Jan 22, 2015
Executives
Lavanya Sareen - MD, IR Brad Tilden - CEO Brandon Pedersen - CFO Andrew Harrison - SVP of Planning & Revenue Management Mark Eliasen - VP, Finance and Treasurer Joseph Sprague - SVP, Communications and External Relations
Analysts
Savi Syth - Raymond James Michael Linenberg - Deutsche Bank Hunter Keay - Wolfe Research Helane Becker - Cowen and Company Jamie Baker - JPMorgan Duane Pfennigwerth - Evercore ISI Joe DeNardi - Stifel Dan McKenzie - Buckingham Research Glenn Engel - Bank of America/Merrill Lynch Darryl Genovesi - UBS David Fintzen - Barclays
Operator
Good morning. My name is Michele, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Alaska Air Group Fourth Quarter and Full year 2014 Earnings Conference Call. Today's call is being recorded and will be accessible for future playback at www.alaskaair.com.
[Operator Instructions]. I would now like to turn the call over Alaska Air Group’s Managing Director of Investor Relation, Lavanya Sareen.
Please go ahead.
Lavanya Sareen
Thanks, Michele. Hi good morning everyone and thank you for joining us for Alaska Air Group’s fourth quarter and full year 2014 earnings call.
Before we get into the results for our fourth quarter, we hope we have got a chance to see the results of the spectacular fourth quarter turnaround by our other CFO, our Chief Football Officer, Russell Wilson. Our entire team at Alaska congratulates the NFC champion Seattle Seahawk on their win last Sunday and we wish them all the luck for the Super Bowl next week.
For the earnings call today our CEO Brad Tilden; our other CFO Brandon Pedersen; and our Senior VP of Planning & Revenue Management, Andrew Harrison will provide highlights from the fourth quarter and our outlook for the first quarter and full year 2015. Several members of our senior management team are also on hand to help answer your question.
Our comments today will include forward-looking statements regarding our future expectations, which may differ significantly from actual results. Information on risk factors that could affect our business can be found in our SEC filings.
We will refer to certain non-GAAP financial measures such as adjusted earnings and unit costs, excluding fuel. We have provided a reconciliation between the most directly comparable GAAP and non-GAAP measures in our earnings release.
This morning, Alaska Air Group reported a fourth quarter GAAP net profit of $148 million. Excluding mark-to-market fuel hedge gains of $6 million and a $30 million benefit related to certain post requirement benefit plans and a one-time gain associated with a legal settlement, Air Group reported a record adjusted net profit of $125 million or $0.94 per diluted share.
This result compares to first call consensus of $0.93 per share and exceeds last year's adjusted net income of $77 million or $0.55 per diluted share. For the full year, Air Group reported a record adjusted net profit of $571 million compared to $383 million in 2013.
Adjusted earnings per share grew by 55% from $2.17 per share in 2013 to $4.18 per share. Additional information about cost expectations, capacity plans, fuel hedging, capital expenditures and other items can be found in our investor update included in our Form 8-K issued this morning and available on our website at alaskaair.com.
And now, I'll turn the call over to Brad.
Brad Tilden
Thanks, Lavanya, and good morning, everyone. We are very happy to be talking with you again.
We had a record year on almost every front even as we approached the end of the second year with much more competition in Seattle. We got a fabulous group of folks here, folks that look at the outside world realistically and then get to work putting together plans that will work, and then we relentlessly focused on executing those plans.
I could not be more proud of all of the people of Alaska and horizon together with the leadership team who have risen to the occasion and produced some outstanding results. Looking at the numbers, our pretax profit for the quarter was $206 million and that was 67% higher than 2013.
It helped us post record full-year pretax profits of $922 million, up 50% from 2013. We had a 17.2% pretax margin which is almost 480 basis points higher than 2013.
And our ROIC for the trailing 12 months is 18.6%, an improvement of 500 basis points. Importantly, that improvement was driven by great earnings but also by reductions we made in the invested capital base through share repurchases.
Even excluding the tailwind from lower fuel costs, our full year margins expanded by 300 basis points. One of the distinguishing characteristics of high quality companies is the durability of their profits.
2014 was our fifth consecutive year of profitability in every quarter and our second year profitability in every single month. In fact, in 2014, our monthly profit, when compared to the same month in 2013, was higher in every single month.
These results affirm that we have built a business that performs when challenged and that works well throughout the cycle. Our cash flow from operations was over $1 billion, which has enabled us to reinvest in the business and return cash to shareholders.
Brandon will talk more in a moment about our financial engine and about how growth in profit is enabling us to improve our balance sheet and our competitive position. As you know, given our belief in the sustainability of our results we declared our first dividend in 21 years in July, 2013 and we increased it by 25% just six months later.
Today, we are very pleased to announce that we are raising our dividend by 60% from $0.125 per share to $0.20 per share, and that's per quarter. With today's announcement we’ve doubled our dividend in the 18 months since we announced it and with today's announcement our dividend yield is 1.2% and our dividend payout ratio is 18%.
If we step back and look at our results over a longer period of time, say five years, we see that we've have grown ASMs by an average of almost 8% per year. We’ve grown revenues by almost 11% per year.
We’ve actually shrunk unit cost by 1.7% per year. And finally, we’ve growth both net income and cash flow from operations by $150 million per year.
From a financial perspective, this machine is working well, and at this point, we are singularly focused on driving this performance higher. As I said at the outset, these financial results were driven by the development of good plans and, more importantly, by great execution of those plans.
As we do every year, we put out a call to action to our folks at the beginning of 2014 and I’d like to report out on how our team did against those objectives Operationally, ALK leads the industry in reliability. Alaska was named the top U.S.
airline by Wall Street Journal's annual score card of airline service for the second year in a row. This is a quantitative analysis which is based on data collected from the DOT and other sources.
