Jul 28, 2008
Executives
Shannon Alberts - Managing Director IR Bill Ayer - Chairman and CEO Brad Tilden - CFO Jeff Pinneo - CFO Brandon Pedersen - Controller Glenn Johnson - EVP, Airport Services and Maintenance and Engineering Jay Schaefer - VP of Finance and Treasurer Gregg Saretsky - EVP of Flight and Marketing Caroline Boren - Managing Director of Corporate and Strategic Communications
Analysts
Ray Neidl - Calyon Securities Jamie Baker - J.P. Morgan Mike Linenberg - Merrill Lynch Peter Jacobs - Ragen MacKenzie David Simpson - Lehman Brothers Daniel McKenzie - Credit Suisse Kevin Crissey - UBS Ted Reed - TheStreet.com Hugo Miller - Bloomberg News
Operator
Good morning. My name is Jody, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Alaska Air Group second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).
We ask that you please limit your questions to one question and one follow-up question. Also, ladies and gentlemen, today's conference is being recorded for future playback at www.alaskaair.com.
Thank you. I would now like to turn the conference over to Ms.
Shannon Alberts, Managing Director of Investor Relations. Please go ahead, ma'am.
Shannon Alberts
Thanks, Jody. Hello, everyone, and thank you for joining us for Alaska Air Group's second quarter 2008 conference call.
Alaska Air Group Chairman and CEO Bill Ayer; CFO Brad Tilden, and Horizon Air CFO Jeff Pinneo, will provide an overview of the quarter, after which we will be happy to address questions from analysts and then from journalists. Other members of the senior management team are also present to help answer your questions.
Today's call will include forward-looking statements that may differ materially from actual results. Additional information on risk factors that could affect our business can be found in our periodic SEC filings available on our website.
Our presentation includes some non-GAAP financial measures and we provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release. This morning, Alaska Air Group reported a GAAP profit of $63.1 million or $1.74 per diluted share for the second quarter.
Excluding the impact of unprecedented mark-to-market adjustments for fuel and the MD-80 and CRJ fleet transition charges, Air Group reported an adjusted net loss of $14.1 million or $0.39 per share. This compares to a first call mean loss of $0.40 and to a net profit of $47.2 million or $1.16 per share last year.
Again, excluding special items, Air Group reported a year-to-date loss of $50.4 million or $1.38 per share, compared to a profit of $31.4 million or $0.77 per share for the first six months of 2007. Additional information about expected capacity changes, unit costs, fuel hedge positions, capital expenditures and fleet count can be found on our investor update, which is included in our form 8-K available on our investor website at alaskaair.com.
Now I'll turn the call over to Bill Ayer.
Bill Ayer
Thanks, Shannon, and good morning, everyone. Well, in spite of the great strides made by employees to improve our operation and deliver an exceptional customer experience, the skyrocketing increase in fuel costs combined with a relatively modest yield improvement resulted in a second quarter adjusted loss.
This result is particularly disappointing in light of the operational improvements our employees have achieved over the past several months. We're all aware of the impact of fuel on the industry, so I won't dwell on that other than to note the significant role that it played in our second quarter results.
In addition to fuel costs, increased competition in a few of our West Coast markets created a drag on unit revenues and kept us from recouping a greater portion of our fuel cost increase. In light of this, we are taking action to cut capacity and adjust several other areas of our business.
Our plan includes, one, preserving and enhancing our cash balance, two, cutting capacity and redeploying aircraft, three, boosting unit revenues through fare increases, improved load factors and ancillary fees, four, conserving fuel, and five, controlling our non-fuel costs. Brad and Jeff will talk more about these in a moment but let me elaborate on a couple of points.
It's obvious that fare levels in many of our markets must go up. For example, with oil at $130 per barrel, the unhedged cost of fuel to fly one passenger from Los Angeles to Seattle is approximately $66 on a 737-800 and about $69 on an A-320.
That means that $79 fares simply don't work. We all recognize that as fares rise, capacity must come out to match lower demand.
Both the industry and customers will be best served over the long run if the airplanes that continue to fly are those that are the most fuel efficient and economical. Therefore, given our young fleet, and our fuel efficient fleet, our capacity cuts will likely be less severe.
That said, you will see us initiate reductions in a number of markets, and if our competitive position weakens significantly, we'll be prepared to reverse the action. As we reduce our schedule, we'll need to reduce the number of gates and other facilities we use and the number of people we have on our payroll.
We expect to provide further information in early September but are announcing today a 5% reduction in our management headcount that will take effect September 1. This will result in annual savings of approximately $7 million.
Horizon has already made headcount reductions to save about $4 million annually. We are keenly aware of the impact of these changes on the lives of our employees and regret having to take this action, but our core responsibility is to ensure the survival of our company and current fuel price levels, which are devastating for airlines and consumers alike, require these actions.
As we navigate this period of unprecedented change, we have several relative advantages that will serve us well. Cash is of increasing importance.
We ended the quarter with over $1 billion, up almost $200 million from the beginning of the year. Our hedge portfolio provides considerable value, especially through the end of 2008.
In addition, the fleet transitions at both companies to aircraft that are among the most fuel efficient provide a long-term fuel hedge. And last but not least, we take great pride in providing a product that customers prefer, and that's why we were extremely pleased that in a recent well-known national customer satisfaction survey, Alaska Airlines ranked first among network carriers, with the most 5-star ratings, including overall customer service.
This recognition was particularly gratifying because it came on the heels of a very significant improvement in Alaska's reliability, on-time performance and baggage handling. You may have seen the Wall Street Journal article noting Alaska's move from fifth place to second place in DOT on-time performance for the first five months of 2008.
