Brandon, Yes, our cost guidance includes the signing bonus.
Okay, great. So that on my math, the new rates and the signing bonus or about 90 basis point headwind to your to your CASM outlook for the year signings and your new cosmetic, including that is only 10 basis points better than what you were previously forecast, saying so.
I guess, what's driving that improvement I think on my math at least most of that most of that is made up in the June quarter.
I know you guys talked about a few things are trending better than expected.
But you know in the back half is there an opportunity to see to see some of that cost strength.
Continue and maybe even a trend down despite the new the new deal.
Hey, good chain. Thanks for the question.
Sort of really reiterate reiterate what you said and what we said on the.
Remarks that the team did a fantastic job managing costs in Q1, and Q2 I think we may have even surprise ourselves a little bit how well, we manage them and I think that if we continue to do that there is opportunity in the back half of the year.
There are some cost that we know are shifting Brendan mentioned those some of the pilot training costs and a few other areas, but we're feeling seeing real strength on managing overhead managing productivity managing selling expenses as an example in the quarter revenues were up 6% selling expenses were down 3%, which is just a really wonderful result, usually those correlate together and go up at the same rate. So we're finding areas to marginally improve the company all over the place and we will continue to mine that in the second half.
Okay, great Yeah, really impressive because at least at least on my math.
Fully offset by the June quarter better performance there the new deal.
And then maybe one for Andrew just.
We keep hearing about how saver fare is trending better than expected, but I don't think we've officially gotten a raise that hundred million dollar annual target any comments still waiting for more testing, there or or should we be expecting you're up to that at some point.
Katy I would would not hold your breath, because we don't plan on giving out specifics and updating that other than to tell you that.
The 330 that we shed.
We feel very solid about say the phase is actually performed better than we had thought some others a little bit less though.
But we're just going to stick to the high level now numbers versus go into all the details, but its doing very very well for us.
Thanks, so much as Katie.
The next question will come from Rajeev Lalwani with Morgan Stanley . Please go ahead.
Hi, guys. Thanks for the time.
Okay, Andrew a couple of.
Four questions for you as far as the Macs, what sort of.
Benefit or impact are you seeing there whether its in your third quarter guide or your second quarter Guide and then your latest read on competitive capacity and how that's trending and then finally any color on development markets and maturity, there and whether or not there was much much more opportunity.
Thank you.
Yeah. Thanks, the best way for me to talk about the Max is just to really look at the industry seats and what we're dealing with and as is very public knowledge. We saw a number of closer in pull downs by carriers to accommodate the Max.
So weve sort of being.
A recipient of that if you look forward, though.
You know how competitive capacity on a weighted basis is actually down 0.7%.
In the third quarter.
And again I think thats in no small part to the.
Industry capacity coming down, which I think brings good things for everybody when capacity discipline is carried out that way. The other thing I would tell you is that on the new markets in the maturity. We still have we've seen really good improvement. Some you know were on average I think up to about 85% of normalized yield and they continue to improve and a little bit some of the California markets, especially so so there is still upside for us as we continue to to mature these markets.
Can you quantify maybe the last one I mean, how what you've seen so far or how much more there or is to go.
As it relates to the guidance, but I think what we continue to want to see in now developing markets, which were a much smaller percentage of our network now, but we still want to see high single to double digit unit.
Revenue increases in those markets, but I don't have a dollar figure on RASM number to quantify that for you.
Okay No worries thanks, guys.
Thanks, Charlie.
The next question is from Helane Becker with Cowen. Please go ahead.
Thanks, Operator, hi, everybody. Thank you very much for the time.
So I had two questions. My first question is related to love field and what are you doing there and will you not be serving that market anymore is that the way to think about it.
Hi, This is Andrew no, we absolutely serving love field I think whats got a little confusing on all of that is that we have as you know there is a lawsuit going on I'll, let Kyle touched on that in a second but then we have two dates there.
There is a lawsuit going on.
And we have 13 flights a day what we've done is there is uncertainty around how that lawsuits going to end up on what's happening. So we had scheduled more flights. So what we're doing is holding 12 13 flights a day, what we're doing is concentrating now on full markets, which is Seattle, Portland, San Francisco and Los Angeles.
And that's sort of what were going to be flying here for the foreseeable future. The Kyle did you want to comment or hi, Helane.