86% of our flights this year arrived on time and we expect this to result in Alaska being the number one carrier in 2014 is ranked by flightsdesk.com for the fifth year in a row. Our completion factor of 99.5% was also the highest among the seven largest domestic carriers.
From a customer perspective, we reached an internal customer satisfaction record in 2014. Our 84% blended satisfaction score is the best score we've received since we began collecting this data in 2007.
As you know, this internal data has been validated by J.D. Power & Associates which ranked Alaska as the leading U.S.
airline for the seventh year in a row and by their first ever survey of frequent flier plans in 2014 which rated us number one. From an employee perspective, I think we're doing reasonably well also.
I think these results demonstrate that our folks are flat delivering every day. We've got a great group of folks and our employee survey shows that employee engagement is at an all time high.
We spend a lot of time with our people listening to them and talking with them about where the industry is headed and where Alaska is going; and I think that’s paying off. On the labor front, our flight attendants approved a new five-year contract in December.
With the flight attendants the deal done, the weighted average duration of our agreements covering represented employees is almost four years; its three years and nine months to be exact. And we believe that compares very favorably to the rest of the industry.
I want to thank our flight attendants for not losing focus on our customers during a long and difficult negotiation. Another reason Alaska is performing well is that we have great alignment with our employees.
When the company does well our employees do well and every one of our employees participates in the same gain sharing plan. Our programs, which we call PBP, pay close to the maximum for the fifth consecutive year.
This is also the fifth consecutive year where our employees will get a full month salary and performance bonuses. Brandon will talk more about this in a bit; for me, I'd just like to say that this alignment between shareholders and employees is powerful and I also want to say that I'm proud of our employees for working hard and earning these pay outs.
As we sit here today, we're very excited about the future. Airlines are managing capacity to match demand and management teams across the industry are running airlines to create a better experience for customers, better jobs and more job security for our employees and, most importantly, real value for our shareholders.
And lower fuel prices provide real opportunity in the near-term for owners. For Alaska these great results have come amidst unprecedented competition in our markets and the folks throughout our company are rising to the occasion to make us a great airline every day for our customers.
We think of this customer experience together with our low fares and low cost as a competitive advantage or as an economic moat to borrow a term from Warren Buffett. We have a whole host of initiatives that we're focusing on in 2015 to further widen this moat and they range from working with our employees to further enhance our onboard service, to investing in our onboard product and experience, to further improving our mobile and other customer facing technologies to maintain our leadership position.
We're excited about the future and our entire team of 13,000 people is completely focused on achieving our plan so that we can continue to deliver strong results in the years to come. With that, I'd like to turn the call over to Andrew.
Andrew Harrison
Thanks, Brad, and good morning, everyone. Our 2014 passenger revenue grew by 7.3% on 7.1% growth in capacity, resulting in a PRASM increase of 0.2%.
Very strong performance considering competitive capacity grew 7% in our markets. Our total RASM outpaced PRASM and grew 0.9% as a result of ancillary revenue initiatives that we launched in 2014.
Looking at the fourth quarter, our revenue was up 8% on a capacity increase of 10.6%. PRASM was down 2.4% as a result of the 8% increase in competitive capacity and a 1.1% increase in system trip length.
That said, underlying demand continues to be robust and we continue to work on improving the strength and profitability of our network in a numbers of ways. First, we have the best schedule utility for customers in Seattle and the Pacific Northwest and our launch of 16 new markets over the last year brings our total North America destinations served from Seattle to 79 versus our closest competitor at 26.
Our Seattle market share of 55% is four times our nearest competitor and ensures that we will continue to provide the greatest network utility for our customers. Secondly, our growth has been incredibly efficient and margin accretive.
An important element of this has been our fleet retrofit program which has helped lower unit costs without compromising passenger comfort. As of the end of December, we've completed the retro seat fit on all our 737-800 and 737-900 aircraft.
These improvements combined with the delivery of 10 more 737-900ERs accounted for 50% of the capacity growth in 2014. In addition, the seat retrofit program should provide an incremental benefit of about $25 million in 2015 or a total run rate benefit of approximately $50 million per year.
Third, as I shared at our investor day last month, the industry is moved to revenue based loyalty program and presents us with a unique opportunity to increase our membership base while evaluating the right structure for Alaska in the long run. Active Mileage Plan members are up over 11.4% this year, the largest increase we have ever seen, on a 6.8% increase in passengers.
In fact, the growth rate is almost double what we have observed on average over the last five years, but perhaps even more impressive is our elite members on average flew 6% more segments on Alaska versus last year. The growing loyalty member base and fierce loyalty of our customers gives us confidence that we will continue to be successful in our core markets.
Finally, while fuels has been a nice tailwind in the fourth quarter several of you have asked us if we are pricing to account for the lower fuel prices, and the answer is no. When pricing tickets we look at the supply and demand in each of our markets and adjust prices to balance the two.
Approximately 90% of our flying is in the United States domestic market and the U.S. economy continues to be strong.
Looking ahead, Alaska's first quarter capacity is expected to be up 11% approximately 4 points of which is driven by efficient up gauging. Our full year growth expectation for 2015 is 8% and that's in line with previous guidance.
Other airline capacity in the first quarter of '15 is expected to be up 15%, that's a 2 point reduction from three months ago and a 7 point reduction from published schedules six months ago. While the demand environment is robust there are some factors that will pressure unit revenues in Q1 especially January; I would like to point those out.
Firstly, the first quarter of last year was our lowest capacity growth quarter, up about 4.5% wherein 2015 it will be our highest capacity growth quarter as we sit here today up 11%. Second, our comps are top.