And July is shaping up to be an excellent month, with a 10-point improvement to date in on-time performance. This improvement stems from a major turnaround in our Seattle operation that was the result of a lot of hard work by hundreds of employees at the airport and on board our aircraft.
I want to publicly acknowledge their efforts, and key leaders include Alaska's Vice President, Seattle Operations, Ben Minicucci, our Vice President of Customer Service, Jeff Butler; and divisional leaders Laurie DeMarco in maintenance, Cindy Pechnick from in-flight and Seattle base chief pilot Greg Sturges. To each of you and to all of our Seattle based employees, thank you for your hard work and congratulations on a great accomplishment.
I'd also like to note that Horizon improved its performance, and it started from a high base, so kudos to the Horizon team as well. In closing, our near term focus is of necessity on cash flow.
We have not taken our eye off our ultimate goal of creating value for our shareholders, including a 10% ROIC, enhancing value for our customers, and providing a bright future for our employees. Now, I'll turn the call over to Brad to discuss Alaska's results.
Brad Tilden
Thanks, Bill. With fuel stated on an economic basis and excluding the MD-80 charge, Alaska Airlines reported an adjusted pre-tax loss of $15.6 million for the quarter, compared to a pre-tax profit of $82.4 million last year, a change of nearly $100 million.
Consistent with the practice that we've used for several years now, our adjusted number excludes mark-to-market gains on the value of our hedges that settle in future periods. While we feel its right to treat our hedging gains in this fashion, the sheer magnitude of the gains, $155 million before tax or $97 million after tax, is a good indication of the long-term value of our hedging program.
Air Group's economic fuel expense increased by $111 million this quarter and that's after taking $50 million more in hedge benefit this year than last. To provide some context for the run-up in fuel prices, at the current rate our raw fuel bill for 2008 will be $1.5 billion versus $386 million in 2003.
It's difficult to overstate the impact of this change on both the industry and Alaska Air Group. Looking at revenues, mainline passenger revenue increased 2.9% this quarter, on a 1.6% increase in capacity and a 1.3% increase in passenger unit revenues.
Our passenger RASM lagged the domestic industry by 3.4 points, but it's worth noting that the industry gains came on a 4.2% decline in capacity. Also, our stage length grew by about 6% during the quarter.
Adjusting for this, our unit revenue performance was essentially in line with the industry but far short of what we need to cover current fuel prices. Although unit revenues for the quarter were up only marginally, our performance improved as the quarter progressed.
In April, our passenger RASM fell by 0.4% but it rose by 1.3% in May and by 2.9% in June. Geographically, the inter-Alaska, Canada, Transcon and Mexico markets all showed significant gains, while Southern California, Arizona and Nevada showed declines due to new competition or excess capacity.
We were encouraged to see that in many of our city pairs where there is not excess capacity, RASM increased at double-digit rates. Our revenues up and down the West Coast have been negatively impacted by the competitive battles that we're fighting with Virgin America and JetBlue, among others.
We're very encouraged by the exit of ExpressJet as a brand, and the pull down of the majority of the flying ExpressJet was doing under the Delta code. These changes should materially help Horizon in particular.
Notwithstanding these, we need to see further capacity reductions. Higher unit revenue is the only way we're going to return to profitability with these fuel costs.
To this end, we are working to get the capacity right in our existing markets, improve our revenue management practices, and find new revenue sources. We expect capacity to be down 2% in the third quarter on a 9% decrease in departures, as our average trip length is growing significantly.
The reduction in the fourth quarter will be even more pronounced, with capacity coming down 5% on a 10% decline in departures. This will result in flat capacity for the full year.
Within these broader capacity pull downs, we have made a number of redeployments of our aircraft. For example, we've announced new service from Seattle to both the Twin Cities and Kona that will start later this fall, and these follow the start of the Seattle Maui service last Thursday.
We're in the process now of looking at capacity for November and December of this year and all of 2009. Our current thinking is that mainline capacity needs to decline by 5% to 10%, likely toward the upper end of this range.
We are working now to determine how this schedule reduction will affect our employment levels as well as our need for gates, other real estate and overhead. We expect to say more about these changes in early September.
Moving forward, we will be more focused on absolute capacity reductions than adding new cities, although, we do expect to add some new service as a way to bring more revenue into our network. In addition to changes to our networking capacity levels, we're also working to maximize the revenue we are earning on each flight.
Last quarter, we announced some new fees and some increases to existing fees. Since many of these increases have just taken effect, we expect to see the benefit in the third quarter and beyond.
We're also evaluating or have implemented other changes, such as closing fare buckets earlier in markets with high demand, adjusting our pricing to make local traffic more attractive to customers while increasing add-ons for connecting traffic, reducing the number of mileage plan award seats available in certain markets, and as we also announced this morning, increasing the number of miles required for an awards seat. For the third quarter, we're currently forecasting mainline CASM ex-fuel of $0.74 to $0.75, up 3% to 4% from last year.
For the full year, our goal remains unchanged at $0.75. This number will be more difficult to achieve as we make further reductions to our schedule, so there is some risk in it.
Given the extraordinary prices, reducing fuel consumption has been a key area we have been working on. Because of our fleet changes, the wing lists, longer stage lengths and other operational initiatives, we've improved our fuel efficiency significantly.
Our ASMs per gallon increased 5.5% this quarter compared to last year, and 17% compared to 5 years ago. We need to do more, however, and we're hard at work looking for additional ways to reduce consumption, by increasing the amount of time that engines and auxiliary power units run while our aircraft are on the ground, by working with the FAA to change our flight profiles, and by further reducing the weight of our aircraft.