Yes, the litigation really just plods on its scheduled to go to trial in September we'll see if that sticks or not in the meantime, the judge has been very active in keeping up settlement discussions among the carriers and the city and I'm afraid to say there so far not been much progress there although people are talking.
Okay and then my second question was on Trans Con.
So I think in the us.
First quarter that was kind of a problem and I didn't hear you mention whether that was improved in the second quarter and how that looks for the summer.
Thanks, Thanks, Helane, yes, it was.
That was a real problem in the first quarter and in my prepared remarks and.
You know just what weve been sharing is we are very very encouraged with whats happened there.
We have significant unit revenue increases in those during the second quarter was pricing stabilized. It's continued into the third and we have seen double digit margin increases.
In those transcon routes and in pot noticeable pot that our employees have really rallied around those markets around the guest service both in the aircraft on the ground, but making sure the satellite flights get on that.
So she has done a magnificent job getting the 99.5% completion right. So we just all in focusing on the guest experience and it's making a difference.
Okay, and then could I just follow that up with one one macro question.
Would you consider keeping athree twentys to backfill the Max.
Helane, it's branded I'll take that one.
You know we have three a 319 plus 320 airplanes that are due to be returned between now and the end of 2020, and we're going to stick with that for the time being those are already in process to one degree or another we do have Max is coming in next year. Our Max exposure was pretty darn small we were supposed to get three in the last few months of this year. It's perhaps one now those two that we were not going to get this year will probably comment if things play out like we are hearing they might play out in the first quarter. So the capacity issue for us isn't nearly as acute as it is for some other macs operators.
Okay. Thank you thanks, a lot lately.
The next question is from Michael Linenberg with Deutsche Bank. Please go ahead.
Yes, Hey, Andrew you called out.
The improvement in pricing indicated its stabilized and improved through the quarter could you just give us maybe some additional color to show how things trended and then is that continuing that trajectory continuing into the third quarter.
Yes, I think I think really around the pricing environment I would say its.
It's.
Biggest problem was obviously closing phase in business fares were very very low during the first quarter.
So those have substantially going away in a stabilized.
The fare environment I would say in in a number of areas is still sort of down a little bit year over year, but stable and again the way. We've overcome that of course is with all these new revenue and revenue initiatives and a lot of the changes were making to the business. So for me personally the way I would describe the fare environment for Alaska.
Is one of stability and were working with that and.
We're not seeing any real changes in demand and demand continues actually to be quite robust.
Okay, Great and then just the second question. Andrew This is to you as well I realize it's early with the pain field operation but.
How has the startup in and when you look at the clientele are these passengers who formerly flew out of Seattle are they are they new customers may be coming from other carriers.
What can you make of the the pain field startup just curious about how its gone that's.
You know I don't remember about.
Starting.
What we did in pain with eight new markets.
In starting off with 18 frequencies has been quite amazing other than Portland, Seattle will probably go a little too much excuse me pain, Portland, we got to probably a little too much capacity there, but on the whole all of these markets are well into our average load factors now and the yield is working its way up and I think we couldn't be more impressed and excited with how the startup of that operation only after three months is gone I will say that we've probably seen a lot of our non non frequent flyers actually a flying at a pain field on my initial got would be a lot of the loyal customers will and they are.
Some habits are hard to break, but whats really exciting is were seeing a lot of noncore loyalty members, taking advantage of the close location of pain field and demands being very very good.
Oh very good to hear great great quarter. Thank you.
It's Mike.
The next question is from Hunter Keay with Wolfe Research. Please go ahead.
Hi, everybody.
Hi, Brandon you sound very excited today by the way I, just want to mention that and.
I appreciate you guys not pulling out the signing bonuses special item, that's really good stuff.
It's noticed.
I do have a question for you on.
Selling expenses this is shane or brand and how is it down so much I know that some of that's accounting reclassification, but even if you take that away adjusted it's still down.
By tens of millions of dollars in last couple of years is this something you like renegotiated with Virgin what are you doing to get that down how much more is there to go. Thanks.
The scene, yet you pretty much now that we did get an opportunity to renegotiate a lot of deals that version had that got closer.
Not to our rates in a lot of those cases, we were able to actually bring our rates down at the same time. So that's stuff that has taken.
Place or last year or two it includes not only the cost of distributing tickets like through travel agencies Ngs is a medic.
Partners, but also.
Our core passenger service system, we've basically renegotiated all of those in last three years, I really attractive rates and the company.