We had a 3.5% increase in PRASM last January, that was the highest of the year helped by a significant amount of revenue we generated carrying traffic for other airlines that had high storm cancellations. For the first quarter last year that was about a point of PRASM or $9 million most of which was in January.
And finally, we have a special promotion going on right now where the first bag is free for members of our Mileage Plan through the month of January. New customer acquisition has far exceeded our expectation that the foregone bag revenue equate to nearly a point of RASM for the quarter.
As I look at 2015, underlying demand is strong, competitive capacity while high has moderated versus previous expectation, initiatives developed are working well, members in our loyalty program are growing at unprecedented rate and, in general, new markets are exceeding our expectations. This gives us confidence that we are entering 2015 on a strong footing.
At our Investor Day, we shared some of the revenue initiatives we are undertaking to ensure we continue to perform well in 2015 and beyond. I wanted to give you some additional details on a few fronts.
As you might recall, we added a discounted booking class to our first class fares and rolled that out to approximately 50% of our market by year end. This increased our paid first class traffic by 7 points in the fourth quarter and we are rolling this out to the remaining 50% of our system by the end of March.
First class PRASM in Q4 was up approximately 1% or 3 points above system PRASM performance. Second, we will launch the preferred seating product in the second quarter which allows customers to book an exit row or bulkhead seat for as little as $15 to $50 one way depending on the stage length of the flight.
We bundled this with a free drink and priority boarding to make this a compelling offer to our customers. Initially, we expected to at around $15 million in revenue and margin on an annualized basis but we anticipate growing these revenues over time.
Third, we are upgrading our revenue management system in the first quarter. While the underlying pricing algorithms are the same, the system will be able to optimize flights based on demand more regularly which will help us optimize revenue.
The upgrade will also help automate certain processes that are manual today in the system. A primary example of this is P fares I just talked about.
And finally, and personally for me, very pleased to announce that John Kirby has joined Alaska as our Vice President of Capacity Planning overseeing Alaska Air Group's network and scheduling functions. John will richly add to our team with over three decades of experiencing working at carriers of all sizes.
We are confident that the 16 new markets we launched in 2014 combined with the 2014 initiatives and the additional projects we are rolling out in 2015 will help us continue to deliver strong results this year. And with that, I'll turn the call over to Brandon.
Brandon Pedersen
Thanks, Andrew, and good morning, everyone. Air Group's adjusted net profit for the fourth quarter improved by 67% and, because of the reduction in shares outstanding, earnings per share improved by 71%.
Full year profit grew by 50% and, as Brad said, after tax ROIC came in at 18.6%, 500 basis points higher than in 2013. Our $206 million fourth quarter pretax profit was $83 million higher than last year.
Revenues grew by almost $100 million and non-fuel expenses grew by $60 million but those increases were offset by a $42 million reduction in price of fuel. I know the collapse of fuel prices is front and center in investors’ minds right now, but I don’t want that to overshadow the excellent cost performance we achieved both in the fourth quarter and in the full year.
CASM ex-fuel for the quarter declined by 2.4% on a 10.6% ASM growth. Even with the reduction, there were a couple of noteworthy items that negatively impact the quarter; first, Q4 includes the impact of the new agreement with Alaska’s flight attendants.
The signing bonus and new rates accounted for about $9 million of additional cost. And as you might recall, last year in Q4, we recorded a final favorable true-up to Port of Seattle lease costs making Q4 this year a very tough comp and explaining much of the 31% increase in landing fees and rents on the P&L.
For the full year, we lowered non-fuel unit cost by 1.3% making this the fifth year in a row of non-fuel unit cost reduction and the 12th year out of the last 13 for the main line operation. The reduction widens our cost gap versus larger rival network carriers which is on average about 20% to 25% and which continues to be source of important competitive advantage.
We saw excellent cost control in most areas all year and productivity continues to be a great story. Across Air Group we increased passengers for FDE by another 2%.
We are proud to report that incentive pay increased by 10%. Our people earned a new record $116 million.
About $14 million of that was earned under the operational performance rewards program for meeting monthly on time and customer satisfaction target; the other $102 million was earned through our PBP program. PBP is not a traditional profit sharing plan but rather has annual goals set by our board in four categories: safety, customer satisfaction, and non-fuel unit costs, which each may get 10% of the total, and an Air Group profit goal which may accept the remaining 70%.
Employees at Alaska exceeded all of these goals and are receiving the maximum pay-out of 10% of base wages. Horizon employees missed the cost goal but hit the maximum pay-outs for the other measures.
As Brad said, PBP pay-outs will approximate a month pay for nearly everyone. We will be paying PBP on Monday, almost a month earlier than normal thanks to the great efforts by our payroll and HR teams.
Turning the page to 2015, we expect non-fuel CASM to be out flat. At Investor Day, we told you that the expected non-fuel CASM -- we expected non-fuel CASM to decline about half a point.
In absolute terms, we ended with a budget that was very, very close to what we thought at the time. However, because we finished 2014 with better cost than we were expecting then the comp is simply tougher.
Let me walk you through some of the larger cost drivers. First, a new flight attendant contact is expected to add about $25 million of structural expense in 2015, up about 19%, but adds about $15 million of incremental expense in 2015 after considering the signing bonus and additional wages already booked into Q4.
The new contract does, however, include some important productivity enhancements. Second, pension expense is expected to increase about $20 million or 150% driven by lower discount rates and higher life expectancy assumptions.
Even with the discount rate and required assumption changes our pensions remain 93% funded with no required contributions. Third, depreciation will be at 14% because of the significant investments we're making in the fleet.
We took delivery of 10 Boeing 737-900ERs in 2014 and will get another 11 of those highly efficient aircraft in 2015. The 900ERs have 37 more seats than the 737-400 but burn about the same amount of fuel.