We're hopeful that these efforts can ultimately save us close to 1 million gallons per month. At this point, I'll turn the call over to Jeff.
Jeff Pinneo
Great. Thank you, Brad and good day, everyone.
As reported, Horizon posted an adjusted pre-tax loss of $7.7 million compared to a loss of $4.6 million in the same period last year. Our results, while disappointing, were largely a function of fuel expenses that masked some very encouraging improvements in many areas of the business which I'll discuss in a moment.
Revenues grew 6.1% on a 3% decline in capacity and an 11.6% system yield improvement. System wide revenue per available seat mile was up 9.4% and, as in previous quarters, line of business mix played a key role in the year-over-year comparison, as we are no longer flying low RASM, low CASM missions for Frontier.
Looking at lines of business more closely, brand capacity was up 15.9% and RASM declined by 4%, due to a 3-point drop in load factor and flat year-over-year yields. Purchase capacity flying for Alaska was up 12.3%, a function of larger gauge aircraft and more harmonization flying than in the prior year.
On the expense side, a $23 million increase in economic fuel costs was partially offset by a $7.7 million reduction in maintenance expense, resulting in $13 million of additional adjusted operating costs or a 7.1% increase over last year. Some of the maintenance cost improvements stemmed from the timing of events, but the lion share came from lean process improvements in our heavy check programs.
In addition, we recently received FAA approval to extend our Q400 engine repair intervals, which should produce an additional $1.6 million in savings this year. As the industry and economic outlook for the year worsened last quarter, we launched a series of additional profit improvement initiatives across the company, including spending freezes, fee increases and divisional restructurings that resulted in the elimination of about 75 management and staff positions over the past nine months, roughly 13% of the base.
Together, these measures will improve profitability by $8 million annually. Looking ahead, the capacity reductions and market trims we have announced will drive a proportional reduction in front line and management positions.
While we hope to manage these reductions largely through normal attrition and voluntary means, some furloughs and layoffs will be unavoidable. Our productivity as improved in 24 of the past 26 quarters, reaching an all-time second quarter high of 168 passengers per FTE.
We expect more opportunities for structural savings as we complete our transition to a single type fleet. We are also encouraged by ongoing efforts to improve fuel efficiency through our fleet transition and other initiatives.
The comfortably greener Q400, which consumes 30% less fuel than other 70 to 100-seat aircraft, and has correspondingly lower emissions, anchors a program that is already producing tangible benefits. We reported CASM excluding fuel and fleet transition costs that were 4% below last year, a noteworthy accomplishment considering that we no longer have the low CASM Frontier flying in our base.
Turning to operations, our teams served our customers exceptionally well, with an on-time performance rate of 87.5% for the quarter. Were we a DOT reporting airline, we would have been ranked in the top spot among all mainland US carriers for April and May.
Working together, Horizon employees also exceeded our other service goals in each month of the quarter, triggering well-deserved monthly operational bonuses. In these times of industry uncertainty, our people's dedication to delivering a best-in-class experience for our customers distinguishes them as the caring professionals they are.
I couldn't be more proud of them or more grateful for their efforts. Since our announcement last quarter to transition to an all Q400 fleet, we have assembled a cross-divisional, cross-Air Group team to drive the project, led by Andrea Snyder.
One of their early recommendations was to accelerate the retirement of our entire Q200 fleet to late October. This action will minimize costs and allow us greater flexibility to remarket the remaining aircraft.
We delivered one Q200 in the quarter and we have letters of intent for six more, and are in discussions for the remaining five aircrafts. The transition out of our 20 CRJ700s is also well underway.
While the market appears to be softer than for the Q200s, we're encouraged by the broad initial interest for parties around the world. We've designated two CRJs to be parked for the fall schedule, and currently intend to continue to fly the remaining aircraft until we find new homes for them.
As fuel costs remain incredibly high, our sights are set on transitioning to an all Q400 fleet as quickly and as efficiently as possible. While there is much work to be done, the aircraft's best-in-class fuel economy, broad customer acceptance, and dramatically improved reliability confirm the appropriateness of this strategy.
Looking ahead, we plan significant fall and winter capacity reductions across all regions. In this softening economy, we're taking swift action to adjust frequency and capacity in each market to generate profit and/or to defend our home turf.
We're also taking aggressive steps to reduce schedules in many underperforming markets and to redeploy that capacity into promising new markets such as Flagstaff and Prescott, Arizona, and seasonal service to Mammoth Lakes, California. For the third quarter, we're forecasting a 14% decrease in capacity and non-fuel unit costs of $0.144 to $0.146, which is up 7% to 8% from 2007's third quarter.
For the full year, we're forecasting CASM expenses-fuel to be 1% to 2% higher than in 2007, and we expect our fourth quarter capacity will be down nearly 20% over the fourth quarter of 2007. Now, I'll turn the call back over to Brad, who will update you on Air Group balance sheet.
Brad?
Brad Tilden
Thanks, Jeff. As Bill said, we've increased our cash and short-term investment balance to just over $1 billion at June 30th, compared to $823 million at the end of 2007.
We generated $104 million of operating cash flow during the first six months of the year, down substantially from $267 million last year. During the first half of the year, we had capital spending of $312 million, new debt and lease financings at $485 million, long-term debt repayments of $45 million and common stock repurchases of $49 million.
Substantially, all of the share repurchases occurred in the first quarter. We're continuing to focus on liquidity and may increase our position even further in the months ahead.