Oh, so there is such a thing as a merger synergy then.
Okay. Good and this is a little bit more of a high level question, but I don't know if you've noticed but the market at Hawaii has changed a lot over the last 10 years and there's a lot more sort of long haul narrow body flying with Neos and for a time, Max's where theres more outer island destinations being served from smaller communities that was not previously.
Really able to do with without these neo technology and Max technology I feel we're starting to see that a little bit in Alaska, you mentioned, some oversupply of Seattle, you're seeing American put for example, or through 21 neo at a Phoenix into it.
And to encourage are you prepared for this how are you thinking about overfly being a permanent issue as more airlines get the Neos and are you prepared to sort of cannibalize your own connecting traffic with the Maxim if you need to do that sort of like Hawaiian is doing with their neos.
Hi, Yes, I do wonder its actually your obvious observation is spot on.
I think the way that we look at it is.
The opportunity for others is the same equal opportunity for us I mean, we fly all of those east coast destinations from Seattle, We have a strong obviously network actually in the state of Alaska, including strong feed 'em, we fly and create Chicago. So I think a couple of things I think they could be opportunity for us going forward given the aircraft type to do some of that al self.
Yes, there will be occasions, where there is true of a fly in traffic that we might have challenges getting but at the end of the die. We have a very very strong network up to a very very strong loyalty proposition and we will continue to fly where alaskans need to go on a non stop basis.
And as we go forward 100, something like two out of three Alaskans are members of our mileage plan and I would agree with Andrew there is a desire for more longer distance flying into Alaska hubs, we should be competing for that.
I think I just noted.
And.
Just the relationship between the economies in the state of Alaska and in Seattle in particular is extraordinarily close whether its government or fishing or timber or whatever it is tourism whatever industry, we might be talking about a lot of the business connections are here someone doesn't want to go to Houston for oil or something like that that's a customer that we are going to have to compete for up there.
Doing longer distance flight, but.
I think a lot of it actually is Seattle business and a lot of it's just really just being in the <unk> and the peak summer season as well that's exactly right.
Okay. Thanks.
Uh huh.
The next question is from Joseph Denardi with Stifel. Please go ahead.
Hey, good afternoon.
Andrew just just on RASM.
Performance in Twoq you up.
5%, three and a half points or so from the initiatives. So one create 1% increase in capacity led to.
Maybe a point and a half increase in core PRASM. If you want to call that like why is that a good result, why isn't there more.
Traction in PRASM, given youre kind of modest capacity growth.
You know I mean, the way the simplistic way I look at this.
Is firstly, what we've committed to is number one.
We want to grow unit revenues.
In line with the industry.
And the industry also has initiatives and revenue initiatives in there and if you look at our revenue and synergies that's about 400 basis points. So what we're really saying is we're going to grow with the right. The industry is.
That includes their initiatives plus another 200 basis points on top of that.
So that's how we're thinking we think thats a very strong result, although so I think our stage length increase by about 1.5% during the second quarter, which also puts downward pressure on unit revenues and we're also seeing significant increase in stage length, even in the regional business as well as Dan mix gets more a little bit long hole. So overall and then last thing I'll just point to is our margin we have close to.
16% margin for the second quarter, and we have powder left in both cost and revenue. So overall, what you are seeing is a track that we're headed to a 13% to 15% margins and so you are right. It can be better and it will be better as we continue to move this thing forward.
Okay, and then Andrew I guess I was little bit surprised given how important revenue generation is do an airline business that you are using 20 year old technology I would have thought that that could create a little bit more.
Frequently so why is that.
And what is the revenue opportunity from that so its so again, we have a system and again, it's just all about priorities and I think when we acquired Virgin America much of what we're looking here massive step change in the size and complexity of our business. So we definitely it's time for a new system.
We will be sharing with you as part of our outlook for 2020, what our revenue initiatives will be including the revenues. There. So we don't prepared to speak to those today and is immaterial.
It's.
Yes, yes it is.
Yes.
Revenue management.
Leadership.
And we have a top notch commercial analytics team that.
That makes up maybe a little bit for us.
Getting this business.
And if we're on the vendor with now it's not like they haven't updated that software business, because it's a new platform.
Good.
I think Kevin Crissey might be next.
Kevin Crissey with Citigroup. Please go ahead.
Yes. Thank you very much and I just continue on with the M&A as quickly.
Why choose on Monday as my understanding is that the best aspect of that is the international.