They are more reliable and customers like them better. We will also take another Q400 earlier in the year.
Fourth, maintenance expense will increase about 12%, split about 60-40 between Alaska and Horizon. Much of our Q400 fleet is entering an engine overhaul cycle.
And finally, as Brad mentioned, we're investing in things that customers will notice such as new in-flight entertainment and improved food offerings. The customer service workshops for more than 8,000 of our customers facing employees will cost us about $10 million but this will be money very well spent much like the flight path training that we had a few years ago was.
Now, fuel. The dramatic retreat in oil prices should translate into higher profitability and cash flows for all airlines.
Having said that, and even at these oil prices we're really focused on fuel efficiency in order to increase our all out competitive advantage on the cost side. In 2014, our fuel efficiency on an ASM per gallon basis improved by another 2.1% bringing our fuel efficiency improvement for over the last 10 years to 22%.
We have now installed splits scimitar winglets on 48 aircrafts with more to go and look forward to phasing out to remaining 27 737-400 aircraft and replacing them with efficient 900ERs by the end of 2017. The recent collapse in oil prices has put fuel hedging policies in the spotlight.
Alaska's program is simple and straightforward. We buy call options that act as an insurance policy against sudden spikes and allow us to fully participate in fuel price declines with no risk of collateral calls.
Turning to cash flow and capital allocation. Operating cash flow topped $1 billion in 2014 for the first time ever.
Free cash flow was $344 million. Alaska's debt balance declined to $800 million as scheduled principal payments more than offset new financing.
We ended the year with $1.2 billion in cash and a $260 million net cash position even after factoring in our operating leases. We own 77% of our fleets, including 76 airplanes that are owned free and clear, that are mostly high value NGs.
And we expect this to increase as we replace the 737-400s with new 900ERs. Alaska's strong balance sheet compares favorably to other high quality industrials in the S&P 500.
The credit rating agency say Alaska is only one of two investment grade airlines in the U.S. and only one of five worldwide.
Access to high grade credit markets is another way Alaska differentiate itself and as a competitive advantage. This will give us more options when and if we want to go to the debt market and we’ll be able to do at a lower cost.
We invest $667 million into the business in 2014 bringing the total since the beginning of 2009 to nearly $2.8 billion. We are generating very strong returns on that investment and have created substantial value for our owners at these returns levels and even without the benefit of low fuel prices which may very well be short lived, Air Group like any other high quality industrial earning 10 percentage points above whack should be investing more into the business and we are doing so.
We are currently projecting CapEx for 2015 to be between $650 million and $700 million. Brad noted that we repurchased 7.3 million shares of our common stock for $348 million which equates to about 5% of the shares that were outstanding as of the beginning of the year.
We also paid $68 million in dividends bringing the total returns to shareholders to $416 million in 2014. This exceeded our cumulative total returns in the proceeding five years.
Dating back to 2007, our share repurchase programs have allowed us to buyback 30% of our shares before dilution and 18% after. As we said at Investor Day, we expect to return more cash to shareholders in 2015 than we did in 2014.
2014 was a very good year for Air Group. Alaska has real and durable competitive advantages that will help us sustain these returns going forward.
We're safe; we run an excellent operation. We offer award winning service, have really loyal customers, a great network, low costs, a modern fuel efficient fleet, a strong balance sheet and engaged employees.
I want to join Brad and thank them all for everything they did to produce these terrific results. And with that, we'd like to open it up to questions that you may have.
Operator
[Operator Instructions]. Your first question comes from Savi Syth from Raymond James.
Your line is open.
Savi Syth-Raymond James
Just kind of curious on that, I appreciate all the color you gave on the unit revenue side, just -- in December, I was wondering, how much of the timing shift Thanksgiving kind of hurt your December unit revenue?
Andrew Harrison
Hi Savi, this is Andrew. I don’t have an exact numbers, but I think I'd put it around a point or so of that shift, and again December was a very high capacity growth month at around 12 plus percent versus November.
Savi Syth-Raymond James
Got it. It makes sense.
And then the mileage plan, how long does that go through?
Andrew Harrison
That actually ends for folks actually flying on an airplane January 31 at midnight. So for the full month of January folks who physically fly on our airplanes who are mileage plan members will get a free bag.
Savi Syth-Raymond James
All right, great. And then if I may just one last on the CapEx side, and I understand the fleet CapEx, just wondering what the CapEx increases on the non-aircraft side and what those investments are?
Brandon Pedersen
Hi, Savi its Brandon. You caught me off guard on that one.
The -- let me come back on the line and get you that answer.
Savi Syth-Raymond James
All right, sounds good. All right thanks.
Brandon Pedersen
Yes, thanks.
Operator
And your next question comes from Hunter Keay. Your line is open.
Brandon Pedersen
Hunter, are you there?
Operator
I'm sorry; he has jumped out of the queue. So we'll move on to your next question, Michael Linenberg from Deutsche Bank.
Your line is open.
Michael Linenberg-Deutsche Bank
Just two questions here, Brandon, historically, I've liked how you have positioned yourself and how you hedge well and I'm just thinking with the curve having gone from backwardation in to a fairly steep contango. I think if I look at over the next year, it seems like prices are like to $8 to $10 above where they are now.
That combined with the increase in volatility it would suggest that the call options are probably a bit pricier. Does that change or slowdown the pace at which you have been building your positions, or is it just systematic?
Do you just keep adding or you've been more sensitive on some of the structural changes to the curve?
Brandon Pedersen
Hey Mike, it’s Brandon, good morning. I'm going to let Mark Eliasen take that one.
Mark Eliasen
We are very systematic in it. We did take the approach that its insurance and when insurance rates go up slightly you continue to buy insurance.