Our main sources of incremental liquidity are at 11 unencumbered aircraft, including seven 737-800s, as well as purchase deposits and other assets such as spare engines, inventory, buildings, and receivables. The fair value of our hedge portfolio was $300 million at June 30th, and I might note that none of our hedges have been collateralized, and we also have a $185 million unused line of credit.
We still expect our capital spending to be $570 million for 2008 and $450 million for 2009. We have 10 remaining 737 deliveries this year, and we currently expect to finance the majority of these.
At this point, I'll turn the call back to Shannon.
Shannon Alberts
Thanks, Brad. We're happy to address questions from analysts at this time.
Jody, would you please assemble the roster for us?
Operator
Yes. (Operator Instructions) Your first question comes from the line of Ray Neidl with Calyon Securities.
Ray Neidl - Calyon Securities
Good morning, everyone.
Bill Ayer
Good morning, Ray.
Caroline Boren
Good morning, Ray.
Ray Neidl - Calyon Securities
More in general terms of -- you gave a lot of information about potential capacity cutbacks. It's understandable everybody is doing it, you're trying to get your cost structure down, but does that leave you open to competitors, particularly Virgin America, on maybe grabbing market share or grabbing some of your customers as you cutback in many of these markets?
These are fairly deep capacity cuts, I think, that you're considering?
Bill Ayer
Ray, this is Bill. Maybe I can start and then Brad and others can chime in.
You know, we intend to at least maintain our competitive position. And so, what's needed here, given fuel prices, is a proportionate reduction in capacity across all carriers in any given market.
And as we said in the prepared remarks, we're going to initiate some reductions and we're going to see what happens competitively. And if we find ourselves going backwards then we will be very capable of reversing those actions.
So, this is a real fluid situation but clearly what has to happen across the industry is more reductions from where we are given where fuel is running.
Brad Tilden
Maybe just to help scale it a bit, Ray, Alaska Airlines has 500 flights a day or 250 round-trips, so 5% of that would be 12 round-trips and 10% would be 25. We have more than 80 flights a day between Seattle and California and between 30 and 40 between Portland and California, so there is a lot of opportunity to trim a flight here and there while still keeping a very significant presence against Virgin and that's the intent.
Ray Neidl - Calyon Securities
Okay. And Brad, building -- or for Horizon, I guess, building on that with the Horizon situation, there's very deep cuts there, is the mission at Horizon going to change?
And what's the timing of that in going to one fleet type? And also the aircraft that Horizon is getting rid of are probably really undesirable aircraft, maybe they have to be scrapped or would you be stuck with those for a long time?
Jeff Pinneo
Maybe I'll start that, Ray. This is Jeff.
It is a very fluid situation, just as Brad said, on the capacity front and we have the added dimension of course of remarketing the CRJs. When we made the announcement to move in this direction, we said we would be doing it in the next 18 to 24 months.
We think that window will still give us ample opportunity working in very close partnership with Bombardier on both the remarketing of our RJs and the staging of our Q400 deliveries to get there. But that's our focus, is to move as quickly and as cost efficiently as we can to that final state.
The capacity reductions are significant. Much of it of course with the parking of the Q200 fleet in October drives that 20% reduction from the fourth quarter, and that will leave us about 9% down for the whole year.
So, transitions like this are difficult, but at the same time we have done a really good job I think with the up gauging Q400s, maintaining good strong presence in all of our core markets that support both our brand flying and the Alaska Air Group network support role that we have. And going forward, we don't see any changes to those two roles.
We're going to be right now in a place where 60% of our flying is brand, 40% is in Alaska CPA and both missions are critical to our future.
Bill Ayer
And Ray, this is Bill. One more time, I might just say that we want to be cautious.
We think this is the appropriate action given the circumstances and the initial cuts, we think we are right to try to right the ship here in terms of the bottom line. At the same time, we don't want to lose the opportunity to be opportunistic, and we certainly have a good track record there.
The whole experience following 9/11 is when we essentially launched our Transcom operation out of Seattle. So, we are keeping an eye open for opportunities, certainly, Kona and Minneapolis are examples of that.
Over at Horizon with Jeff they're doing Mammoth Lakes, and Prescott and Flagstaff, and Arizona. So, we're continuing to look for things, but overall we know capacity has to come down to get yields up.
Ray Neidl - Calyon Securities
Great. Thank you.
Operator
Your next question comes from the line of Jamie Baker with J.P.Morgan.
Jamie Baker - J.P.Morgan
Good morning, everybody.
Bill Ayer
Good morning, Jamie.
Caroline Boren
Good morning, Jamie.
Jamie Baker - J.P.Morgan
A question on costs and, Brad, I know you've touched on this a little bit, but the strict interpretation of the guidance that you gave this morning implies just stellar ex-fuel cost containment in the fourth quarter, obviously the time that you would be shrinking the most. And this is kind of emerged as, I guess, the theme for the earnings season.
I don't know if you've listened to any of your competitor conference calls, so Alaska isn't alone in this regard, but I'd love to hear what areas of cost reduction you expect to be able to hit at the time when capacity cuts should be putting the most pressure on your unit economics?
Bill Ayer
Jamie, you might ask Brandon Pedersen, our Controller, to comment on that.
Jamie Baker - J.P.Morgan
Okay.
Brandon Pedersen
Hi, Jamie, it's Brandon.
Jamie Baker - J.P.Morgan
Hi, Brandon.
Brandon Pedersen
Right now, we're seeing declines in the fourth quarter in wages and benefits, particularly as we take capacity out, we're going to need to make changes at the airport that really reflect those capacity cuts. We're expecting a decline in the fourth quarter in maintenance, and also expecting a decline in aircraft rent, just to name a few.