Component does does that suggest maybe a more of an international focus going forward or was there. Some other reason for that vendor selection. Thank you.
Without going into details we did a very thorough RSP looking at all the vendors and it came down to cost it came down to capabilities. It came down to what our RM team needed and wanted throughout network today and future network. So that that was the decision but to be clear I don't think.
New International service I don't think that was a big driver not long hole service now.
Okay. Thank you. Thank you.
Thanks, Kevin.
The next question will come from Brandon Oglenski with Barclays. Please go ahead.
Hey, this is actually Matt on that was new scan for Brandon.
So I know, it's early for 2020, but.
As you know growth starts to ramp and.
Next year, I mean turned to a return to growth.
Wondering if you could share any kind of attributes on what are the priorities for growth are and what.
How we should be looking at that and then.
As a secondary.
In the context of the four for 4% to 6% growth.
How much flexibility would there potentially be in that.
Specifically in the context of the margin targets. Thanks.
Hey, Matt its Brad I might jump in here I think the first priority. We've got just an incredible economic engine in the Pacific Northwest of the first priority would be feeding that engine and doing everything we need to do to sort of.
Defend and grow markets out of the state of Washington, The state of Alaska, The state of Oregon.
I think the second priority, we've got some important new geography in the state of California, and San Francisco and La X in particular, I think it would be doing the flying that we need to do in those markets to provide just the important base utility for business travelers and others in those markets.
No I think after that I think there are and Andrew sort of hinted at this there is opportunities for us to do a better job of connecting the different parts of our network in strategic ways and so I think that would be the third priority. Finally, we've always got an opportunity to make sure. Our when we have multiple frequencies in the city pair to make sure. Those flights are well timed to make sure that we're flying back and forth from the west coast to the middle of the country that are times are friendly to west coast customers. So those are.
In my own mind, those are sort of that would be sort of a top to bottom sort of priority about how we would think about future growth.
Okay.
Yes, the line now.
No.
Thank you appreciate it that's really helpful. Matt.
Thanks, Matt.
The final question is from Dan Mckenzie with Buckingham Research. Please go ahead.
Hey, Thanks for squeezing me in the nominee as question as well, presumably that gives you more merchandising capability versus what you have today is that a fair characterization.
Hey, Dan chain.
I'll just take this because I happen to be the person who installed the merchandising system. We actually have one we use fair logics today.
Amadeus has a really good one as well.
We're super happy with our partnership with her logics right now, but if there was an opportunity to move Tom. It is we could do that but we've got a really good robust merchandising platform to that.
Got it okay pillar sort of technical question here with respect to the increased premium seats coming from the receding the Airbus.
Can you remember me revenue manage these seats real time as they come online or is there some conservative conservatism on that.
Until you reach a critical mass either in terms of aircraft or or as you think about the plane. These.
Hey, Dan This is John again, I I launched PC, So I guess I'll take this one too the only real conservatism is making sure that if we sell the seat the PCC shows up as you know, we don't really assign a specific.
You know shell to market until we are closer in so trying to sell.
See six months ahead of when we actually assign the aircraft Thats always that's the calculus, we try to go through.
So there is a little bit of a ramp up period as these come online, but it doesn't take that long for us to be able to pre sell through the entire window.
Got it so its on a new aircraft comes on these premium seats, you know maybe don't sell at a premium for like the first month or.
How would you how would you characterize the leg.
Yes, the way we do it it does not to get too technical if we have like 20 planes coming in we might sell 10 planes worth for about a quarter and then the next quarter, we'd sell 15 planes worth and next quarter. We fell 20 planes worth so might take two or three quarters to burn in.
Got it Okay and then one final question here I Wonder if you could talk about the air Bnb restrictions that were recently passed in Hawaii, how are you thinking that might or might not.
Impact.
Travel to or demand to Hawaii.
Yes its income.
We like everyone to watching that I think my understanding is about 5000 units of inventory coming offline for wahoo only it may resulting people flying to the other islands for better availability and costs and we fly to all of those four islands.
But again, that's something we'll be watching over time.
How big a focus obviously is how many seats going into Hawaii, because at the end of the day, Hawaii is about supply and demand.
Very good thanks for the time guys.
Okay.
Okay. I think I think we are not going to hear from the operator again, thanks, everybody for tuning in today for our second quarter call. We look forward to speaking with you all again in 90 days time. Thank you.
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