So that’s what we do.
Michael Linenberg-Deutsche Bank
Okay, great. And then just my second question and just to Andrew, Andrew, just the stats on Mileage Plus I thought that was very interesting and the fact that employments[ph] were up I don’t know about almost 7%, 6.8% your Mileage Plus members I think you said up about 11%, what when you look at the -- where you're getting the new Mileage Plus members from, I mean is some of this coming from markets outside the Seattle?
So for example Salt Lake that was a market where may be you had three or four flights a day and may be for sometime your penetration was low, but once you moved to say 14 or 15 daily frequencies and the same with San Diego, you get to tipping point or all of a sudden it does make sense for that local passenger to move into the program, or are some of these customers coming from may be some of your partner airlines where their programs have changed and they're playing this arbitrage how might -- which program or which carrier is going to give me better, is going to get me more miles for what I'm purchasing?
Andrew Harrison
Right, Michael, that’s a lot of questions in there, let me try and hit because I think it’s very pertinent. So our mileage plan royalty program just on the growth side, I think what's most encouraging for us is that it’s across the board.
So we obviously have our largest basis in the Pacific Northwest and in California and we've seen good healthy growth in those areas. And then on the small areas whether it’s sort of the Salt Lake City or some of these other key focus points the growth has been off the charts obviously on smaller basis.
And so we've been very encouraged but this is across the system. An important thing and maybe some lessons learned here, we've been far more proactive about investing in our program, advertising our program, getting out there with our program than we have before and we've seen big significant changes there.
And then lastly I think here is the question and its early days at on the industries change to an accrual -- revenue based accrual process. And as we shared on Investor Day, a huge amount of our customers will be better off in our program and but more importantly as you know our program, we have a big portfolio both global and domestic carriers and we think we bring a great proposition to the table.
So all of those things combined we feel like we've got good momentum here that will continue.
Operator
Your next question comes from Hunter Keay from Wolfe Research. Your line is open.
Hunter Keay-Wolfe Research
So I’ve a couple of questions maybe for Andrew about your State of Alaska business. Can you do your best and let us know so what percentage of revenues are tied -- that you can tie directly to the oil market, whether that’s corporate or oil town that you serve, non-oil clients that you serve, anything like that?
And also, Andrew, let us know what your point of sale mix is with business up to Alaska? For example, you have people buying tickets, flying up to Alaska take a cruise back down so that might not be even packed from low oil prices.
Help us understand what’s going on with that market.
Andrew Harrison
I think and maybe Joe might add here a little bit but I think -- I don’t want to give specifics on some of the items you’ve requested. So what I would tell you is that the State of Alaska we’ve seen the resilience over the years from booms and busts and it just had a steady as she goes, marginal increase year after year.
We have a very big mix. So in summer times, its huge amounts of volumes in traffic for vacations, coming up through our network and up to the State of Alaska.
To your point, there’s huge oil and commercial business, and as you know, Hunter, we are highways and the byways for the State of Alaska and so a lot of that is just static that continues day in and day out. So overall the State of Alaska we feel is way less volatile than probably other parts of our network.
Joe, did you just have anything to add there?
Joe Sprague
Hunter, Joe here. The only thing I would add is in terms of oil towns in the State of Alaska really Anchorage is the big oil town.
The production activity happens up on the North Slope. We fly up there to Prudhoe Bay.
Actually there’s a fair bit of winter time traffic that’s counter seasonal because they do all the exploration work on the North Slope during the winter time, and I think the oil companies despite the low oil prices right now lot of those projects are to produce oil for 2, 3, 10 years from now. So they’re continuing to explore and do their activities and we see the benefit of that in the winter time.
Hunter Keay-Wolfe Research
Okay, thank you guys. And Brandon, given the amount of really incredible multiple compression we’ve seen with Alaska’s stock over the last couple of months as oil has collapsed, you guys have still only bought back about $2 million of shares per day.
Why would you not really, really ramp up the buyback materially here given the fact that the market is really not giving you guys any credit or really any airlines for that matter for the decline of fuel prices? Do you have the type of flexibility that you need within the structure of your buyback to do something like that?
Brandon Pedersen
Yes, absolutely. And by the way, good morning; we have a ton of flexibility and I think you can see that if you look at our track record over 2014 where we bought back I don’t know rough order of magnitude $350 million of stock over the course of the year with probably two-thirds of that occurring in the back half.
We can do that in 2015 as well. One of the things that we have always liked is kind of steady issue goes approach, we love the benefits of dollar cost averaging.
I’ll say if I go into the market and by $50 million this week, next week fuel will be $40. And so we just really like -- I think we will really like ratable execution and we stand by our commitment of return more capital to shareholders than we did in 2014 and we’ll do that as the year progresses.
Operator
And your next question comes from Helane Becker from Cowen and Company. Your line is open.
Helane Becker-Cowen and Company
Thanks very much. Hi guys, thanks for the time.
I just had a couple of questions. The first one is with respect to your business to Hawaii.
You didn’t talk about that this time and I would have thought you would have given us an update on that business.
Andrew Harrison
Hi, Helane, it’s Andrew. High level, we’ve as you know been rapidly growing in Hawaii.
We’re about 8% in capacity for the quarter; again the overall business in region is doing well. I think for us the most exciting part there is as we get these new 900ERs we are able to increment capacity there in a nice way.
So again just like many of our other regions we haven’t seen any material change in the environment there.
Helane Becker-Cowen and Company
Okay. And then can I just ask an Alaska related question.
I think every year when the folks who live in Alaska get their dividend checks you usually due a fair promotion program and without commenting necessarily on pricing this year those dividend checks maybe lower than they have been in past years. Would you still consider a similar promotion?