Jamie Baker - J.P.Morgan
Well, that's helpful. I appreciate that additional color.
I don't have any follow-ups. Thanks.
Glenn Johnson
Jamie, this is Glenn Johnson. The other thing I might comment on is just the economic benefit of the improved operation that we're seeing.
We've talked about the benefits of this before, but we are seeing over time being down the number of gates and the amount of airport space that we're requiring is down as a result of the improved operation, fuel burn is down due to less delays, hours on airframe and engines are down, which reduces maintenance expense. Passenger remuneration is down quite significantly, the list just goes on and on.
So, we expect to see that continue and accelerate into the fourth quarter.
Jamie Baker - J.P.Morgan
Any guidance on what fuel burn economics might look like? You did about at the mainline about 72.2 ASMs per gallon in the second quarter.
With all the changes in the fourth quarter, any sort of color there? It may not be the kind of metric you have at your fingertips, I'll understand.
Glenn Johnson
Yes, we actually don't have that at our fingertips. The number does sound right, Jamie, we do think we're going to lead the industry, as we get the last MD-80 we'll retire on August 25th, and the work we have done using that ASMs per gallon metric is that we will be industry-leading at that point, but just the way the fleet goes, I would expect it's another 1% or 2% or something like that, it's not huge.
Jamie Baker - J.P.Morgan
Okay. If you still add 737 classics to throw at it, then imagine what you could do, but that's an industry thing.
Okay. Thanks a lot, everybody.
I do appreciate it.
Glenn Johnson
Thanks, Jamie.
Operator
Your next question comes from the line of Mike Linenberg with Merrill Lynch.
Mike Linenberg - Merrill Lynch
Yes, just some further color on the RASM performance. I think Brad when you were running through and highlighting the geographic regions that performed well, intra-Alaska, Canada, Transcon, you mentioned that some of those markets, maybe all of them, were up double-digit.
I look at your total RASM for the quarter, which was on the low side, just kind of backing into the math here would suggest that your core markets north, south, were under pretty significant pressure there, maybe down, single digit some. Can you give some color on that?
Brad Tilden
Yes. I think, Mike, candidly your color is pretty accurate.
As we look at our network, I might divide it into three groups. One part of the network is where we have competition of network carriers or legacy airlines, and we might put the Transcon into that category.
We might also put Mexico and Hawaii into that category. And with those group of markets, we've actually had terrific success getting RASM up and it's typically up at double-digit rates.
Another category would be where we have very strong positions, and so we represent the majority of the capacity in the market, and we've done okay in those markets. It candidly, why you look to there is the strength of the economy, when you look at your RASM, and I think we've done less well than where the legacies have brought down some competition, or where the legacies have brought down the schedule we have done less well, but we've done okay.
And then, the third area you point to is up and down the West Coast, it's Southern Cal, Bay Area, Nevada, Arizona and those areas are the most challenged, Southern California in particular, RASM is down in the mid-to-high single-digit rates.
Mike Linenberg - Merrill Lynch
Do you have, you know, any sort of additional color on, maybe what ASMs look like in some of those markets? We know ExpressJet is pulling back, although, it seems like some of that is maybe being partially or entirely offset by frequency adds by the likes of JetBlue and Virgin America.
Can you give us maybe third quarter '08 versus third quarter '07 in some of those markets outlooks? Do you have that?
Brad Tilden
No. Maybe.
I think in general your sense is right. The capacity is still too high and capacity in California needs to come down.
As Bill said, we're going to take a shot here but keep a good eye to maintaining the market share, so we're looking for proportional cuts. One of the things we look at, Mike, is we look at capacity that we're flying against and we look at our schedule and our competitors' schedule, and then weight that to our presence in each region.
And Horizon in particular looks great on that score. The last four or five quarters, capacity in the Horizon market has been up 10%, 11%, 12%, 13% and that is it's us, but it's also ExpressJet and Delta.
If we look at that metric in the third quarter it's down 2%. So that's a huge, huge swing that should be really beneficial.
If we look at the markets where the Alaska mainline is, it's up 3%, 4%, 5%, and the third quarter, candidly, looks very similar to what the last few quarters have looked like.
Jeff Pinneo
This is Jeff, Mike. I think it's important to point out that while we had capacity in place to match the competitive presence of ExpressJet at that time and we have pulled some of that direct capacity down.
We still have very sufficient capacity on the network to flow that same traffic, for instance out of Spokane, over Seattle and Portland, and our advances for September or particularly August, September and beyond in those markets looks much stronger as a result. So, we're restoring the health of the network without having that direct capacity in place.
Mike Linenberg - Merrill Lynch
Okay. Great.
That's very helpful. Thanks, guys.
Jeff Pinneo
Thanks, Mike.
Operator
Your next question comes from the line of Peter Jacobs with Ragen MacKenzie.
Peter Jacobs - Ragen MacKenzie
Hi. Good morning, everybody.
Bill Ayer
Good morning.
Caroline Boren
Good Morning
Peter Jacobs - Ragen MacKenzie
First, Brad, could you just give me a sense of where raw fuel costs are now?
Jay Schaefer
Yes. This is Jay.
I'll cover that. Of course you can use your own [ford] curve in terms of projecting it out, but given what we saw yesterday, a raw would be sort of 3.86 a gallon for us.
Peter Jacobs - Ragen MacKenzie
Okay. Thanks.