Joe Sprague
Helane, its Joe again. Just the way that the Alaska residents Permanent Fund Dividend program where its actually less tied to the oil prices and more tied to just what the overall markets are doing because it’s a dividend off of their sort of their permanent fund, their sovereign wealth fund.
So it actually doesn’t track exactly what oil prices are doing and the checks even in low years have been pretty healthy, healthy enough tapping into them with all different businesses and services up there tend to permanent fund sales of some sort to tap into that inflow of cash to the state each fall.
Brandon Pedersen
And we’ve had that -- just in ’14, Helane, we had that in the fourth quarter and we’ll look at again in 2015.
Helane Becker Cowen and Company
Thank you. Can I just ask one quick capacity question for the Super Bowl.
I think I saw you guys are adding flights from Seattle to Phoenix for that weekend, so I guess that Feb what end of January beginning our February kind of thing. So does that skew your capacity growth number for this month and next month and all?
Andrew Harrison
Helane, Andrew. No, its -- that’s only a couple of three flights and it’s completely immaterial to our capacity.
Helane Becker Cowen and Company
Great. Okay thanks very much, very helpful.
Operator
Your next question comes from Jamie Baker from JPMorgan. Your line is open.
Jamie Baker-JPMorgan
Hey, good morning, everybody. I was going to suggest you charged $50 not to sit in the ball cat I guess that’s why I don’t work at an airline.
Maybe I need the room for that mutant [indiscernible] you showed at Investor Day. Back in early 2013 Delta started seeking somewhat aggressively about its desire to be added we had S&P 500 and obviously there is only so much a company you can actually do but clearly when they were out at that autumn it was to shareholders benefit.
You meet the eligibility requirements. Is this something that you spend anytime thinking about or having any sway over?
Brandon Pedersen
Jamie, it’s Brandon, good morning. Let me ask Mark to answer that question.
Mark Eliasen
Hey, good morning, Jamie. To answer your question we do think about being in indexes and as you know we are in the S&P 400 right now which is --
Jamie Baker-JPMorgan
Right.
Mark Eliasen
We are one of the larger companies in the mid-cap index. So we’re promoting the case that should graduate and move up to the large cap.
As you say we’ve been for some time and it would makes sense for us to be there; our performance certainly has been good. So we’re keeping an eye on that we know we’re eligible and there isn’t a lot of lobbying you can do for that but I think just continuing to perform well and make sure that the committee understands that we a quality candidate.
Brad Tilden
It is a goal of ours, so Jamie, just to be really clear about that.
Jamie Baker-JPMorgan
Got it, got it. And second, with all the talk about the Frequent Flyer program this morning both Southwest and United made some smallest changes in their accounting policies; Southwest as it relates to spoilage, partner sales and United I think it was timing of revenue recognition.
I’m not sure you had time to even digest these changes. I’m just kind of wondering how your Frequent Flyer accounting might flush out relative to whatever the industry norm is right now, they are more conservative less conservative in line, any thoughts there?
Brad Tilden
Jamie this is Bradford. From an accounting standpoint there are really no changes unless you change your program right and so for our accounting its there is a mix in the industry on how mileage planner how frequent flyer programs are accounted for but we don’t anticipate any changes unless we makes changes to the program itself and then you have to consider certain accounting implications of that but, yes, there is nothing on the horizon right now.
Jamie Baker-JPMorgan
Okay that’s fair.
Brandon Pedersen
Jamie, Brandon, I wanted to follow-up on that. I've always viewed ours as relatively conservative, if you look at our liability a new size adjusted to what other airlines have as liabilities, I've always viewed ours as being relatively conservative on that perspective we're using that measure.
Jamie Baker-JPMorgan
Perfect, I appreciate, it’s not a big issues but its one that’s just all of a sudden kind of topical, so I appreciate the color. Thanks guys.
Operator
Your next question comes from Duane Pfennigwerth from Evercore ISI. Your line is open.
Duane Pfennigwerth-Evercore ISI
Just a quick one here. With fuel at these levels, how do you think your relative hedge advantage impacts the competitive environment in Seattle if at all?
Brandon Pedersen
Duane, its Brandon. I think Mark spent some time talking about what our hedging policy is and to the extent that there is an advantage, I don’t think we're looking at that as something that influences the fare environment necessarily.
I think Andrew articulated our perspective on that. We set fares equal, match supply and demand to the extent that we have a favorable hedge position or an insurance position that allows us to have fuel prices that looks a lot like the spot price that’s going to benefit the bottom line.
But I don’t think it impacts the pricing environment in Seattle.
Duane Pfennigwerth-Evercore ISI
Maybe not for you but may be for others. Any estimate for the value of that unencumbered fleet which you reminded us of the 79NGs?
Brandon Pedersen
None that we're going to share today, but I think you can do the math. One of the things we try to do in the prepared remarks is to help you with that by just giving the numbers of unencumbered aircraft and then also alluding to the fact that the vast majority of those airplanes are really high value, high marketability NGs that are pretty darn new.
So whatever you want to estimate the value of a 737-900ER you can do the math from there.
Duane Pfennigwerth-Evercore ISI
Okay, great. And then just could you remind us on the E175s when those are coming on this year and from a network perspective, what capability did those give you either into Seattle or market types that you haven't historically had?
And thanks for taking the question.
Andrew Harrison
Thanks, Duane, its Andrew. The first three arrived this summer June that will be on mid-continent routes, these aircrafts will be very valuable assets to our tool chest for a couple of reasons.
They're going to have sort of the first class product because we're going to fly them at the longer trips; they're going to be really powerful on the longer thin routes out of Seattle. And then the preferred seating products we talked about this aircraft will also have seats where we'll be selling it on that and then we have another four coming after that sort of late in '15 and in early into '16.
Operator
Your next question comes from Joe DeNardi from Stifel. Your line is open.
Joe DeNardi-Stifel
Andrew, I think it looks like this is the first time in a couple of quarters that TRASM is more or less inline with RASM, and it sounds like that will probably continue into first quarter given the free bag in January. I'm just wondering as the preferred seating comes online in second quarter, is the hope that the TRASM starts to outpace RASM?
Andrew Harrison
Joe, yes, what you're seeing is really the animalization of the bag and change fees we've made over a year ago basically completely come down to net out. So to your point, the next major driver here would be the preferred seating which would probably start to roll out in the second quarter.
Off the top of my head, I can’t tell you what the differential drive will be, but the hope is that our RASM will be a tide higher than our TRASM.
Joe DeNardi-Stifel
Okay, and then --
Brandon Pedersen
Joe, its Brandon. One thought on that; its not huge umbers in the grand scheme of things but maybe important to the modeling is our TRASM includes the results of our cargo business and cargo is about $100 million that’s probably a 2% or 3% growth business.
So growing much less than ASMs although certainly a factor or a part of that TRASM calculation. So just be aware of that.
Joe DeNardi-Stifel
Okay, that’s helpful. And then, Andrew, you also mentioned that the competitive capacity outlook has moderated a little bit.
Can you quantify that just over the next couple of quarters?
Andrew Harrison
Yes, so if you look at, see here my little sheet, so if you look at the first quarter competitive capacity from other airlines is up 15 points current schedules and the second quarter is 12 and then the third quarter is 12. So that’s what we see today.
Again as noted on the call, we've seen these come down as we get closer to the launch date and we see a lot of carriers has been jet on cold taking a look at supply and demand and we've seen carriers adjust their capacity given some of the changes going on in Seattle.
Joe DeNardi-Stifel
Okay, thank you.
Operator
Your next question comes from Dan McKenzie from Buckingham Research. Your line is open.
Dan McKenzie-Buckingham Research
Well, hey, guys, I appreciate the commentary on the elite passengers. And I guess looking ahead, what are your business travelers saying about their plans or business travel spend in 2015?
And in particular, should we expect the spend to grow in line with your growth and capacity or would it likely lag?
Joe Sprague
Thanks, Dan, for the question, this is Joe again. Actually the Seattle market with the growth that we have here is helpful in that regard because we are adding, as Andrew said, a lot of new flying to key various destinations for some key business destinations and really strengthening our Seattle network where we have, as you know, a ton of key corporate customers.
So I think on sort of the managed corporate travel business it was up mostly in the fourth quarter and we would expect at the beginning of the year here and those businesses have fresh travel budgets that that growth would continue, and so we are looking for that to be reasonably strong as we move into 2015.
Dan McKenzie-Buckingham Research
Okay. Then can you just remind us what percent of the revenues are tied to this aspect of the business?
Joe Sprague
We can get you that. For us it's a relatively small amount because of the heavy amount of leisure destinations and just general leisure traffic that we have.
Brad Tilden
Dan, this is Bradford. Managed business travelers not that -- especially if you accomplished other airlines not that greater percentage of the pie; if you look at business travel we think its 30% to 35% of total revenue.
Dan McKenzie-Buckingham Research
Understood. Okay and then just one other final question here.
Brandon, debt financing obviously is pretty key for you guys and if I am not mistaken a higher debt level would lower your cost of capital. I am just wondering if you can just give us what are the puts and takes at this point from your perspective on using debt financing to perhaps leverage of the return of capital to the shareholders.
Brandon Pedersen
Hi Dan, it's Brandon, maybe I will take a stab at that and Mark can jump in with any additional thoughts that he has. Totally get the math on using debt increased leverage and returns to equity holders and we are obviously very aware of where the rates are today and raising debt would be very attractive for us.
On the other hand, you need to have a need for the money and I think if you look at the history of our company over the last couple of years we have been really trying hard now for a couple of years to position ourselves as a high quality industrial and we do a lot of things to emulate high quality industrials including where we set our capitalization level and the mix between debt and equity. So that's probably the primary driver of where we are in terms of the leverage level and to the extent we need to use debt to go and manage the capital structure we will do so, but I think it's a complicated question and we are thinking about a lot of different ways.
Dan McKenzie-Buckingham Research
Okay. Thanks very much.
Mark Eliasen
Hey, Dan, this is Mark. I was just going to add on to that that we could borrow today at under 3% and we are aware of that.
We can borrow on unsecured -- on an unsecured basis. Those are very attractive to us but we have enough free cash flow right now to fund most of our return to shareholder just out of free cash flow.
So as Brandon said, we will balance that out, we are aware, we do have a lot of options given our strong results and our strong balance sheet.
Operator
Your next question comes from Glenn Engel from Bank of America. Your line is open.
Glenn Engel-Bank ofAmerica/Merrill Lynch
Hi, good morning. The question I have one on the competitive capacity numbers you gave, does that exclude what Alaska is adding itself and is that the big change in '15?
Is that Alaska's adding a lot of competitive capacity on top of what everybody else is doing too?
Brandon Pedersen
Glenn, actually the numbers are sort of similar. So as I said, for the quarter, it was up 15 points.
The industry which will include Alaska and the competitor is up 14. So basically, just looking at other airlines capacity increases and then if you add out they are all within a point of each other.
So they are very much interchangeable.
Glenn Engel-Bank ofAmerica/Merrill Lynch
And on aircraft utilization, if I look at the numbers, 2014 was actually slightly down year-over-year. Why was that and would we expect to see that number rise again?
Ben Minicucci
Glenn, Ben Minicucci here. We had several modifications ongoing, the major one was the seat conversion program where we had a [indiscernible] of seats going in.