Secondly -- as you're thinking about potentially 5% or 10% capacity reduction next year, obviously there's the 737-400s that you have in the fleet, but could you kind of expand upon on how you would implement that capacity reduction? Would you park those planes and keep them just kind of at standby, or would you just get rid of them off of operating leases or sell them?
Just walk me through a couple of scenarios, if you would, please.
Bill Ayer
And maybe just to get the flow right here, Peter. I think really what we're saying today is we have unacceptable financial results, they're putting more pressure on our cash flow than we want to see.
And so, we have announced that we do need to pull the schedule in and we've basically said that we're going to come back in early September with details of that. So that's what we're going to be doing in the next month, is looking at that very question.
And then, in terms of whether there are reductions in the fleet or whether the airplanes we have today fly less, whether we trim the late night flying, the red eye flying, the Saturday night flying, the Tuesday flying, the leisure destinations, it's always weak, we don't actually have -- we don't know what the answer is going to be there. So, we can't really comment today on whether there will be any reduction in the fleet or not.
Peter Jacobs - Ragen MacKenzie
Let me ask it maybe a different way. Currently, there's plan to take four 737-400s out of the fleet next year.
Is there opportunity based on how operating leases may be expiring in 2009 to put back a couple more airplanes?
Bill Ayer
To [lessors]?
Peter Jacobs - Ragen MacKenzie
Yes.
Bill Ayer
No, there's not. We have six airplanes in and five airplanes out, and we don't have additional lease returns that we could take advantage of.
Peter Jacobs - Ragen MacKenzie
Okay. And basically a follow-up to the previous question.
You talked about the three buckets to describe RASM dynamics, and you talked about the Transcon, Mexico and Hawaii up double-digit, and then you had a second bucket. But in that second bucket could you give us some examples of some of those regions?
Would that include the State of Alaska or to and from the State of Alaska, where just RASMs are up okay?
Bill Ayer
Yeah. I think maybe the best example of those regions would be the state of Alaska, Peter, and maybe some of the Horizon markets, where a lot of single carrier markets that we're in.
Peter Jacobs - Ragen MacKenzie
Okay. And lastly, the CapEx forecast for this year for aircraft -- at Alaska Airlines for aircraft of $390 million.
That would be indifferent to how you're actually going to be financing those airplanes that you're going to take delivery of; is that correct?
Bill Ayer
That's correct.
Peter Jacobs - Ragen MacKenzie
Okay. So, we're not going to necessarily see a $390 million reduction in cash?
In fact, it could be significantly smaller than that or none at all?
Brad Tilden
Yes, in fact to Bill's point we have a very singular focus on liquidity, so I think you would not likely see us deteriorate our cash position at all.
Peter Jacobs - Ragen MacKenzie
That's what I would have assumed. Okay, thanks and that's all I have.
Brad Tilden
Yeah.
Operator
Your next question comes from the line of David Simpson with Lehman Brothers.
David Simpson - Lehman Brothers
Hi, good morning guys. Quick question, I think it was Bill who had mentioned on the 2009 mainline capacity guidance from 5 to 10, maybe you thought you'd need to be on the higher end of that.
Just want to get some color on sort of what the oil assumptions are behind that. I mean, are you thinking something closer to $145 oil when you say that, or is that at today's oil?
Brad Tilden
David, as we kind of came up with that, we looked at a number of things. Oil prices, how we think RASM will respond to capacity cuts, and we tried really hard to balance short-term improvement and profitability and cash flow against long-term market position and profitability.
I will tell you that $127 a barrel fuel we think we need a 10% RASM increase to breakeven in a scenario where we have no hedges. So that's one input to the model.
But candidly, we looked at many, many things when we came up with the 5% to 10% objective.
Bill Ayer
And David, this is Bill, I might just add that we view this as being sort of an iterative process, and I think it's probably what all carriers are doing, is you take an initial cut at it with a reduction and then you kind of see how that goes, and certainly oil is -- who knows, you know? Again, we think this is a prudent thing to do given where we are right now and we understand we need to be flexible and we may need to do more, we need to do less.
We are just going to see how it goes and stay very close to it.
David Simpson - Lehman Brothers
Got you, thanks. And just on -- you have a couple of months, almost a few months now of going head-to-head with Virgin.
Just wanted to get some color just on what you're seeing in terms of, you know, the front of the airplane versus the black of the airplane? Some of the RASM commentary, is that skewed towards the back of the airplane or are you seeing impacts on both in the first class and coach?
Gregg Saretsky
David this is Gregg Saretsky. We're not seeing any reduction in our unit revenues.
In fact, the Seattle/San Francisco market is performing strongly despite an increase in capacity in the last quarter of about 10% year-over-year. Little more -- a little more softness I would characterize in the L.A.
basin, and I think that's more of a function of not Virgin but of all the incremental capacity there in Long Beach by JetBlue, and in San Diego as well as by JetBlue. So, our Southern California unit revenues are actually declining, while the Bay Area unit revenues are increasing year-over-year and we're not seeing any deterioration in our mix.
David Simpson - Lehman Brothers
And is that tracking better than what you guys had expected relative, when you saw the announcement or would you say it's having less impact than you expected?
Gregg Saretsky
Yes, that's a good question. I would say that we probably would have expected demand to fall off more than we have seen.
David Simpson - Lehman Brothers
All right, great. Thanks, guys.
Bill Ayer
Given where fuel prices are, the absolute level is way too low.
David Simpson - Lehman Brothers
Right. Understood.
Operator
Your next question comes from the line of Daniel McKenzie with Credit Suisse.
Daniel McKenzie - Credit Suisse
Yes. Hi.