So we had a couple of lines of modification going. That program is complete so that’s why you see the boost in utilization in 2015.
Glenn Engel-Bank ofAmerica/Merrill Lynch
Okay. Thank you.
Brad Tilden
Glenn, this is Brad. There is a guy here who told me you and I haven't had a chance to chat but they have told me that you have been promoted and we may not get to chat with you in the future.
Just wanted to wish you well and thank you for your coverage of Alaska over the years.
Glenn Engel-Bank ofAmerica/Merrill Lynch
Thank you, you guys have always been first class.
Operator
You next question comes from Darryl Genovesi from UBS. Your line is open.
Darryl Genovesi-UBS
Good morning guys. Not to beat a dead horse on the balance sheet but fully understanding that you are comping yourself up against other high quality industrials but I think the way the market will likely measure your leverage will be on some sort of interest coverage ratio basis or a probably that adjusted net debt to EBITDA basis and given the earnings trajectory that you guys are on with lower fuel and the operational improvements that you have made those metrics do certainly look much more conservative.
And then with regard to the use of your cash, as Hunter brought up, your stock is relatively cheap. So just wondering if may be your framework is changing I know historically you have sort of articulated your balance sheet goes to us with reference to a debt to capital ratio but just wondering if may be that view is evolving a little bit.
Brandon Pedersen
Darryl, it's Brandon. Thanks for that I would say the question is absolutely not beating a dead horse.
Our balance sheet is very alive and it serves us very well. I totally get your question.
And we think about that stuff all the time; we talk with our board about that. I think as to the extent that we're going to evolve our approach to that it would be over matter of quarters or even years.
We've had a fuel environment that looks like it does now for I think three months and I don't think you would see Alaska pivot from a very purposeful strategy of capital allocation based on three months fuel decline and the rosier cash flow outlook that that produces but rather look and see what happens over a longer period of time and adjust accordingly. But I can assure you that we talk about this stuff all the time both internally and with our board.
Darryl Genovesi-UBS
Okay. Thanks for that.
And then, I guess over the last couple of years you’ve really prided yourselves on having a pension fund that's full funded. With the move down in rates during 2014, is the plan still full funded on a GAAP basis and to the extent its not, should we expect a ramp up in the contribution that you guys would make to get it to be full funded on a GAAP basis?
Mark Eliasen
Hey, Darrell, this is Mark. What drove our pension funding to drop from a $104 down to about $94 was just the decline in long-term interest rate.
So our investments are performing very well there. So we're comfortable.
Pensions are of course they're very, very long-term assets and liability, so we're comfortable kind of letting that ride. Substantially, we are fully funded.
If you look at it, it will bounce around a little bit but we are substantially fully funded. We do not anticipate making a huge contribution to that, to pensions, nor do we need to.
Darryl Genovesi-UBS
Okay. Thank you.
Lavanya Sareen
Michele, we have time for more question.
Operator
Okay. So your finally question then will come from Dave Fintzen from Barclays.
Your line is open.
David Fintzen-Barclays
Hey. Good morning everyone.
Thanks for the time. Quick one, quickly for Brandon.
In the full-year CASM guide how much of a -- or if any PBP details, how you're managing that, is it assumed in there?
Brandon Pedersen
Yes. That's a tough one every year and it does periodically result in adjustments to CASM along the way as we progress through the year.
We paid max payout this year and we would not expect to do that necessarily every year, so we budgeted something a little bit less than that.
David Fintzen-Barclays
Okay.
Brandon Pedersen
Than what we did in 2016.
David Fintzen-Barclays
Okay. That's very helpful.
Thanks. And just taking a step back and you guys have done a smaller airline with every high returns, high returns relatives that you’ve grown now your returns are only going higher presumably with lower fuel.
How are you going to kind of look at low fuel in terms of your growth going forward obviously knowing oil [indiscernible]?
Brandon Pedersen
Yes. It's Brandon again.
The thought I would say on that is that we are in a very low fuel environment. And as I said in the prepared marks that's going to result in an improved profitability cash flow.
But we're really not considering that in how we think about planning the long-term growth of the business. As I look across the last seven years or so, I -- just on raw fuel price basis, I've seen everything from a $85 which we guided today up to $331.
The simple average for the last seven years is $298, $290 a gallon and that's where our head is from a planning standpoint, big picture of planning standpoint. Our planning mindset is lets' put airplane to capital where we can produce returns for our owners.
David Fintzen-Barclays
Okay. Thanks for that.
That's very helpful. I appreciate that.
Brandon Pedersen
Thanks. Hey one other mop up.
Just before I lose everybody I want to come back to Savi and her question about non-aircraft CapEx. Savi, I would encourage you to buy a lottery ticket today because I have a one inch book with about 50,000 numbers all except that one.
It is a variety of things they're driving that increase, some of it is left over spending that we didn't quite get to in 2014, some relates to the big IT capital projects that we have in place and that we've spoken to you about over the last couple of years and some of that relates to refresh that we're doing at many of our airports to try to make the Alaska presentation at a lot of our airports or most of our airports very, very consistent to improve the customer experience.
Brad Tilden
All right. And with that, thanks everybody.
We appreciate your interest in us and we look forward to chatting with you next quarter. Thanks.
Operator
Thank you for participating in today's conference call. This call will be available for replay beginning at 12:00 p.m.
Pacific Time today through 11:59 p.m. Pacific Time on February 22, 2015.
The number to dial for the replay is 1 (855) 859-2056 or 1 (404) 537-3406. And the conference ID number for the replay is 62357440.
Also, the call will be accessible for future playback at www.alaskaair.com. Thank you everyone.
You may now disconnect.