Good morning, guys.
Bill Ayer
Good morning.
Caroline Boren
Good morning, Dan.
Daniel McKenzie - Credit Suisse
One quick housecleaning question. Have the scheduling changes been fully uploaded at this point?
Brad Tilden
No, Dan. I think what's in the system now should reflect a 2% reduction in capacity in the third quarter and a 4%, just under 4% for the fourth quarter, and what we talked about today was a 5% reduction for the fourth quarter.
So, they are not fully loaded for the fourth quarter and they are not -- for 2009 they are not loaded at all, the changes that we're talking about today.
Daniel McKenzie - Credit Suisse
Got it. Okay and then perhaps, this question might be a little bit premature then, but following up on some of the competitive capacities here, capacity commentary, I wasn't quite clear where the capacity cuts are going to be coming from looking ahead, and I guess in particular I wonder, if you guys can talk about sort of what percent of the total cuts are coming from the more competitive areas like the -- I guess South California basin or Virgin markets or perhaps even, in markets that might fall into the third bucket, as you would characterize it?
Bill Ayer
Yes. Dan, we will provide more detail on what we're doing and where in early September.
I might just go back to the comment we made earlier that just given the 80 flights we have into Southern California and the 35 or 40 flights we have from Portland to California -- sorry, 80 from Seattle and all of California and 35 or 40 from Portland to all of California, we have a lot -- a big opportunity to do cuts of one and two in city pairs without having big significant reductions in particular city pairs.
Daniel McKenzie - Credit Suisse
Okay. Good, that's helpful.
And then, I guess, finally my last question here is perhaps a little more challenging and broad, but I'll throw it out there because it's a question that I get, and that's realistically, how should longer term investors think about what Alaska looks like in two or three years, and how do you get there?
Bill Ayer
Our intent obviously is to get back to profitability and go after this 10% ROIC goal, and that's the track we were on a year or so ago, and we've made great progress and we don't know why that isn't doable again albeit with a smaller base, and the whole industry, if these oil prices stay high, will be considerably smaller than it is today. But there's no reason we can't develop a profitable model with a smaller company, and achieve the very same goals that we laid out back in our 2010 plan several years ago.
Brad Tilden
And Bill talked about all the strength and the cash position, the position in the State of Alaska, we are just the number one customer satisfaction that we just got, the terrific operational performance and the fleet. A huge thing for these oil prices is both airlines are going to be moving forward with -- in the deepest fleet position you could possibly have so we're very bullish.
Daniel McKenzie - Credit Suisse
Okay. Good.
Thanks. Appreciate it.
Operator
Your next question comes from the line of Kevin Crissey with UBS.
Kevin Crissey – UBS
Good morning.
Bill Ayer
Hi.
Kevin Crissey – UBS
Hi. On your hedge guidance, is that somewhere -- is that includes the capacity cuts similar to 5 to 10, like at the midpoint when you say approximate percentage of fuel hedged?
Or is that prior to the cuts?
Jay Schaefer
Kevin, this is Jay. It does, it includes the projected cuts.
Kevin Crissey - UBS
Okay. Thanks.
And you guys, when you're looking at Virgin America, what are your thoughts on their financial health and would it be -- maybe it's a mistake to be pulling back. Should you think about trying to go the opposite way?
Brad Tilden
So, our thoughts on their financial health, what -- we don't see a lot there. You know, one tiny little nip that folks might be interested in is that we're all required to file information with the Department of Transportation, and Virgin is actually not making those filings.
So, it's difficult for us and others to know how they're doing in some of these markets. And as we said earlier, I think we are trying really hard to balance the long-term against the short term.
We are going to do everything we can to keep this company in a position to come back and take great opportunity of a healthier airline industry, but I think everybody recognizes that if fuel stays where it is, fares need to go up a lot. And as fares go up, fewer people will travel and as fewer people travel, some capacity is going to have to come out of the system.
And it may be much, much more than the 5% or 10% that Alaska is talking about. So, I think our own sense is that at the end of the day, if we're all dealing with an environment of high fuel prices, this 5% to 10% reduction might be on the more aggressive end of the spectrum in terms of presence.
So, I think, we're going to have a lot of capacity and a lot of availability to fight a fight against Virgin and maintain the great position that we have in California.
Gregg Saretsky
Kevin this is Gregg Saretsky, I might just add that we have 15 flights a day from Seattle to L.A. in a softening economy and moving into the slower winter months.
Moving that 15 flights a day down to 14 or 13 still provides plenty of pressure on Virgin and won't allow them to move into our market. We're very confident about our ability to defend that position.
Kevin Crissey - UBS
Okay. And I'm not sure if you guys have an opinion or have expressed it and maybe I have missed it.
There's some talk in Washington. Where do you think the feel is in Washington, if you have an opinion, on kind of the -- if there is this much loss of capacity, which I mean, I agree it ultimately has to happen if this is going to be the real fuel price, but that may not be as palatable to regulators and government types.
What are your thoughts on what's happening on the Hill?
Bill Ayer
Yeah, Kevin, this is Bill. I don't know exactly what's happening on the Hill at any given time, but I do, I tell you our position generally is that, and maybe you're getting to this, people have advocated Re-regulation of the industry, we are very much free market advocates, and we believe in spite of all the bumps in the road that deregulation has provided a lot of customer benefit.
And we also think there is a role for government, and I think that needs to be thought through very clearly by lawmakers. I think, providing a more robust air traffic control system, we as a country, dropped the ball on that several times, and we're in the process of doing it again I think.
Essential air service is an area that I think the government can play a role in, and there are certainly communities that are losing air service, and their own economic development efforts are going to be severely impaired. And so, we would advocate a re-look at EAS, and we benefit to some degree from that, but I think the whole country could benefit, and that could be a role for government.
And then Brad mentioned this, the kind of a knit with Virgin, but them not filing data gets to a level of level playing field. There's another role for the government.
It don't re-regulate the industry in a major way but do ensure that there's a level playing field to make the competition work. So that's a bit on that.
I think you get into the environmental side of things, and the airline industry has a great story in terms of emissions and reductions, both in fuel burn and emissions over the last decade or so. That story needs to be told more, so people understand that.
I think the government needs to be careful that they don't dictate something that's not achievable or is too costly for this industry, but we're certainly advocates of continued improvement in emissions and carbon emissions and so forth. And then, I guess, maybe the final thing is just this whole effort that's going on right now that ATA and we have been a part of with respect to excessive speculation in the oil markets.
Our view on that is that, and we did sign onto the letter with the other carriers, we're pretty sure that speculation is playing a role -- excessive speculation is playing a role in the current run-up. I don't know how big that is.
And there's certainly supply and demand that's a significant element of this, and we're just hopeful that Congress can balance those things and end up and it sound like there's some reason to be hopeful right now that one or two bills that are being worked on, could actually end up with something that helps, that does reduce some of the excessive speculation and also addresses some of the supply issues, and it needs to be a bipartisan bill to really get traction and be successful. So, we're trying to support that effort to the degree that we can.
Kevin Crissey - UBS
Okay, thank you very much.
Operator
Thank you, I would now like to turn the conference over to Caroline Boren.
Caroline Boren
Thank you. And Jody, would you please remind our media callers of the procedure for asking questions as we shift to the media portion of the call?
Operator
Yes, ma'am. Thank you.
(Operator Instructions) Your first question comes from the line of Ted Reed with TheStreet.com.
Caroline Boren
Good morning, Ted.
Ted Reed - TheStreet.com
Thank you. Good morning.
Just two things. First of all I'd like to know -- I'd like to hear a little bit more about fall demand?
Brad Tilden
Hi, Ted, this is Brad. We do have some advanced booking information that we've put into our 8-K that went along with our filing this morning.
Advances for July are down four points at the moment. For August, we're flat to down one point.
September, we're currently up three points, and so that gives you the volume side. We don't have a lot of information about the pricing side of this equation yet.
But I guess we're currently seeing, I guess, I would say some weakness in July and hoping that that gets better in August and September as we begin to pull capacity down.
Ted Reed - TheStreet.com
All right, thank you. And secondly, you're making pretty severe cuts but at the same time oil prices maybe, I don't know, maybe are going down.
What happens to you and also to the industry were fuel prices to go down substantially? What would happen then?
Bill Ayer
Well, it's great news. Let's hope.
And I think, as we said, we're going to be fluid and flexible and we're going to look for opportunities but given where we are today, we think this is the prudent action to take with the capacity reductions, and we'll respond from there depending on what happens externally and with the competitive environment as well.
Ted Reed - TheStreet.com
Are you locked in for third quarter yet or not?
Brad Tilden
Locked in, in terms of our capacity?
Ted Reed - TheStreet.com
Hmm
Brad Tilden
Yes, essentially.
Ted Reed - TheStreet.com
Okay. All right.
Thank you.
Brad Tilden
Yes.
Operator
Your next question comes from the line of Hugo Miller with Bloomberg News.
Caroline Boren
Hello, Hugo.
Hugo Miller - Bloomberg News
Yes, hello. Just to reiterate what you were talking about with the advanced bookings that was down 4%, August flat and September 3% down?
Brad Tilden
Down four points of load factor and --
Hugo Miller - Bloomberg News
Four points of load factor?
Brad Tilden
Yes and I think August is down zero to one.
Hugo Miller - Bloomberg News
Okay. And so that's the bookings for July, August and September, load factor down?
Okay.
Brad Tilden
Yes.
Hugo Miller - Bloomberg News
Okay. The announcement today, 5%, what does that mean in actual numbers of jobs that you're likely to be cutting within management at Alaska Airlines, first of all?
Bill Ayer
Well, we said in the announcement today 5%, about 80 jobs in management.
Hugo Miller - Bloomberg News
80 jobs or so? Okay.
Bill Ayer
Correct.
Hugo Miller - Bloomberg News
And that's management. In terms of what has been announced or planned on ground staff, in-flight staff, pilots, attendants, what kind of cuts have come or are coming?
Bill Ayer
We haven't decided that yet. It's going to be dependent on exactly how the schedule shakes out for next year.
Hugo Miller - Bloomberg News
Can we assume that it would be at least as much as it is on -- a commensurate cut as management, at least 5%?
Bill Ayer
I don't think we want to put a number on it right now. We've got to look at this and be very careful.
We want to do as little as we need to do. We've got great people at both companies, and you don't like to do these things at all if you can avoid it.
So, we're going to be very careful with this but it's clear that with the capacity reduction, and the front line jobs are related to capacity, they're related to departures and numbers of passengers, there's going to be a requirement for a reduction.
Hugo Miller - Bloomberg News
Okay. Thank you.
Operator
Thank you. I would now like to turn the conference back over to Ms.
Alberts for closing remarks.
Shannon Alberts
I think that's all we have.
Bill Ayer
Yeah. Thank you, everybody, for joining us and look forward to talking with you next quarter.
Take care.
Shannon Alberts
Thanks.
Operator
Thank you. That concludes today's conference call.
You may now disconnect.